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Companies with a mobile workforce often struggle with overpaying on mileage. It can be difficult to know how to control your program spend while ensuring employees are fairly reimbursed, especially in the face of gas prices that keep fluctuating.
If these challenges are on your mind, then a Fixed & Variable Rate (FAVR) program may be the perfect solution for your company to reimburse employees who drive their own vehicle for work. While some companies use a Cents Per Mile (CPM) reimbursement program or pay a flat allowance, FAVR offers a more precise, tax-free alternative.
This guide will help you decide which reimbursement plan is right for your organization by answering top questions about the program:
A FAVR plan reimburses employees who use their own car for business purposes. FAVR payments are a combination of a monthly allowance and mileage reimbursement.
The allowance covers the fixed costs of owning a vehicle. The mileage reimbursement covers the variable costs of operating a vehicle.
Because a FAVR program is designed to closely match an employee’s actual costs, it is considered the fairest reimbursement program. It most accurately pays employees with different driving amounts, not under- or over-reimbursing different people. As a result, it also often leads to lower spend compared to a Cents Per Mile program.
Curious to see how much you could save with a FAVR program? Let's chat!
Each employee’s reimbursement is tailored to their location and vehicle type. This customization is another reason FAVR is considered very fair.
The fixed payment is calculated by adding together the fixed vehicle ownership costs. These costs include:
While costs are based on a representative “standard auto,” employees have the flexibility to choose any vehicle they want, as long as it meets certain value and age requirements relative to the standard auto. The standard auto can be different for different employee groups, such as managers and junior reps. This customization also gives companies flexibility to meet their budget and benefits goals, while ensuring employees are showing up to customers with a vehicle that aligns to the image they want to project.
The variable rate is calculated by adding the variable vehicle operating costs, which vary based on location and vehicle type. These variable costs include:
Since the variable rate, as the name suggests, varies from month to month, it helps make FAVR one of the most agile vehicle programs and a straightforward way to keep up with changing gas prices. As gas prices rise, your employees are still getting reimbursed fairly, since local fuel prices are taken into account with the variable rate.
In addition, when gas prices decline, your cost to reimburse employees will also decrease accordingly. As a result, FAVR not only helps you reduce costs, but also adapt to rising (and falling) gas prices and reimburse employees fairly every month.
Both FAVR and Cents Per Mile (CPM) are IRS-compliant programs for tax-free reimbursements.
Unlike a flat allowance, these mileage-based reimbursements do not lead to "tax waste"—a costly problem that reduces the take-home benefit of stipends for employees and adds to your expenses. For an in-depth discussion of the cost of allowances to your business, please see our guide on The True Cost Difference: Vehicle Stipend vs. Mileage Reimbursement.
The main differences between these programs are in how reimbursements are calculated and paid. CPM treats all employees the same, regardless of where they live and the type of car they drive.
Whether someone lives in New York or Missouri, they’re reimbursed the same cents per mile rate for every mile that they drive. The same goes for whether they drive a 20-year old Honda Civic or a brand new Tesla Model S. CPM reimbursement is fairer than a flat allowance because it takes into account how many miles an employee drives, but does not go as far as FAVR in terms of fairness.
FAVR tailors reimbursements more closely to an employee’s actual costs for owning and operating a vehicle. These costs vary based on their location and vehicle. For instance, average auto insurance premiums are higher in New York or California than the Midwest, as are prices at the pump.
CPM reimbursements are just a variable payment. As a result, monthly reimbursements fluctuate depending on how many miles are driven. If an employee does little driving (like during the start of COVID), they will get a small reimbursement. Nevertheless, these employees still incur ownership costs for their car. On the flip side, if employees do a lot of driving, they will get a large reimbursement, regardless of their actual costs.
In contrast, FAVR payments more accurately reflect actual employee costs. The fixed payment—much like the fixed costs of car ownership—does not change regardless of how many miles an employee drives, introducing more stability into your employee reimbursements. The variable payment, which depends on mileage, is just a smaller portion of the total reimbursement.
This combination means less budget fluctuation and less under- or over-reimbursement, making a FAVR program fairer for drivers and more stable for your company budget as well.
Another difference between FAVR and CPM is their level of complexity and potential administrative burden.
CPM reimbursements, whether using the IRS standard mileage rate or a company rate, are straightforward. It’s easy to get started and manage. Calculating an employee’s reimbursement is nothing more than a simple multiplication.
FAVR is more sophisticated. This means it takes more time to implement and maintain. Companies who work with Everlance typically implement a FAVR program within 6-10 weeks. The time to implementation depends on the type of program they’re transitioning from and their target timeline.
