Every business trip is different, yet many employers reimburse their workers using one static rate. This ignores costs like fuel, which changes with every trip depending on the length of that trip and where in the country workers are traveling. Keep in mind, however, the hidden costs of one-size-fits-all reimbursement programs go far beyond just filling up the gas tank.
The average price of insurance premiums, taxes, and more vary greatly by location, sometimes by thousands of dollars per year. Companies with workers living in multiple states are often unaware of just how much these differences can cost employees. If reimbursements are found to be inadequate, employers may end up having to pay out multimillion-dollar settlements in court.
Employers have several options for reimbursing employees who drive for business. They can create custom payments for every employee based on his or her location and actual mileage to account and reimburse for all costs; this methodology is known as a Fixed and Variable Rate (FAVR) reimbursement program.
Others use flat Car Allowances for every employee by offering a fixed amount to pay for all travel ($400 per employee each month, for example). Cents Per Mile programs, on the other hand, reimburse by the miles driven. The most popular Cents Per Mile rate is the IRS rate, which is set at 57.5 cents per mile for 2015. While these offer simple options, only FAVR programs can fairly and accurately reimburse employees, if you consider how travel and vehicle-use costs differ by location.
There has been a lot of talk lately about the drastic differences in fuel prices in California versus the rest of the country, but fuel isn’t the only cost that differs based on location. Costs like insurance premiums, license and registration fees, and taxes all vary greatly by location, too. Yearly insurance premiums average $3,150 in Detroit, Michigan but only $825 in Charlotte, North Carolina, for example. Excise taxes cost $294 in Nevada, yet $1,689 in Rhode Island for the same $21,000 sedan (a $1,395 difference). Unless companies track these many costs as they fluctuate, they will be inaccurately reimbursing their mobile workers.
Commonly used flat Car Allowance and Cents Per Mile programs do not take these geographic variances into consideration, and so either under- or over-reimburse workers living in different areas. Only Fixed and Variable Rate (FAVR) reimbursement programs can account for all the geographic cost variances to calculate appropriate repayments.
Taking all these costs into consideration to create accurate reimbursements isn’t just nice for employees; FAVR programs eliminate the inequality that unfair, one-size-fits-all reimbursements create and help companies avoid the threat of lawsuits from unjustly reimbursed workers.
The costs of driving for business vary widely as one travels, and so using static reimbursement methods will never provide appropriate solutions. Only FAVR programs consider the full range of costs, and how those costs change from state to state, to provide fair, accurate, and defensible repayments.
In the past, FAVR programs were deemed too complex to cost-effectively manage, but modern technology has made them easier to implement than ever. Remaining with reimbursement methods that do not account for geographic variances, on the other hand, creates inequity across the mobile workforce and increases liability with each passing day.