Employee Expenses Deep Dive: Understanding Mileage and Travel Reimbursements
Lesson Last Updated: July 31, 2023
Lesson Highlights
Mileage and travel reimbursements are a confusing area for many employers. Do you have to reimburse for commuting? What about time spent in the air during a flight?
In this lesson, we'll cover the following topics:
- Which travel-related expenses employers are required to pay for;
- Whether or not employers are required to pay for travel time;
- Out-of-town travel obligations; and
- How much to pay for everything!
Which Travel-Related Expenses are Employers Required to Pay For?
California law requires employers to reimburse employees for necessary expenses and costs “in direct consequence of the discharge of his or her duties.” [1] These include business-related expenses, such as the costs of using a vehicle for business purposes.
When an employer requires their employee to use the employee's own car in the course of employment, they are “obligated to reimburse the employee for the costs necessarily incurred by the employee in using the car or truck in the course of employment.” [2] This reimbursement covers all reasonable operating expenses incurred in the operation of the vehicle for business uses, including losses due to accident or theft incurred during the course of employment.
Employers that provide vehicles to their employees for business-related purposes must reimburse for all business-related expenses incurred (such as fueling costs or repairs), but the number will likely be smaller because they're not reimbursing for use of the vehicle itself.
Are Employers Required to Pay for Travel Time?
The California Supreme Court has determined that regular commute time to and from work is generally not compensable, and, therefore, not subject to employee reimbursement. This is true whether the employee works at one location or different locations every day. [3] However, the rules around travel time are not as straightforward as they might appear at first glance and details matter (that's the takeaway from this entire course!). There are always caveats.
Under state law, travel time is compensable when the employee is subject to the control of the employer, even if they're not actively "working" or otherwise being productive. [4] This is important because as we mentioned above, commute time is generally not compensable, unless the employer is controlling how the employee commutes or other details. Take the quiz at the end of this lesson to get a feel for an example where this rule applies.
But what about traveling to different work sites? Per the Department of Industrial Relations, "Compulsory travel time longer than the employee's normal commute is considered compensable time. Travel time to a job site within reasonable proximity of the employee's regular work site is not compensable. If an employee has no regular job site, travel time to the new job site each day is not compensable. If an employee has a temporary work location change, the employee must be compensated for any additional time required to travel to the new job site in excess of the employee's normal commute time." [5]
Time spent running an errand for the employer or otherwise doing the job will always be compensable.
Out-of-Town Travel Obligations
Out-of-town travel presents another tricky area for employers. California takes the stance that "if an employer requires an employee to attend an out-of-town business meeting, training session, or any other event, the employer cannot disclaim an obligation to pay for the employee's time in getting to and from the location of that event. Time spent driving, or as a passenger on an airplane, train, bus, taxi cab or car, or other mode of transport, in traveling to and from this out-of-town event, and time spent waiting to purchase a ticket, check baggage, or get on board, is, under such circumstances, time spent carrying out the employer' s directives, and thus, can only be characterized as time in which the employee is subject to the employer's control." [6] This statement provides a rich example of how broad the employer's obligations for reimbursement are for out-of-town travel, and there is no way to subvert these obligations through a written company policy that states otherwise (although some have tried!).
However, California has also given us examples of what is not considered compensable time during out-of-town travel: "On the other hand, time spent taking a break from travel in order to eat a meal, sleep, or engage in purely personal pursuits not connected with traveling or making necessary travel connections (such as, for example, spending an extra day in a city before the start or following the conclusion of a conference in order to sight see), is not compensable." [6]
It's also important to note here that if an employee is traveling for work during a time they're not normally scheduled to work (i.e., on the weekend), that will be compensable time, even if the employee is traveling earlier than necessary to their business location. We'll touch on this in the quiz at the end of the lesson, so be sure to think about this carefully!
