Are fleets of company vehicles a good option?
Fleets are a good option if your drivers have specialized cargo and drive more than 25,000 miles annually. Otherwise, there are better choices.
Let us look at the pros and cons of, and alternatives to, fleet. This will help you understand whether a fleet is a good option for your business in 2022, or whether another option (like a vehicle reimbursement program) is preferable.
What is a company fleet?
A fleet is a group of vehicles owned or leased by a business. Fleets were historically popular choices for company vehicle programs; many businesses are now switching to vehicle reimbursement programs.
For some companies, fleets remain necessary. Large hauling operations require fleets of trucks, because their work is specialized. Smaller distributors with particular needs—such as refrigerated pharmaceutical transport—may also require an owned or leased fleet in perpetuity.
However, for many companies (whose fleet operations are not specialized) fleet is an outdated model. For businesses whose fleet has been a "company car program"—cars for salespeople who transport nothing—it is becoming clear that a fleet is an extravagance.
This table lays out the pros, cons, and alternatives of fleet. Below the table, you can read in depth about these points.
What are the pros of fleet?
- The company's image is tightly controlled
- Necessary for specialized work
- Provide a fringe benefit to employees
What are the cons of fleet?
- 30% more expensive than reimbursement alternatives
- 100% liability for all vehicles
- Cumbersome, administrative burdens (use up valuable HR and admin hours)
What are the alternatives to fleet?
- Flat rate vehicle allowances
- CPM "Cents per Mile" reimbursements
- FAVR "fixed and variable rate" reimbursements
What are the pros?
1. The company's image is tightly controlled
If you want all your cars to look identical, you can buy or lease a fleet. If you want every member of the sales team to always arrive in a white sedan, fleet can achieve this.
You are also free to brand your cars. If you want your vehicles to also be mobile advertisements, a fleet may be a good choice for your company. However, if your aesthetic preferences end at vehicle colour, you may be content with a vehicle reimbursement program.
Many business owners set company policies concerning the appearance of employee vehicles driven for business purposes. They may request, for example, that only white cars be purchased for work.
2. Fleets are necessary for specialized work
Fleets are a necessary solution if your business does specialized work (for example, transports medicine that needs to be kept at a precise temperature).
This type of fleet, however, is different from a fleet of company cars driven by salespeople. In general, a fleet of refrigerated trucks would be left on the company lot at the end of the workday. This mitigates some of the risk attendant on fleets of company cars.
If a car is not being used on weekends for an employee's personal driving, the company's liability is lessened. However, a company-provided vehicle that goes home with an employee is an insurance hazard.
3. A company car is a fringe benefit
Employees will generally be happy to receive a company car as part of their onboarding package. Paying all of a driver’s business and personal vehicle expenses is a generous thing for a company to do.
However, through a mileage reimbursement program, employees are empowered to choose and drive their own vehicle. Your company helps employees purchase and maintain a vehicle. They retain the equity if they leave the company, and when the vehicle program term ends.
1. Fleets are a gratuitous expense
Owning and operating a fleet is the most expensive kind of vehicle program. On average, a fleet of vehicles costs 30% more than a FAVR reimbursement program.
You are paying for an employee’s personal use of a company car. Contrast this with the reimbursement system, in which the cost is split.
Paying for business and personal driving is unnecessary. It is no longer expected by most drivers; alternatively, pay for only the work week, 5 of 7 driving days.
2. Fleets are risky operations
Companies carry 100% of the liability for the fleet, even when cars are being driven by employees for personal use. When a vehicle is involved in an accident, the owner or the primary on the insurance policy is held liable. With a fleet, this falls squarely on the business.
Also, when seeking damages in tort cases, plaintiffs often target companies because of the deep pockets theory. This theory holds that an entity's available resources should be taken into consideration when apportioning blame in a tort case.
If an employee takes a company car home with them on the weekend, and they let their friend drive it, and that friend crashes the car after having a few drinks, nevertheless the company is responsible for damages. This is an enormous amount of risk for a company to tolerate.
Switching to a FAVR reimbursement program significantly reduces that liability burden.
3. Fleet management is an onerous task
As a business owner, you have to manage the acquisition, maintenance, insurance, and replacement of all fleet vehicles. This can be a full-time job for multiple administrators if the fleet is a large one.
