An easy answer to that question would be to say that “like snowflakes, no two reimbursements are created exactly alike.” However, that wouldn’t answer the question, nor would it consider the various factors that contribute to a modern, fair and accurate reimbursement figure for each individual mobile employee.
So, with that in mind, let’s jump into a quick reimbursement 101 session and learn about exactly how the figures you and your co-worker receive for reimbursement may differ.
Historically, companies with mobile workers have administered one-size-fits-all reimbursement programs, such as a flat auto allowance or cents-per-mile reimbursement. Neither of these programs account for the different factors each individual employee experiences while driving their personal vehicle for business. A flat auto allowance program reimburses employees the same amount, regardless of where they live and how many miles they travel for business.
By the same token, a cents-per-mile program doesn’t take into account that it’s more expensive to drive in, say, California than Ohio, given the difference in gas prices, insurance premiums, license and registration fees, etc. These one-size-fits-all types of programs aren’t fair or accurate and tend to over and under-reimburse employees as a result.
A fixed and variable rate reimbursement program, known as FAVR, reimburses employees for their individualized fixed and variable costs. There’s no guesswork involved, and employees are reimbursed based on where they live and how much they actually drive for business. But what exactly do “fixed” and “variable” costs refer to? Good question. Let’s dive into that.
Fixed costs are constant month over month, but can vary from employee to employee. They include insurance premiums, license and registration fees, taxes and depreciation. Each employee’s fixed cost will vary depending on where they live and how much he or she drives. To illustrate this further, let’s consider a fictional example.
Janice drives 20,000 business miles annually and lives in New Jersey, which is known for having a very high state property tax. Janice’s employer has also determined her reimbursement is based on driving a large sedan. Ron, on the other hand, drives only 5,000 business miles annually and lives in Alabama, which is known for having a very low state property tax. Ron’s employer has decided his reimbursement is based on driving a small sedan. Should Janice and Ron be reimbursed the same fixed amount? Of course not.
Based on this example, Janice should receive a higher fixed reimbursement than Ron based on depreciation (20,000 annual business miles vs. 5,000 annual business miles), personal property tax (New Jersey being much higher than Alabama) and employer-determined standard automobile (large vs. small sedan).
Variable costs vary month over month and are based on the actual number of business miles driven by the employee. These costs include gas, oil, vehicle maintenance and tire wear. To continue our fictional example from above, Janice would also receive a higher variable reimbursement than Ron because New Jersey is a far more expensive state to own and operate a vehicle than Alabama.
A FAVR program considers these demographic factors – which are different for each mobile employee – and calculates an individualized reimbursement rate for each employee. This ensures that each employee is treated fairly and accurately – and that no one is being over-or-under reimbursed.
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