Employee Mileage Reimbursement Law Basics

Mileage reimbursement, on its face, is pretty simple: Mobile employees who use their personal vehicles as part of their job duties are reimbursed at a set rate for their work-related mileage. Things start to get a little more complex when it comes to employee mileage reimbursement law. 

Reimbursement is governed by a combination of federal tax guidance and state-level labor protections. Because no single federal statute exists mandating reimbursement for all mobile employees, employers frequently misunderstand legal requirements around reimbursement, and that’s where the trouble can really start. Improper understanding of employee mileage reimbursement law often leads to improper reimbursement, which can create minimum wage violations, tax problems, and employee disputes.

It’s probably best to head all of that off at the pass, don’t you agree? In this article we’ll break down legal considerations around reimbursement, including IRS rules, state regulations, and how reimbursements can bump up against the Fair Labor Standards Act. 

By embracing a better understanding of employee mileage reimbursement law, employers can avoid costly mistakes while building fair and transparent programs for their mobile workforce. 

An Overview of Federal Employee Mileage Reimbursement Law

There is no federal United States employee mileage reimbursement law requiring universal reimbursement for all mobile employees. The IRS does play a pretty central role in mileage reimbursement, but that’s through tax guidance and regulations – more on that in a moment – rather than through labor mandates. 

When Mileage Reimbursement Becomes a Wage Law Issue

That being said, if employers aren’t careful, employee reimbursement can bump up against federal laws. One of the more common examples of this is the Fair Labor Standards Act, or the FLSA. The FLSA has a narrow exception for reimbursements known as the kickback rule, because it governs money kicked back to the employer in the form of underreimbursed mileage expenses. 

If the value of these so-called kickbacks pushes the employee’s salary under minimum wage, a wage and hour issue is created. The Department of Labor evaluates whether necessary business expenses shift employer costs onto employees. 

There have been several cases in which failure to properly reimburse for mileage has resulted in a class action lawsuit. A few years ago, the owner of several Domino’s pizza franchises found himself 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. That same franchisee faced another suit of a similar nature earlier this year. In a similar suit from 2021, Papa John’s ended up settling several state and federal wage hour claims brought by delivery drivers, to the tune of a $3.25M settlement. 

Let’s Talk About State’s Rights! 

While the federal government doesn’t, some individual states do explicitly require employers to compensate employees for necessary business expenses, including travel mileage. 

States that Require Mileage or Expense Reimbursement 

California

California’s Labor Code Section 2802(a) says that employers must cover all “necessary expenditures or losses” incurred by employees who use their personal vehicles for work-related travel. The statute goes on to define those “necessary” expenditures or losses as all reasonable costs, which extends, if necessary, to attorney’s fees incurred by an employee seeking to enforce their right to compensation. 

Illinois

Illinois’ Wage Payment and Collection Act states that employers must reimburse workers for all necessary expenditures or losses incurred by an employee in the course of that employee’s regular job duties and services. It goes on to note that an employer is not responsible for any losses an employee might incur due to negligence, normal wear, or theft. It also stipulates that necessary expenditures must be submitted with the correct documentation within 30 days of the incurred expense. 

Massachusetts

Massachusetts regulation 454 CMR 2700.4(4)(B) states that an employee who in the course of their job duties must travel between locations after the beginning of or before the end of their work day will “be compensated for all travel time and shall be reimbursed for all transportation expenses.” This does not count commutes between home and work, which are not considered compensable time. 

It’s important to note that Massachusetts’ employee mileage reimbursement law only applies to workers in an occupation. An occupation, according to MGL. ch. 151 s2, covers industries, trades, and business, but does not extend to professional service, farm work, “work by persons being rehabilitated or trained under rehabilitation or training programs in charitable, educational or religious institutions, work by seasonal camp counselors and counselor trainees or work by members of religious orders.”

IRS Rules 

We’ve put it off long enough; It’s time to talk about the Internal Revenue Service. 

