The hidden costs of mileage reimbursement & car allowance programs

In the wake of a global pandemic compounded by a looming recession, business leaders across every industry are thinking about how they can tighten their budgets and make their operations more cost-effective. Businesses that use company fleets are no exception. Widespread vehicle shortages continue to drive up costs, and manufacturers aren’t offering the kinds of incentives that many fleet owners are accustomed to.

“We are in a very unprecedented time in the fleet management industry,” says Kathy DelCol, a client partnership manager with Mike Albert. “We’re still dealing with a lot of the after-effects of COVID-19, so what the norm was, isn’t now—and will probably change again in the future.”

It’s no wonder, then, that many fleet managers are considering the replacement of company vehicles with mileage reimbursement or car allowance programs. These types of initiatives shift more responsibility to employees, requiring them to use their personal vehicles for business purposes. In turn, employees are either compensated for their mileage or given a flat monthly allowance for maintenance and upkeep.

However, many fleet owners aren't aware of the hidden costs associated with these initiatives—or, that in many cases, leasing company cars is the more cost-effective approach.

“I see the consideration of mileage reimbursement or car allowance programs as waving the white flag in response to current market conditions. Out of frustration, some company leaders think, ‘We can’t find the vehicles we need very easily, so let's go with plan B,’” says Joe Voors, a director of client partnerships at Mike Albert. “But too often, companies are only looking at these alternatives from an acquisition standpoint. They don’t really consider the total cost and downstream impacts."

Below are just some of the costs and challenges that companies are likely to face after replacing their existing fleet with programs that compensate employees for using their own vehicles on the job.

They make more work for your company.

Companies considering the transition from company-leased vehicles to mileage reimbursement or car allowance programs often do so because of the supposed simplicity they afford. “In my recent experience, some company leaders think these programs will make things easier because they transfer tasks like mileage tracking, vehicle maintenance, and insurance to employees,” says DelCol.

What they may not realize is that making this change saddles their company personnel with an added administrative burden, taking up valuable time that could be spent on core business objectives. Developing the right reimbursement or allowance program for your company, and overseeing it, is more complicated than you may think.

“It's not just throwing out one number and being done with it,” says Brent Pietroski, a director of client partnerships at Mike Albert. “There’s a lot of research and planning involved. Then, a company will need additional people to manage the program, which requires time and training.”

By underestimating the work involved with compensating employees to use their personal vehicles for business use, companies may end up spending much more than if they had leased their own vehicles through a fleet management company.

They may lead to downtime & damage customer satisfaction.

Forgoing company vehicles and relying on employees to use their personal vehicles for business may seem like an easy way to reduce costs—but it can often result in adverse outcomes.

“With reimbursement or allowance, you have no real control over the mechanical health of your employees' vehicles,” says Voors. “And that impacts your ability to deliver your products or services from point A to point B efficiently and on time.”

In fact, employee downtime is one of the biggest hidden costs for any company that relies on employee-owned vehicles for its day-to-day operations.

“If your employees are using their personal vehicles for business, you can’t guarantee they’re getting oil changes or other preventive maintenance completed when needed,” says Pietroski. “Because of that, chances are higher that their vehicles will break down causing customer appointments to be missed. With company-provided cars, you can control and monitor maintenance needs and other issues, preventing problems that could hurt your business.”

They increase your company's liability risks.

Companies that implement mileage reimbursement and allowance programs for employee vehicles need to be aware of the added liability they could incur in the event of employee accidents.

“Insurance is probably the biggest hidden cost that most companies don’t think about,” says DelCol. “If an employee is using their car for work purposes, they should be reporting that use to their insurance company. But too often they don't, because they know their insurance premiums will increase as a result."

Without proper supervision, some employees may let extended coverage lapse after providing initial proof of coverage to their employer. Or, they may not acquire the necessary business-use coverage at all. That can pose a big problem if an employee gets into an accident on company time due to vicarious liability, which means an employer can be held liable for an employee’s negligent actions while working on the job.

In other words, if an employee injures someone with their vehicle on company business and their personal insurance doesn’t cover the damages, their company can be included in a lawsuit or insurance claim against the employee.

“If an employee doesn’t have the right insurance and gets into an accident, their company can be held liable,” says Pietroski. “That can be a huge expense, depending on the type of accident the employee has been in.”

They jeopardize the integrity of your employees' mileage reporting.

Many workers are feeling the squeeze of inflation, which may tempt them to defraud their employers by padding the business mileage they accrue on their personal vehicles.

“The reality is, requiring employees to use their own vehicles for business puts extra pressure on their time and resources," says Voors. "They're looking for ways to maintain their cost of living, make their car payments, and endure volatile prices at the pump—so they may try to pad their business miles to benefit from whatever program their employer has. There are a lot of recent industry reports showing that reimbursement-related mileage reported by employees has increased dramatically.”

This is a relatively common problem, and if employers aren’t serious about verifying their employees' mileage, a flat-rate reimbursement program can end up costing companies a lot more than they bargained for.

“When companies move from leasing their own vehicles to employee reimbursement or allowance programs, we see an increase of up to 30% in the mileage reported for expense purposes,” adds DelCol.

In times of economic upheaval, it’s only natural for business leaders to consider how they can streamline operations and cut costs. But, as with any major decision, moving toward a mileage reimbursement or car allowance program demands thorough research and analysis of all other alternatives. Without the proper information and data, businesses might end up committing to a program that may cost them money, productivity, and employee satisfaction.

Interested in learning more? Talk to one of our fleet management specialists today.