Employee Mileage Reimbursement Law Basics

Reimbursing employees for the miles they drive with their personal vehicles for company business has significant benefits for both sides. The practice is so pervasive that some may wonder if it’s required by law. Employee mileage reimbursement law isn’t complex, but there are some legal considerations growing companies should be aware of as they weigh offering mileage reimbursement.

Employee mileage reimbursement law is not complex

There is no federal law that says employers have to offer mileage reimbursement. Many do because it’s a smart way to attract and retain employees. Reimbursements made at the standard Internal Revenue Service (IRS) rate are not considered income, so they are not subject to tax. Companies also get a tax break as the reimbursement payments are a deductible business expense.

Reimbursement arrangements used by employers should meet three basic criteria to abide by an IRS accountable plan. They must be made for deductible business expenses, which would include business travel reimbursement. Claims must be substantiated by employee records that prove the time, place, and purpose of the travel. And any excess reimbursement should be returned to the employer.

Employers don’t have to pay the IRS recommended rate…

Each year the IRS releases its optional standard mileage rate. The standard mileage rate in 2024 for the use of a personal vehicle for business purposes is 67 cents per mile driven. That’s an increase of 1.5 cents from 65.5 cents per mile set for 2023, and significantly higher than the rates in previous years.

The optional standard rate is just that: optional. Another approach is to require employees to keep track of actual travel-related expenses, but this is considered more onerous for both parties as it complicates tax accounting and expense record keeping.

Some employers choose to reimburse at less than the IRS rate, as well. Before the Tax Cut and Jobs Act (TCJA) of 2017, employees were able to claim a tax deduction for mileage and other expenses that were not reimbursed up to the IRS rate by their employer. Now, however, most employees are not able to do so.

It should be noted that as of 2024, there are three states that do require businesses to reimburse employees: California, Illinois, and Massachusetts. In most cases, these states recognize the IRS standard mileage rate as the appropriate reimbursement rate employers should use.

… But they should be aware of the FLSA kickback rule

The Federal Labor Standards Act (FLSA) has a narrow exception concerning mileage reimbursements that employers should heed if their employees are earning at or near the minimum wage. This employee mileage reimbursement law is called the kickback rule because it governs money kicked back to the employer in the form of under reimbursed mileage expenses. If the value of those so-called kickbacks pushes the employee’s salary under the minimum wage, a wage and hour issue is created.

There have been several cases in which failure to properly reimburse for mileage has resulted in a class action lawsuit. A few years ago, two large Domino’s Pizza franchises found themselves in court defending class-action suits from delivery drivers who were being paid a flat $1 per-delivery fee. They claimed they were being underpaid by $1.30 per delivery and $3.25 per hour. In a recent case still unfolding in North Dakota, Papa John’s Pizza delivery drivers have claimed that they should have been reimbursed for vehicle expenses at the IRS standard mileage rate.

Companies can – and should – decline specific reimbursement requests

So if a company agrees to reimburse employees for mileage driven for company purposes, does that mean employee mileage reimbursement law states it must pay every claim? Most certainly not. Like many other aspects of employment, companies can and should establish guidelines that spell out mileage reimbursement requirements and rates. They can then act with confidence if they feel they should deny a specific claim.

An effective mileage reimbursement policy starts with the usual language that employees have valid driver licenses and adequate automobile insurance. Then it should add as much detail as needed to cover anticipated contingencies, such as excluded activities like personal trips and commutes to and from home. There should be explanations of policy violations and accompanying discipline.

The documentation associated with mileage reimbursement, such as in vehicle mileage logs, is important not only for expense control but for claiming the employer’s own tax deduction for mileage reimbursement. Accurate documentation comes from a rigorous process that builds in safeguards, encourages questions, and includes a monitoring system that will uncover expense fraud and other forms of abuse.