Businesses with company cars often have dedicated fleet managers on staff. No wonder, given the diversity of tasks associated with fleet operations. Managing a fleet involves:
- Finding cars to lease or buy, and shopping around for the best deals
- Keeping those cars in working order, and compliant with safety regulations
- Organizing repairs on high mileage vehicles, which always need repairing
- Insuring the cars
- Ensuring the fleet conforms to national, statal, and municipal laws
- Implementing a sound driver conduct policy
- Hiring and training drivers in accordance with that policy
Switching to a FAVR plan significantly reduces the administrative burden of fleet management.
There also exist many options for fleet management software. While this option does indeed decrease the administrative onus, the other costs of the fleet remain. Risk, cost, and hassle are all reduced in a transition to reimbursement.
Alternatives (Fleet vs. Mileage Reimbursement)
There are three alternatives to owning or leasing a fleet of company cars. All three empower employees to drive their personal vehicle for work.
1. Flat rate vehicle allowances
A flat rate vehicle allowance is an arbitrary sum, paid together with a driver's salary, meant to cover monthly driving expenses. Cardata does not generally recommend flat rate allowances to our US clients.
Offering a car allowance reduces corporate risk. The employee is required to supply and insure their own vehicle for business use.
An allowance, however, does not curtail business expenses. Allowances are assessed for both FICA payroll tax and income tax, so there is a significant amount of tax waste. The costs of an allowance program are nearly as high as those of a fleet.
Allowances are also not data-driven, and do not correspond to the actual costs of driving. For these reasons, Cardata does not recommend this alternative.
2. CPM "cents per mile" reimbursements
A CPM standard rate reimbursement is a per-mile payment of 0.56¢ (2021), suggested by the IRS. Again, because the employee is supplying a vehicle for work, they are the primary on an insurance policy. Their insurance will cover damages incurred during and outside of work.
CPM programs are ideal for companies whose employees drive occasionally. "Occasionally" can be defined as fewer than 5000 miles per year. That is the minimum number of miles that must be driven to qualify for FAVR reimbursements.
There are several deficiencies of CPM programs; however, for certain clients, Cardata does recommend cents per mile. You can schedule an informational call with us to determine if CPM is the right reimbursement program for your business.
3. FAVR "fixed and variable rate" reimbursements (Cardata's top choice)
Fixed and variable rate programs are the most cost effective vehicle reimbursements. In general, they are 30% cheaper than fleet. Given the high cost of business vehicle programs, that translates to hundreds of thousands, even millions of dollars in savings.
Like allowance and CPM, FAVR reduces company liability through employee-provided insurance coverage. Unlike flat rate allowances, FAVR programs are tax-free when compliant.
When provided by Cardata, a FAVR program is based on granular and robust vehicle expense databases. Fluctuating fuel prices, local repair and insurance costs, annual mileage bands, and more are all accounted for.
Taking geographical data into consideration means your drivers are reimbursed fairly. The reimbursement figure dovetails with their actual driving expenses.
Why are FAVR reimbursements better than fleet?
FAVR reimbursements are better than a fleet of company cars because cost, risk, and administrative hassle are reduced.
There are benefits to the employee and to the company. Drivers are empowered to choose and drive their preferred vehicle for work. And, with Cardata's software suite, companies receive business intelligence that they can action to streamline their operations.
How do I switch from fleet to FAVR?
Switching from fleet to a FAVR reimbursement plan is best accomplished in partnership with Cardata. There are multiple factors to consider, and many stakeholders involved in the process.
You will need to dispose of your fleet vehicles if you own them. Cardata can advise you on how best to do so.
You will need to clearly communicate the benefits of FAVR to company stakeholders. Some will be enthusiastic about the switch, while others will have reservations. Cardata's approach to transitions is stakeholder-focused, meaning we open channels of communication for every interested party in your company.
Drivers will not want for guidance and support during the transition.
Can you have a fleet of electric vehicles?
Transitioning to EVs is a nascent trend in business vehicle programming. Because the range and service life of electric vehicles is dramatically increasing, they are becoming a viable option for fleets also.
Can you reimburse employees for using electric vehicles?
Operating a fleet of electric vehicles is doubtless a more sustainable option. Fleet costs are deflated through the lower maintenance burden of EVs. Yet even more savings can be realized through instituting an electric vehicle reimbursement program. Cardata specializes in electrification.
Disclaimer: this article contains no legal advice. It is written exclusively for entertainment and edification. If you need legal advice regarding anything in this article, contact a lawyer.
References & further reading