Labor Employment Law Blog

In response to the recent increases in the cost of gasoline, on September 9, 2005, the Internal Revenue Service ("IRS") increased the optional standard mileage rates used by employees, self-employed individuals, and other taxpayers for the last four months of 2005 to 48.5 cents per mile.

Under newly issued Revenue Procedure 2005-99, the increased rate will apply to all business miles driven between September 1 and December 31, 2005. The new rate of 48.5 cents per mile is an increase of 8 cents from the 40.5 cent rate in effect for the first eight months of 2005, as set forth in Revenue Procedure 2004-64. While the IRS normally updates the mileage rates once a year, in the fall for the next calendar year, the IRS made this special adjustment for the final months of 2005. Next year’s rate, which will be set closer to January, could be different than 48.5 cents per mile.

Significant for California employers, the California Division of Labor Standards Enforcement's ("DLSE") has determined that, absent evidence to the contrary, use of the IRS mileage rate will satisfy an employer's obligation to indemnify employees under California Labor Code Section 2802 for use of the employee's personal automobile for business-related travel.

Accordingly, it is critical that employers pay mileage reimbursement at the increased rate announced by the IRS for business-related travel during the period September 1 through December 31, 2005. Labor Code Section 2802 requires an employer 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, or of his or her obedience to the directions of the employer . . ."

The DLSE has interpreted Section 2802 to apply to automobile expenses, including any loss or damage to the employee's vehicle, that occurs while he or she is on company business. According to the DLSE, the payment of the IRS mileage reimbursement rate will cover all reasonable operating costs incurred by the employee using a personal vehicle for business purposes, including damages or loss due to accident or theft. (However, where the damage or loss is the direct result of the employer's negligence, an exception will apply.)

In cases where there is no agreement for reasonable reimbursement for business-related mileage (i.e. the IRS rate), the DLSE requires the employer to reimburse the employee for the actual costs incurred in operating the vehicle for business purposes. Such costs include losses due to accident or theft while the employee's personal vehicle is being used for business. Thus, a prudent course of action under California law is to reimburse employees at the IRS rate for all mileage incurred in using an employee's personal vehicle for business purposes.

Effective January 1, 2006, the IRS Mileage Reimbursement Rate was reduced to 44.5 cents per mile. This new rate is effective until adjusted by the IRS.