Under the California Labor Code, an employer is responsible for money an employee spends in the course of his or her work. For example, an employee whose job includes the use of his or her own car is entitled to be paid something for that use.
Some employers try to avoid the accounting headache by paying employees a little extra and telling them to handle their own expenses, like gas. But this can backfire if it's done wrong. In a 2007 case involving salespeople for the Pennysaver, the California Supreme Court held that there are three reasonable methods for calculating the cost of an employee's use of a car for work:
1. "Actual Cost," which means collecting receipts and paying the employee for the fuel, maintenance, repairs, depreciation and insurance attributable to the employee's work-related driving.
As usual, employees can't "agree" to accept less than the actual necessary expenses. But that doesn't mean that the employer has to match every penny. The employer does not have to pay "unnecessary" expenses, like higher gas costs resulting because the employee drives a gas guzzler. Some cars cost more in insurance, some need higher priced tires, or premium gas. But all that leads to detailed accounting and maybe an argument over what's "reasonable." So very few employers use the actual cost method.
2. "Mileage Reimbursement," which means paying a reasonable cost per mile.
This is the most commonly used method, and it seems to work for most people. But it's not perfect.
The IRS rate for mileage deductions ($.51 for 2011) is presumed to be reasonable, but an employee can still argue if his or her employee's actual expenses are higher, so long as they are reasonable under the circumstances. Which brings us to the third method:
3. "Lump Sum," which means paying an amount over actual wages, to cover driving costs.
This was the method used in the Pennysaver case, and it turned out to be okay with the California Surpreme Court. The employer can pay a "per diem," a flat sum, a higher rate of commission or some other amount over and above normal wages to cover driving expenses. The lump sum simply has to be enough to cover actual expenses.
One upside of this method is that the employer doesn't have to track miles or other costs every payday. But it's probably a good idea to collect that data periodically as a "reality check," to be sure your lump sum is still legally sufficient.
The downside is that the lump sum may not be directly related to the miles actually driven, and sometimes it may not be enough to cover actual costs. If the employee finds that the amount he or she is paid falls short, the employer must make up the difference.
The lump sum works best where the driving is predictable, like a fixed sales route or trips to the same job site. In those situations, the employer should be able to calculate a lump sum based on known distances. It will be trickier to calculate where the mileage varies from day to day or from employee to employee.
What about a higher commission rate to cover driving costs? Seems risky, unless 10% more miles results in roughly 10% more sales. If not, the reimbursement is unrelated to the actual costs of operating the vehicle. But even this method works just fine if it consistently pays the employee all of his or her automobile expenses. But if you pay too much to cover actual expenses, you could have a payroll tax issue, always check with your tax advisor.
Whatever method you use, make sure the employee's pay stub shows how much is wages and how much is expense reimbursement. The state of California wants to be able to tell whether employees are paid minimum wage (where required) and are also being fully reimbursed for actual expenses.
And make sure employees have a means to question the amount they receive for expenses, if it turns out they're not being fully reimbursed.
Some employers try to avoid the accounting headache by paying employees a little extra and telling them to handle their own expenses, like gas. But this can backfire if it's done wrong. In a 2007 case involving salespeople for the Pennysaver, the California Supreme Court held that there are three reasonable methods for calculating the cost of an employee's use of a car for work:
1. "Actual Cost," which means collecting receipts and paying the employee for the fuel, maintenance, repairs, depreciation and insurance attributable to the employee's work-related driving.
As usual, employees can't "agree" to accept less than the actual necessary expenses. But that doesn't mean that the employer has to match every penny. The employer does not have to pay "unnecessary" expenses, like higher gas costs resulting because the employee drives a gas guzzler. Some cars cost more in insurance, some need higher priced tires, or premium gas. But all that leads to detailed accounting and maybe an argument over what's "reasonable." So very few employers use the actual cost method.
2. "Mileage Reimbursement," which means paying a reasonable cost per mile.
This is the most commonly used method, and it seems to work for most people. But it's not perfect.
The IRS rate for mileage deductions ($.51 for 2011) is presumed to be reasonable, but an employee can still argue if his or her employee's actual expenses are higher, so long as they are reasonable under the circumstances. Which brings us to the third method:
3. "Lump Sum," which means paying an amount over actual wages, to cover driving costs.
This was the method used in the Pennysaver case, and it turned out to be okay with the California Surpreme Court. The employer can pay a "per diem," a flat sum, a higher rate of commission or some other amount over and above normal wages to cover driving expenses. The lump sum simply has to be enough to cover actual expenses.
One upside of this method is that the employer doesn't have to track miles or other costs every payday. But it's probably a good idea to collect that data periodically as a "reality check," to be sure your lump sum is still legally sufficient.
The downside is that the lump sum may not be directly related to the miles actually driven, and sometimes it may not be enough to cover actual costs. If the employee finds that the amount he or she is paid falls short, the employer must make up the difference.
The lump sum works best where the driving is predictable, like a fixed sales route or trips to the same job site. In those situations, the employer should be able to calculate a lump sum based on known distances. It will be trickier to calculate where the mileage varies from day to day or from employee to employee.
What about a higher commission rate to cover driving costs? Seems risky, unless 10% more miles results in roughly 10% more sales. If not, the reimbursement is unrelated to the actual costs of operating the vehicle. But even this method works just fine if it consistently pays the employee all of his or her automobile expenses. But if you pay too much to cover actual expenses, you could have a payroll tax issue, always check with your tax advisor.
Whatever method you use, make sure the employee's pay stub shows how much is wages and how much is expense reimbursement. The state of California wants to be able to tell whether employees are paid minimum wage (where required) and are also being fully reimbursed for actual expenses.
And make sure employees have a means to question the amount they receive for expenses, if it turns out they're not being fully reimbursed.