How A Small Perk Can Cause Big Problems

The 24-hour company car exposure

Due to the difficulty of attracting and retaining talented employees, many companies are providing company cars to corporate officers, managers and top sales executives as a perk.

While a company car might be an enticing benefit, many businesses are unaware of the 24-hour exposure a company car creates. Recent court rulings have sent a clear precedent that there is no distinction between “business” and “non-business” use when employees are driving company-owned vehicles. Liability is assumed by the employer regardless of any agreements or signed documents between an employee and employer. In addition, a business is likely to be held liable when an employee or employee’s family member has an accident during personal usage.

If you currently offer a company car program, it might be time to re-evaluate your position. One increasingly popular approach is to implement a vehicle reimbursement alternative. This will reduce your company’s liability exposure, while still providing most of the same vehicle expense benefits to your employee. A reimbursement program can be implemented through preset allowances or via a cent-per-mile structure.

Program Options
With minimal effort and without additional cost, your company can easily reduce operational risk by implementing a vehicle reimbursement program in lieu of a company car program. There are generally three options for handling vehicles driven by your employees: offer company-owned or leased vehicles, car allowances, or mileage reimbursement.

Company Car
With this type of program, firms purchase or lease vehicles for employees. Generally, companies pay for fuel, licenses, maintenance and taxes, which can be very costly. In addition, early vehicle lease terminations can arise in the case of employees leaving the company.

What does insurance pay after a loss?

This graph illustrates which auto insurance policy responds following an accident involving your employee:

  • Business auto policies pay 100% for losses involving company-owned vehicles, no matterwhether the accident occurs on-duty or off-duty.
  • Hired and non-owned auto coverage might apply when an employee is on-duty. Typically, personal policies are primary, while corporatepolicies are secondary.
  • If off-duty during an accident, an employee’s personal insurancecoverage will be the sole insurance available under a vehicle reimbursement plan.

 

Car Allowance
Car allowances fall into two categories: accountable and non-accountable. Accountable plans are excluded from an employee’s taxable income and are deductible business expenses for an employer. For this type of plan, employees receive a preset stipend on a regular basis for vehicle usage. Employees must then keep a log tracking business miles. Any part of the allowance used for business is not considered to be wages and, therefore, is not subject to income tax.

A non-accountable plan does not separate business and personal vehicle usage, and is considered to be supplemental wages for employees. This type of allowance is subject to income tax.

With minimal effort and no additional cost, your company can easily reduce operational risk by implementing a vehicle reimbursement program.

Mileage Reimbursement
This is considered the most basic automobile policy. Employees are reimbursed on a cent-per-mile basis for business miles driven. Currently, the federal rate for 2008 is $.505. These reimbursements are not considered taxable income and employers are able to deduct reimbursements as a business expense.

The following are important steps toward developing a vehicle reimbursement program:

  • Title all company vehicles in the names of your employees.
  • Require employees to purchase personal liability insurance on the vehicles. At minimum, they should obtain $300,000 in liability coverage. As a general rule, $1 million is recommended by combining underlying auto limits with personal umbrella policies.
  • Obtain proof of coverage and conduct periodic audits.
  • If you choose, reimburse your employees for regular vehicle maintenance, insurance and fuel.
  • Obtain a signed Motor Vehicle Record (MVR) authorization form from your employee, which allows you to pull his or her MVR.
  • Establish driver eligibility guidelines and review MVRs regularly.
  • Maintain hired and non-owned auto liability coverage for your company, which protects your company in a situation where your employee causes an accident while driving during company time.

A well-managed vehicle reimbursement or car allowance program will insulate your company from losses that are not the direct result of business operations, while at the same time offering nearly the same benefit to your employees as a company car. Ultimately, replacing a company car program using either a mileage reimbursement program or monthly allowance method will reduce the likelihood that a liability loss will damage your company’s insurability.

Gases and Welding Distributors Association
Meet the Author
Tony Hopkins is sales executive, welding distributor branch at the Welding Distributors Partnering Group (WDPG), a division of The Horton Group, located in Nashville, Tennessee, and on the Web at www.wdpginsurance.com.