How to write a car allowance policy
For any business, a car allowance is a great opportunity to provide flexibility for your employees who commute to work or use a car for work-related travel. It’s a perfect fit for many businesses, whether it’s a monthly car allowance or a one-off payment—there are perks to having it for both parties.
With that in mind, this article will explain car allowance policies in more detail. It’s useful to understand how a policy is drafted together and how it might differ from one employee to the next.
With more and more remote workers and travelling employees than ever before, a car allowance policy is a must when considering employee contracts and business needs.
What is a company car allowance policy?
A company car allowance policy outlines the structure of the car allowance that’s offered to the employee by the employer.
Car allowances can be great for staff retention and for giving your workforce the cash flow they need to buy a car for work. Whether they have some level of personal use or it’s used for business purposes only, it can certainly be a helpful perk to provide.
That being said, there are certain questions to ask before you create the policy.
- What should I, as the employer, be responsible for reimbursing?
- What other expenses should be covered in this allowance?
Different companies demand different requirements from their car allowance policy—it’s important to adapt the policy to your specific business needs. After all, no two budgets are the same and related expenses such as vehicle depreciation, wear and tear, and car insurance also need to be considered.
What’s in a car allowance policy?
The policy itself is made up of multiple sections and will typically be in the travel section of an employment contract. Having a structure to the policy will make it easier to set up. These sections include:
- An introduction to the policy and the company’s values
- The eligibility of the employee and the allowance given
- Mileage allowance rate / mileage logs and provision of car
- Changes to contract including termination and business expense processes
- Safety and duty of care
Creating a car allowance policy (with examples)
There are many different templates for car allowance policies online. As long as you follow the sections mentioned above, you should have no issues. We’ve broken down the sections into more detail to help get your started, along with some brief examples.
The introduction to the policy will outline what the document entails and the company’s values (if they are relevant to the policy and worthy of mentioning). This may refer to how the organization values its employees and the fairness they provide to each staff member.
Depending on the business, not every employee will get an allowance. For some, it’s simply not necessary and so there’s an eligibility process in place. Plus, employee positions within the company will usually dictate how much car allowance someone receives.
For example, you may have executive-level individuals that will receive $15,000 whereas a middle management role will get $10,000. There’s usually a number of categories into which the employee will fall.
There may be certain conditions you want to introduce if the employee decides to lease a car. Leasing a car can require sticking to a certain number of kilometres and insurance premiums can vary depending on the driver. All these vehicle expenses will be included in the car allowance offered, so it needs to be a suitable choice for the business and fit within the budget.
3. Mileage allowance rates and provision of the car
As mentioned below, there are certain mileage rates and reimbursements that can be added to the car allowance provided. The provision of the car explains how it’s the employee’s responsibility for the maintenance and general upkeep of the vehicle.
For example, a company may choose to offer $10,000 to cover the cost of the car whether it’s bought outright or financed. This cost also covers whatever maintenance is necessary, fuel, and wear and tear.
4. Changes to contract
There’s always a need to put a clause in the policy that details the process for making changes to the contract in case of termination. As a business, it may be important to cover your back in the event that a car allowance is no longer required. This might be because there’s no longer a need for it or it’s proving a financial strain on the company.
These terms are critical to include in the policy in the event that changes need to be made.
5. Duty of care and safety guidance
As a business, an employer has a certain amount of responsibility when it comes to ensuring the safety and care of the workforce. When an employee is given a car allowance, there should be guidance on safety and how to handle the vehicle in a manner that reduces the risk of injury or accidents.
Adding on mileage reimbursement
When offering a car allowance, the cash payment usually covers the cost of running the vehicle, like fuel and maintenance. Some businesses may wish to also provide a business mileage reimbursement policy, depending on the budget. It’s not necessary to do so, but it might be beneficial in some cases.
The reason it can be helpful to offer business mileage reimbursement is due to some of those business miles being tax deductible. So when it comes to paying up with the CRA, it could save your business money.
In Canada, the mileage reimbursement rate is $0.61 per kilometre for the first 5,000km and $0.55 per kilometre for every kilometre thereafter.
How a car allowance policy differs by rank
When you’re creating a car allowance policy for company employees, what you offer might differ depending on someone’s position in the company.
Bearing this in mind, it’s important to create a fair policy—a middle manager could be doing more travel for work than a CEO or executive. At the same time, it’s important to reward those c-level employees too. It’s a balance that every business should aim to get right in order to provide a fair and functional work environment.
The same way a salary is subjected to income tax, the car allowance amount is paid out on top of the employee’s salary. It’s worth asking HR what amounts should be offered in order to make things fair.
A car allowance policy can be useful when a car is required for business use and, in a way, relieves the business of its responsibility for the vehicle.
Implementing a car allowance policy
Some businesses provide a car allowance in the form of a monthly amount and others as a lump sum. Whether you offer a monthly allowance or all of it in one go, is very much up to you as a business.
When implementing a car allowance policy, it’s important to personalize it and make it appropriate, beneficial, and useful for the employee in question. If it’s a personal vehicle that the employee needs, then a car allowance policy is likely the optimal choice. There are other options, such as a company car, that you can consider if the vehicle is mostly used for business travel.
For some staff, it might be ideal for them to have their own car. For the business, it might be better for it to own its vehicles rather than offer an allowance. Either way, there’s plenty of choice when offering travel benefits.