By Mike Antich
Reimbursement has re-emerged as a fleet issue. One reason is that Runzheimer has a rival, which means two competitive sales forces are aggressively selling vehicle reimbursement programs. Founded in 2004 by former Runzheimer employees, Corporate Reimbursement Services (CRS) sells a customizable vehicle reimbursement program, which calculates geographic cost variances to determine reimbursement rates for business use of personal vehicles. The program is very similar to Runzheimer.
Also, the recession, corporate downsizing, funding/credit constraints, OEM viability, and economic uncertainty have renewed senior management's desire to re-examine reimbursement. Runzheimer and CRS are targeting these senior managers and selling reimbursement as an economic benefit. But is it? First, the math doesn't support this contention. According to Greg Corrigan of PHH Arval, the average managed sales fleet operates at 25-29 cents per mile, while some fleet managers say a Runzheimer/CRS-style reimbursement program costs an average 40 cents per mile. Plus, there is also the hidden expense of many employees exaggerating business miles to increase reimbursement. One fleet management company study showed when switching from a reimbursement program to a company-provided program, reported business mileage decreases 30 percent. It's not that employees drive less; it's because business miles no longer generate reimbursement monies, so employees report actual mileage.
Looking Beyond CPM
When considering reimbursement, it is important to look beyond cents-per-mile (CPM) considerations. The company vehicle is the corporate image presented to customers. When an employee drives a personal vehicle, the company surrenders this control. The same is true with corporate green fleet initiatives. It is a non sequitur when employees are reimbursed to drive large SUVs or other models that don't conform to the green corporate image a company wishes to convey to customers and the public.
Sometimes employees will buy a cheaper or used vehicle to pocket money from the company allowance. Fleet driving doesn't lend itself to the use of personal vehicles. It is difficult to afford a retail lease when an employee drives 24,000 miles per year. Most retail leases are structured for drivers who drive 12,000-15,000 miles per year. Invariably, high-mileage drivers are upside down at end-of-lease with a balloon payment for excess mileage.
Employees view reimbursement as extra income, and when hired, this impression is sometimes reinforced by their supervisors as a way to buttress a lower starting salary. In these cases, will reimbursement be used for a vehicle (as intended) or will the monies be used to repay a college loan or make a mortgage payment? With an employee-provided vehicle, how do you know when an employee postpones a safety-related repair? Maintenance is an out-of-pocket expense, and there may even be a temptation (or financial necessity) to postpone repairs. If an accident is caused by deferred maintenance, what is the corporate liability exposure?
Also, if driving a personal vehicle, an employee must buy "business insurance," which costs twice as much as personal auto insurance. If the employee is involved in an accident and does not have business insurance, the personal insurance carrier can deny the claim and incurred loss because it was not advised the personal vehicle is used for business. Invariably, drivers do not carry adequate personal liability insurance, increasing corporate liability.
If not handled correctly, reimbursement can be considered taxable income by the federal government and some states. As such, car allowances are taxable to the employee, and the company is subject to its portion of the FICA tax. The employee's combined state and federal tax burden increases, the equivalent of a salary reduction. Also , employees may be subject to an IRS audit since mileage and vehicle expense deductions are auditable.
A Competitive Advantage
Providing a company vehicle is a competitive edge in hiring top-caliber salespeople, technicians, and managers. Industry surveys reveal prospective employees view a company vehicle as an equivalent benefit to healthcare coverage and pension benefits. Trying to hire prospective employees who already have a company vehicle by offering a reimbursement program puts a company at a hiring disadvantage. While a reimbursement allowance may have the initial appeal of enabling employees to drive the vehicle of their choice, employees ultimately realizes it is not the best economic choice for them. In addition, employee turnover increases when a company eliminates a company-provided vehicle program. Fleet management companies have found when companies shift to driver reimbursement from a company-provided vehicle, about a 10-percent loss in work force occurs because employees do not like the loss of their company vehicle.
Let me know what you think.