Reimbursing employees for the miles they drive personal vehicles on 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 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 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 employers should meet three basic criteria. They must be made for deductible business expenses, which would include travel for business purposes. 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 IRA releases its optional standard mileage rate. The standard mileage rate in 2016 for the use of a personal vehicle for business purposes is 54 cents per mile driven. That’s down 3.5 cents – and more than 5 percent – from the 2015 rate. In fact, it’s the lowest the rate has been since 2011, when it was 51 cents.
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. In that case, the employee can deduct mileage reimbursements from their gross income or the IRS’ standard rate multiplied by the number of miles driven for business purposes, whichever is less.
… But they should be aware of the FLSA kickback rule
The Federal Labor Standards Act has 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.
Two large Domino’s Pizza franchises found themselves in court last year 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. A California suit alone involves hundreds of drivers. A second suit is pending in Georgia.
Companies can – and should – decline specific reimbursement requests
So if a company agrees to reimburse 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 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 abuse.