If you are not reimbursing fleet drivers in electric vehicles for charging at home you are putting your company in legal jeopardy.
Having employees bring electric fleet vehicles home at night to charge can save a company thousands of dollars a year in electricity costs and employee time, but failing to adequately reimburse those employees for their electricity use is a class action lawsuit waiting to happen ― potentially costing a company millions. In California, such lawsuits have become increasingly common rather than exceptional due to the stringent regulations outlined in Section 2802 of the California Labor Code. If you have yet to implement a fair, precise, and legally compliant reimbursement program for vehicle charging, your organization may already be exposed to significant risks.
California labor code
The IRS provides guidance on which expenses are considered reimbursable business expenses for federal tax purposes. In addition, many states have their own regulations that are equally important for companies to comply with. One of the most notable when it comes to vehicle-related reimbursements is CA Labor Code Section 2802 (CA 2808).
California Labor Code section 2802 was first enacted in 1937 and requires employers to “indemnify his or her employee for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties.” Subdivision (c) of section 2802 defines “necessary expenditures or losses” as including “all reasonable costs.” In other words, employers are legally obligated to reimburse employees for all the reasonable expenses they incur related to work.
In 2005, in the case of Gattuso v. Harte Hanks Shoppers, Inc., the Supreme Court of California clarified that CA 2802 covered driving reimbursement expenses, noting that “if an employer requires an employee to travel on company business, the employer must reimburse the employee for the cost of that travel under Section 2802.” For internal combustion engine vehicles, those costs include gas. For electric vehicles, that includes the cost to charge.
A related provision, section 2804, expressly prohibits employees from being able to waive their section 2802 rights, meaning even if they agreed in a contract (or practice) to not be reimbursed by their employer they are still entitled to fair compensation under the law and can be part of a class action down the line. Legally, the employer’s obligation to cover these expenses remains.
Calculate and compensate
In the Harte Hanks Shoppers, Inc. case, where the company ultimately had to pay $7 million to the wronged employees, the company was not disputing that they owed the employee reimbursement money. Instead, they were arguing that those costs were already covered in the form of higher compensation. The court disagreed.
The landmark decision established that reimbursement expenses must be separated from other forms of compensation. The decision went on to outline all acceptable practices available for companies for calculating and reimbursing employees for 2802-related vehicle expenses, including:
A lump sum payment
Mileage reimbursement using the published IRS reimbursement rate
Mileage reimbursement using an agreed-upon rate between employer and employee (as long as that rate covers the true costs)
Actual expenses (fuel, maintenance, repairs, insurance, registration, and depreciation) paid separately
Each of these methods comes with benefits and challenges, which the employer should consider carefully before making a decision.
Lump sum payments
In a lump sum payment, or flat allowance, model, every employee is reimbursed the same amount. The upside for the company is that it is easy to administer. The drawbacks are significant. First, the chance that the reimbursement amount will reflect the real cost of charging at home is virtually zero, which means to be in compliance with Harte-Hanks, a company must overcompensate employees to protect themselves from litigation. As utility rates can vary wildly even within a relatively small geographic territory, ensuring every employee is being fairly compensated can be costly. The second issue with this method is that the payment is considered taxable income for the employee, a point the Harte-Hanks explicitly calls out as a warning to employers and employees alike. Finally, this method does not encourage employees to charge at home, where electricity is usually 2 to 3 times less expensive, which can compound fleet reimbursement costs for the company.
The IRS sets a mileage reimbursement rate employers can use to cover the deductible costs of operating an automobile for business purposes for employee reimbursement. In 2023, this rate is 65.5 cents per mile. The IRS explicitly notes that this rate applies to electric and hybrid-electric automobiles. This IRS-compliant rate works for individuals driving their own electric cars for work, but not for those driving company-owned assets and charging them at home. It is worth noting that the published IRS rate is generally more than what the fair calculated rate would be for fleet drivers using their own vehicles for work by several thousands of dollars, which is why the fixed and variable rate method (FAVR) program became popular. Electric vehicles are even less costly to run than gas cars, so this method will be a significant overpayment to the employee. In addition, for fleet drivers using a company car and charging at home, there is no set IRS rate for pure kWh reimbursement.
The Harte Hanks case notes that the “actual expense method is the most accurate, but it is also the most burdensome for both the employer and the employee.” The court was correct in that until recently, figuring out the actual cost of the electricity used for charging at home was extremely difficult. Several solutions have emerged in the last few years, including installing dedicated chargers at employees’ homes (expensive), or manually separating out charging events from an employee’s utility bill (labor intensive) and doing the calculations manually. The difficulty of administering a program that uses either solution at scale is compounded by the wild variation in employee vehicle types, locations, and living arrangements. Today, ReimburseEV™ makes reimbursement simple by providing a solution that can analyze both charging and rate data to create an itemized receipt employees can submit for home charging reimbursement. The benefits of this system are that it is simple, accurate, IRS-compliant, and the reimbursements are not taxed as employee income.
CA 2802 lawsuits can be quite costly. For example, Radioshack had to pay $4.5 million to employees for only reimbursing employees who followed specific expense reporting procedures (Stuart v. Radioshack Corporation). Crossmark, Inc., settled for $1 million with employees who claimed they were not fairly reimbursed for travel and business-related expenses. Companies with employees in California and across the country need to take notice, as many states have similar provisions that open them up to potential risk of class action liability.
While there has been no class action yet related to failure to reimburse for charging at home, the risk for companies not reimbursing for this business expense correctly is clear and present. In the 2014 case of Cochran v. Schwan’s Home Service, Inc., the court held that under CA 2802, employers must reimburse employees for work-related phone calls made on personal cell phones. They used the phrase “fair portion” as the standard, but also noted that liability for failure to reimburse for cell phone use can be “determined without an inquiry into the specifics of each class members’ cell phone plan.” They found that failure to have an adequate policy or practice of reimbursing employees is enough for the court to certify a class. Replace “personal cell phone” with “personal electric vehicle charger,” and a judge might determine the same principle applies.
Our country is moving to electric vehicles. Companies that move their fleets early or encourage employees to make the switch have so much to gain. But this new EV landscape also brings new risks to employers. Failure to reimburse employees properly for charging at home can have serious consequences. Employers must have a policy or practice in place to reduce their risk. Take the practical measure to reduce risk by offering employees an IRS-compliant program that accurately reimburses employees for charging their vehicles at home.
David Lewis is the founder and CEO of MoveEV, the first-of-its-kind AI-driven green technology solution designed to make it easy for companies to accelerate electric vehicle (EV) adoption. Kate Harrison is the co-founder and head of marketing at MoveEV. With more than a decade of experience as a serial entrepreneur and seasoned marketer, Kate has worked with small businesses, nonprofits, and government organizations to make the world a better place. She is a best-selling author, thought leader, and frequent speaker at conferences and events, sharing her insights and experiences with others who are working to create a more sustainable future.
The views and opinions expressed in this article are the author’s own, and do not necessarily reflect those held by pv magazine.
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