The hidden costs--and hassles--of mileage reimbursement & car allowance programs

The supply chain is still not fully recovered from the effects of COVID-19, and complications remain around tariffs, inflated vehicle prices, and potential parts shortages. As such, business leaders are considering tightening their budgets and making their operations more cost-effective.

It’s no wonder many fleet managers are evaluating alternatives to providing vehicles to their employees, such as mileage reimbursement or car allowance programs. These approaches shift more responsibility to employees, requiring them to use their personal vehicles for business purposes and receive either mileage-based compensation or a flat allowance for the monthly payment, fuel, maintenance, and insurance.

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

“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, Director of Client Partnerships at Mike Albert. “But too often, companies only look at these alternatives from an acquisition standpoint. They don’t really consider the total cost and downstream impacts."

Consider just the first step: vehicle acquisition. “If someone is acquiring their own vehicle, they’re at the mercy of what’s available on local lots—and they’re negotiating skills,” explains Andrew Martin, Business Development Manager at Mike Albert. “Fleets can take advantage of special incentives and, with better planning, lower costs, too.”

Unless employees are required to choose from a few “pre-approved” choices, envy can arise among employees if some are perceived as having a better vehicle. In one case he’s familiar with, Martin says that every employee has an F-150, but because some have better trim levels, there’s grumbling among the staff.

These are the unforeseen issues that can arise with mileage reimbursement and car allowance programs. Let’s explore some others.

They increase your company's liability risks.

Companies implementing these programs must recognize the additional liability risks they assume when employees have accidents.

“Insurance is probably the biggest hidden cost that most companies don’t think about,” says Martin. “If an employee uses their car for work purposes, they should report that use to their insurance company. Too often, though, they don’t because their insurance rates will increase, and your company can be at risk if they aren’t properly covered."

Without proper supervision, some employees may allow their coverage to lapse after providing initial proof to employers or fail to secure necessary business-use coverage. 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.

They make more work for your company and can lower morale.

While allowing employees to use their own vehicles can provide some flexibility and comfort, it can also generate significant frustration. Employees must front personal funds for all vehicle costs, including monthly payments if the vehicle isn’t fully paid off. Delayed reimbursements can lead to dissatisfaction, decreased morale, and even resignations.

“When companies transition to reimbursement programs, they assume they'll simplify operations because they transfer tasks like mileage tracking, vehicle maintenance, and insurance to employees,” says Martin. “However, developing and overseeing the right reimbursement program is more complex than one may think. Increased administrative workloads can increase the potential for errors or disputes.”

“It's not just throwing out one number and being done with it,” says Brent Pietroski, Director, 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 these programs' administrative requirements, organizations often spend more on financial resources and employee goodwill than if they had leased their own vehicles through a fleet management company.

They may lead to downtime and damage customer satisfaction.

Relying on employees to use their 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 efficiently and on time from point A to point B.”

Employee downtime is one of the most significant hidden costs for organizations relying on personal vehicles. Employees may delay preventive maintenance, choose lower-quality repair services, or postpone necessary work altogether to save money. This leads to safety concerns, increased breakdown frequency, and other concerns, including poor curbside appeal.

“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.”

In addition, says Martin, you don’t know if your employees are requesting the right services and paying fair sums for them. “With Mike Albert,” he says, “you get pre-negotiated maintenance rates plus a careful review of the proposed service by an SME-certified mechanic.”

They may cost more than they’re worth—and jeopardize the integrity of your employees’ mileage reporting.

While it may seem fine for employees to use their vehicles in the short term, the long-term financial picture tells a different story. One of the main reasons for this is that your company must reimburse drivers for everything involving their vehicles, including fuel, mileage, and maintenance. Drivers may pay more than they need to for maintenance to keep the vehicle on the road, especially if it’s older, leading to unpredictable monthly fluctuations. While the same can be true with leasing, some lessors offer maintenance packages when leasing a vehicle, easing the burden of maintenance bills and giving monthly payments an element of predictability.

Additionally, employees tend to overinflate their business miles, opening a new can of worms. Many workers feel the squeeze of inflation, which may tempt them to defraud their employers by padding the business mileage they accrue on their vehicles or using less-efficient vehicles to maximize reimbursement. This, in turn, could cause their employers to inadvertently defraud the IRS.

“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. Many recent industry reports show that reimbursement-related mileage reported by employees has increased dramatically.”

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

This is a relatively common problem, and if employers aren’t serious about verifying their employees' mileage, a flat-rate reimbursement program can cost companies a lot more than they bargained for. Employers should adequately document mileage, keep accurate records, and stay up to date with the IRS guidelines for reimbursement, adding to the administrative burden. If it doesn’t happen, your company could face penalties.

As for IRS mileage guidelines, remember that they currently allow for a $0.70 per mile reimbursement. It’s not uncommon, says Martin, to fund a leasing program for that sum or even less.

They can cause missed opportunities for your company.

When companies lease their fleet vehicles for employees, they can implement telematics solutions to achieve more efficient and safer fleets. “Modern fleets are at their best when they have access to telematics and the insightful stories that data tells,” says Martin.

In addition, leased vehicles allow companies to wrap them. “A good-looking wrap communicates that you’re proud of your company,” says Martin. “Plus, they’re rolling billboards that build your brand and generate business.”

The moral of the story: Take a look at the whole picture.

In times of economic uncertainty, it’s only natural for business leaders to consider how they can streamline operations and cut costs. But, as with any significant 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 commit to a program that could cost them money, productivity, and employee satisfaction.

"Driver reimbursement may be a part of your business model, but like retirement or health planning, it's essential to explore all your options,” Martin says. “Weighing the pros and cons and crafting a strategic plan ensures your approach aligns with your immediate goals and long-term vision. We can help navigate the uncertainty of fuel and mileage use, mitigate unnecessary risks, lower internal workload and costs, and ensure your company shows up to every job looking its best.”

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