How Much to Pay
Mileage and Vehicle Costs
There are several ways an employer can reimburse for mileage and vehicle costs:
- The actual expense method is considered the most accurate, though it is usually the most burdensome for both employees and employers. This method involves calculating the expenses the employee “actually and necessarily incurred and then to separately pay the employee that amount.” [4] This requires the employee to keep detailed and accurate records of the use of their personal automobile for business purposes, including fuel, maintenance, repair, and depreciation. Once this information has been recorded, the employee must submit it to the employer for calculation. Also considered is the necessity of the expense, which requires an inquiry into the reasonableness of the circumstances.
- The mileage reimbursement method requires an employee to keep a record of the number of miles driven in performing business duties, which is then submitted to the employer to calculate. The employer determines this calculation by multiplying the “work-required miles driven by a predetermined amount that approximates the per-mile cost of owning and operating the automobile.” [4] The IRS has calculated a widely-used mileage disbursement rate, based upon national averages and expenses related to fuel and other costs. As of the date of this lesson, the IRS has calculated the rate of mileage at 65.5 cents per mile driven for business use; if the employer is a charitable organization (501 status), then the rate can be lowered to 14 cents. [7] The employer and employee may agree upon a different mileage disbursement rate, though this is subject to objection by the employee if they can show that the amount disbursed is less than incurred. In general, if you're going to use this method, you should not deviate from the IRS-approved rate.
- The lump-sum payment method involves an employer paying a fixed amount for automobile and gas expenses, usually in the form of a gas stipend, per diem, or car allowance. This method is legally compliant so long as the amount paid is sufficient to provide full reimbursement for expenses incurred, which means employees should still submit expense reports and the amount might need to be adjusted occasionally to account for underpayments. The expense amount must be separately identified on the employee’s wage statement.
- The fixed and variable rate method involves splitting an employee’s personal vehicle costs into fixed and variable expenses. Fixed costs include insurance rates, registration, and licensing fees, while variable costs include day-to-day costs, such as gas, maintenance, tires, and oil. This method is based heavily on IRS revenue procedure, and is therefore favored by the IRS.
- A California court determined that an employer may also combine wages and business expense reimbursements in a “single enhanced employee compensation payment.” [2] This method of discharging disbursement obligations through an increase in salary or commission requires employers to establish some means by which to identify the portion of the overall compensation that is expense reimbursement.
Which method is best for your workplace will obviously depend on the frequency of employee travel, the amount of employees required to travel, and other factors. Talk to your CPA to figure out your finances and then your attorney before you implement any of these methods in your workplace.
Note: while employers do have discretion in establishing policies related to reimbursement, the courts have determined that reimbursement is still required if no expense report is filed if the employer knew or had reason to know of expense (even if company policy requires an expense report) or if a report is not in compliance with the implemented policies.
Travel Time
The rate at which the travel must be paid depends upon the nature of the compensation agreement with each employee. For non-exempt hourly employees with a fixed hourly rate for all work, then travel time must be paid at that regular hourly rate. However, an employer may establish a separate rate of pay for travel before the travel occurs for hourly employees, provided the rate does not fall below the statutory minimum wage. [5] If you plan on having a separate rate for travel time, it's crucial that this is communicated to your hourly employees before you ever pay them at that rate.
For non-exempt salaried employees, state law expressly provides that the salary only compensates for work up to eight (8) hours per day or forty (40) hours per week. Hours worked in excess of these amounts are overtime and are not compensated for by the salary amount. [6]
Travel time is considered time worked, so it will factor into overtime calculations. Non-exempt employees, either hourly or salary, must be paid at the appropriate overtime rate for any hours worked in excess of eight (8) in a day or forty (40) in a week. [5]
As you can see, the details really matter here. As always, we encourage you to speak to an attorney prior to requiring any business travel by your employees, so that you can be sure you're meeting the obligations that apply to your unique situation.
This Lesson's Sources:
[1] California Labor Code section 2802
[3] Morillion v. Royal Packing Co.(2000) 22 Cal.4th 575
[4] Cal. Code Regs. Tit. 8, § 11040 2(K)
[5] California Division of Labor Standards Enforcement Wages FAQ
[6] California Division of Labor Standards Enforcement Opinion Letters
[7] IRS Standard Mileage Rates for 2023
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