The Accountable Plan Standard

Specifically, let’s break down the accountable plan, and how it pertains to employee mileage reimbursement law. This plan consists of IRS requirements that make reimbursement payments for employees accountable (ie: not taxable for the employer). Reimbursements that fall outside these guidelines are treated as taxable wages. The accountable plan dictates that mileage reimbursement meets these criteria:

• Business-related: The mileage being reimbursed must be both ordinary (ie: commonly accepted in the business or trade in question) and necessary to that business. Acceptable business-related travel includes visiting job sites, running errands for your business, or meeting clients. Commuting miles, on the other hand, are considered personal travel, and not eligible for reimbursement. 
• Substantiated: All mobile employees must keep timely, IRS-compliant mileage logs for each business trip. Mileage logs must contain the destination for each trip, the date and time each trip took place, and its business-related purpose. 
• Returning excess amounts: When an employer pays an employee an amount that exceeds what was incurred or spent, the employee is required to return that excess amount within a reasonable period of time (usually 60 days). 

Dedicated Documentation

The IRS doesn’t have specific stipulations about the format of mileage logs, so how exactly those are kept – spreadsheet, automated tracking, paper mileage forms – is up to the business. What really matters to the IRS is that employees’ mileage logs are organized, timely, and accurate, as adequate documentation is both a legal and a tax requirement for accountable reimbursement. 

Because compliant mileage logs are such a crucial part of employee mileage reimbursement law, carefully consider what forms your employees’ mileage logs take, as well as how they track mileage. For example, manual mileage tracking and logging methods often ask employees to use odometer readings to calculate their work-related mileage, which they then file in mileage log spreadsheets. This method is technically allowed, but the amount of math required and the lack of oversight creates plenty of opportunity for calculation errors and inflated mileage totals to make their way into reimbursement claims.

Inaccurate or overestimated mileage counts in logs could cause trouble for you and for your business. Paying out inflated and inaccurate mileage reimbursements means a financial loss for your business, and runs the risk of rendering reimbursements unaccountable – ie, taxable. Also not ideal. To avoid these risks, more and more businesses are turning to more tech-savvy solutions for mileage tracking and logging. These solutions use automation to track and log work-related travel, reducing the margin for human error and ineligible mileage to end up in reimbursement claims. 

What About the IRS Standard Mileage Rate? 

Each year, the IRS sets a standard mileage rate, calculated based on national averages of operating costs for vehicles, including gas, maintenance, and depreciation. The IRS rate is a common benchmark for businesses to use to calculate tax-free reimbursement, but employee mileage reimbursement law doesn’t require that businesses use this rate. 

If they so choose, employers can calculate reimbursement using the actual expenses method, or a custom rate. It’s relatively common for businesses to use a common rate, but employee mileage reimbursement law requires that custom rates must reflect both reasonable and defensible cost assumptions. If rates fall significantly below typical operation costs, for example, it could trigger legal scrutiny. 

Many businesses that do set their own rate use geographic variations in costs like gas and maintenance. To help businesses easily and quickly find their ideal custom rates, CompanyMileage has its own free rate calculator, which estimates a rate based on the price of fuel in your area. 

Keep it Simple With CompanyMileage

When it comes to employee mileage reimbursement law, and mileage reimbursement in general, it’s important to get everything right. That’s where CompanyMileage comes in, with our suite of software solutions that optimize and automate every step of the process, from logging to reimbursement.

Our mileage reimbursement software, SureMileage, uses point-to-point calculations based on the start and end points of each work-related trip to calculate the cost of reimbursement. This method makes calculating reimbursement fast, accurate, and easy, while keeping logs free of mistakes, inflated mileage, and ineligible travel. Our mobile app, SureMobile, even lets employees log and submit trips right from their smartphones. 

Once submitted, expense reports move through an automated workflow, which CompanyMileage makes customizable to meet the unique needs and structure of your business. Our system also easily integrates with all major accounting and approval software, so you can always rest assured that your hard-working employees will receive accurate and timely payments. 

Contact CompanyMileage for a demo today to learn more about how we can transform your mileage reimbursement processes and even help you save money in the process!