We’ve helped customers transition from a company fleet, another FAVR provider, and CPM reimbursements or flat allowance to a FAVR program that achieves your company’s budget objectives. We design it around your priorities, helping you set the fixed rate and keep variable rates updated based on our proprietary data.
A FAVR program is a great way to stay agile and create a flexible but fair vehicle program that can adjust easily to changing gas prices without significant spend variability.
Remember, FAVR consists of a fixed rate—based on car ownership costs—as well as a variable rate—based on mileage, fuel and maintenance costs—that together make up your monthly reimbursement payment for drivers.
The fixed rate helps your budget stay more stable and prevents ballooning as prices rise, since you’re only reimbursing drivers based on mileage for the variable portion of their rate. In addition, FAVR adjusts for varying prices in fuel based on the location of your drivers—so drivers in Missouri aren’t getting reimbursed at the same rate as drivers in California, where gas prices are much higher.
FAVR not only adjusts for variable gas prices across the country, but also recalculates variable costs on a monthly basis, ensuring you’re reimbursing drivers fairly for the current gas prices—not what gas prices were six months or a year ago. Where the IRS standard reimbursement rate is typically only calculated once a year (or, very uncommonly, twice a year), your FAVR rate will automatically be adjusted every month for the current costs–whether gas prices are rising or falling.
As a result, your company stays agile, helping you weather changing gas prices as they rise and fall, avoid over- or under-reimbursing employees, and keeping your budget stable by having a portion of your mileage reimbursement stay at a fixed rate allowance month after month. Even better, it’s also fair to employees, as you’re taking into account their actual costs based on current prices, location, vehicle type and more.
FAVR offers a few key advantages compared to other reimbursement models.
FAVR has lots of cost-saving potential, as you avoid over-reimbursing high mileage drivers.
Data on overall car costs shows that the cost per mile goes down the more someone drives. For someone driving 15K miles per year, the average cost is $0.47 per mile, but at 20K miles per year, the average cost drops to $0.40 per mile. A FAVR program accounts for this fact and prevents over-reimbursing high mileage employees.
FAVR also avoids over-reimbursing employees in lower cost areas. Think about it: if you have employees driving in Dublin, Ohio, and New York City, NY on a CPM program, they’ll still get reimbursed the same rate—even though the cost of insurance and gas is different in each location.
Companies choose a FAVR plan because it is the fairest, most realistic vehicle reimbursement model.
Reimbursements are tailored to each individual. Employees understand how their reimbursement is aligned to their actual costs. They don’t feel like they’re getting paid less than they should be and are less likely to turnover.
FAVR reduces your company’s liability risk and costs. As part of a FAVR program, employees are required to show proof of insurance that meets certain minimum requirements. If an accident does occur, their insurance kicks in first.
Finally, a FAVR program gives you greater flexibility and budget control over time. Costs are more predictable. Plus, a FAVR program can be tailored to meet your budget objectives—while still reimbursing employees a fair amount and staying compliant.
In addition, since FAVR’s variable costs are recalculated on a monthly basis, a FAVR vehicle program is more adaptable to rising gas costs, variable insurance and fuel costs in different areas and fluctuating car ownership costs.
Before you make the switch, it's important to ensure your company meets the requirements.
Specifically, your company must have at least five mobile workers driving more than 5,000 miles for business on a yearly basis to qualify. If you don’t meet these minimums, a CPM reimbursement is your best option.
We see companies benefit most from a FAVR program if they have:
For companies who have fairly reimbursing employees and keeping them happy as a top of mind concern, FAVR is a great alternative to a CPM or other vehicle program.
The type of business is less important in determining fit. Some examples of businesses who may benefit from using FAVR include:
We’ve worked with a lot of beverage distributors to implement FAVR, amongst many other types of businesses.
Curious to see if FAVR is right for you?
The IRS provides guidelines for developing a FAVR program. However, because developing and maintaining the program requires time and expertise, most companies turn to a solution provider to help them.
These solutions include consultants, who design the program for you, as well as all-in-one solutions, that both develop the program and provide everything you need to manage reimbursements.
We think you’ll find Everlance a no-brainer. Between our #1 rated mileage tracking app, intuitive admin dashboard, and service from a named Customer Success Manager as well as a driver support team, your whole team is sure to love it.
Getting started just takes a conversation with a member of our team to gather details about your business. From there, we’ll perform an analysis to help you determine if FAVR is a good fit for your business. If so, we’ll get started on designing a custom program around your needs!
We help people save time and money. At Everlance, we're on a mission to empower mobile workers and businesses. That sometimes leads us to generalize tax information. Everlance team members are not certified tax professionals. If you need help with your specific tax situation, please reach out to your tax advisor.
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