January 2008, Automotive Fleet - Cover Story
Why Reimbursement Doesn't Work
A perennial question facing corporate management is whether it makes better business sense to offer company-provided vehicles to employees or to reimburse them for the use of their personal vehicles. Lately, this question has gained increased scrutiny and is being fueled by pressure on all businesses to take cost out of their operations. Companies are under enormous and ongoing pressures to reduce costs, especially in the wake of the past six years of elevated fuel prices. A corporate fleet consumes a very large percentage of a company’s operating budget and it is a tempting target for cost-cutting programs. A corporate fleet is always open to scrutiny and the pressures to reduce costs and increase productivity promises to grow in the coming years.
Although tempting on the surface, closer examination invariably reveals that reimbursement is the wrong choice for corporate fleets. What follows are keys reasons why reimbursement doesn’t work from the standpoint of HR considerations, safety issues, liability exposure, tax implications, Sarbanes-Oxley compliance, corporate image, and green fleet initiatives.
HR Implications to Reimbursement
ince a corporate fleet consumes a large percentage of a company’s operating budget, it is a tempting target in cost-cutting programs. Some corporate managers believe that driver reimbursement is less costly than a company-provided vehicle. However, as we all know, it is actually more expensive for employees to use their personal vehicles for business. What isn’t discussed as much are the human resources (HR) implications of a reimbursement program.
A company-provided vehicle can be used as a recruiting tool and company benefit by giving your company a competitive edge in hiring top-caliber salespeople, technicians, and managers. Past industry surveys have shown prospective employees view a company vehicle as an equivalent benefit to health care coverage and pension benefits. A company that offers a reimbursement program to prospective employees who already have a fleet vehicle puts itself at a hiring disadvantage. Prospective employees realize they will be forced to make a large outlay of money to purchase or lease a new vehicle and pay for auto insurance.
While a reimbursement allowance may have an initial appeal by enabling the employee to choose the vehicle of his or her choice, the employee quickly realizes it is not the best economic choice for them and typically not for the company either. It is for these reasons HR directors should discourage senior management from adopting driver reimbursement programs.
Depending on an employee’s financial wherewithal, some may find it difficult to pay for repairs out-of-pocket. Fleet managers say that some employees run short of cash and have to ask the company for a loan to repair their personal vehicle to continue working. Since preventive maintenance (PM) is an immediate, out-of-pocket expense, there is temptation on the part of the employee to postpone routine maintenance, as well as more expensive mechanical repairs.
Neglected PM can lead to break-downs, downtime, and unnecessary car-rental expense. A reimbursed driver has to spend time coordinating repairs, maintenance, rentals, and registration renewals, which could otherwise be devoted to selling the company’s products or services. It is not uncommon for drivers not to repair their vehicles after an at-fault accident because of limited finances.
Employees May Buy the Least Expensive Vehicle
Often, a reimbursement allowance is seen by the employee as part of their personal income. When it is time to replace the current vehicle, the employee may resent the outlay of a large sum of money. Frequently, drivers seek the lowest payments possible through longer terms because they think they can "make some extra money" by doing so.
If you allow employees to buy their own vehicles, some of them will buy the cheapest vehicle in order to make money from the company allowance. Also, drivers do not always replace vehicles on a timely basis. Companies offering reimbursement end up with an inconsistent mix of fleet vehicles and fleet policies with mileage and financing terms that make it impossible to manage equitably.