Vehicle Use Agreement: What is it?
A Vehicle Use Agreement is a contract between a motor vehicle owner (or their company) and a driver, laying out the terms of the driver’s use of the vehicle. Its purpose is to ensure the business’s vehicle(s) are not being used for unauthorized purposes, or driven by authorized drivers in a way that increases the risk of or likelihood that a claim will be made against the business for alleged negligent acts or omissions of the driver (or even theft). It also helps assure the employer that the vehicle is relatively safe and roadworthy.
Most Vehicle Use Agreements spell out who the authorized driver(s) will be, the type of activities in which the vehicle can be used, how often the vehicle should be maintained and repaired , and how to handle claims regarding unauthorized use of the vehicle and moving violations. They may also deal with such sometimes contentious issues as how to handle hand-held cell phone use or texting on the road.
Probably the single most important term in a Vehicle Use Agreement is the requirement that the authorized driver keep the vehicle insured and that the insurance be of a certain amount of liability coverage for personal injury and property damage. Some agreements even require collision coverage, which covers damage to the vehicle itself whether it is the fault of the driver or not. The buyer should consider these requirements before agreeing. It is incumbent upon the buyer to make sure he or she ever actually receives those documents.
It goes without saying that if the purchaser of the vehicle decides to ignore the rules (no alcohol, proper maintenance, etc.), then it is likely that the seller’s insurer will not come to the rescue if the purchaser has a wreck and is sued to cover the damages.
Vehicle Use Agreements: Four Main Types
Types of vehicle use agreements can fall into a number of categories, including personal use agreements, various company vehicles (such as pool cars, cars assigned to executives, cars that are the subject of car allowances or car allowances plus, and vehicles considered "all-in" by the company), rental cars and loaned vehicles. Given the evolution of the use of cars in our society, each of these types is worthy of a brief discussion.
When a car is the subject of personal use, there are a few potential approaches to the valuation of the applicable tax fringe benefits. An employee can either be provided an actual-use vehicle (i.e., the employee pays taxes on actual personal use of the vehicle); there can be a general value implied in a monthly charge for use of the vehicle, or the owner can apply one of two simplified methods for determining the fair market value of personal use of the vehicle: the cents-per-kilometer method (based on the driven mileage during personal use) or the standby charge method (based on availability for personal use). The application of these is guided in Canada by the Income Tax Act (Canada) regulations.
When a company vehicle is provided, it can be characterized as a pool vehicle (used only for the employer’s business and no personal use), a car that is assigned by the employer to an employee and both personal and business use is permitted (this may or may not involve a tax charge depending on the type of vehicle and the value of the vehicle is calculated based 10 per cent of the Canadian deductible cost of the vehicle plus the standby charge value), a car that is assigned by the employer to an employee but the car is driven primarily for the employer’s business use, or an all-in vehicle that is owned or leased by the employer but considered a company asset and free from any tax charge (i.e., may include some personal use but not a significant amount). Car allowances are also popular. Car allowances involve a monthly payment directed to the use of an employee’s car where the amount of the allowance is agreed to between the employer and employee. In "car-allowance-plus" agreements, the employee will receive a fixed monthly car allowance, but the employer will reimburse the employee for certain expenses (i.e., parking, gas) that exceed cost limits. Alternatively, some companies will use car loans as a way to involve employees instead of using allowances. Any employee who drives less than a significant amount of business mileage during a tax year is generally obliged to reimburse his or her employer for taxes as a result of such a loan.
When a rental car is provided to an employee, the employee may or may not be charged a monthly fee. If the employee is not charged for the use of the rental car, then the employee is required to pay taxes on the personal use value. The amount of this value depends on the type of rental car provided, whether the rental car is used for personal purposes and the deductions claimed by the employer on the provided rental car. The deductions claimed by the employer depend on the type of rental car provided. In other words, the value of the personal use varies based on the type of rental car. Personal-use value is the monthly standby charge use value based on the type of rental car provided, plus the operating cost benefit (if applicable).
If an employee is provided with a loaned vehicle, the employee will pay taxes on any amount required to be paid to the employer or third party provider supplying the vehicle. Any amounts paid to sponsors, car dealerships, manufacturers and service providers will also need to be included in the employee’s income.
Clauses Found in a Vehicle Use Agreement
The following essential clauses typically need to be considered in a vehicle use agreement:
Insurance. The agreement should require the vehicle owner to obtain and maintain insurances such as automobile liability and collision, general liability, pollution and contamination, employers’ liability, non-owned insurance and commercial umbrella insurance, all from reputable insurers licensed in the province in which the premises are located and in the amounts that are specified in the agreement. The agreement should also require the vehicle owner to hold additional insured status for other contractors approved by the owner (for example paving contractors, snow clearing contractors, tree contractors) under its policies of general liability insurance and property insurance. In addition, the owner should be contractually obligated to indemnify, defend and hold harmless the landlord from and against any and all claims, losses, costs, deeds, liabilities or damages incurred as a consequence of the owner’s breach of the agreement.
Driver Requirements. The vehicle owner should be required to ensure that its drivers are qualified to drive the vehicle. For example, the agreement should specify the minimum age, the minimum length of driving experience, the minimum level of driver training, and other conditions. The agreement should also require the owner to be responsible for undertaking a screening of the drivers and to list all of the drivers permitted to operate the vehicle in an addendum to the agreement.
Permitted Use. The owner should be required to restrict the use of the vehicle to business purposes only, and the vehicle should not be allowed to be used at any time for personal reasons whether during or after business hours. The right to authorize a third party to use the vehicle (such as the employees of a contractor) should be specifically restricted without the owner’s prior written consent. The rights of use of the vehicle by the owner should also be restricted so that no particular person has exclusive use of the vehicle and no "perks" are associated with the use of it; rather, it should be understood by all that the vehicle is being used only for business purposes and only by those listed in the addendum.
Penalties. The agreement should require that the owner be liable and be responsible for any penalties incurred as the consequence of any enforcement of applicable laws and regulations relating to the vehicle including the Highway Traffic Act. The owner should also be required to install a GPS device not only for tracking purposes but also for tracking all uses of the vehicle. All costs of the installation, as well as all costs of maintaining the GPS device should be borne by the owner. The owner should be responsible for ensuring that it’s drivers are educated about the use of the vehicle and for keeping records demonstrating such education.
Legal Considerations for Vehicle Use Agreements
It is best to enter into a vehicle use agreement before the hire is undertaken. The Vehicle Use Agreement should ideally be legally drafted for the correct jurisdiction and should cover all key terms. The Vehicle Use Agreement is generally a standard document, with any appropriate insertions to reflect the individual circumstances of the relevant position, however it needs to be considered in light of the various laws that govern the use of the vehicle and how they apply to the driver and the employer. As discussed above use of a vehicle for business purposes and private use is usually in return for an allowance or other tax consequence for the employee. In addition, we note any independent contractors must be aware of the tax consequences that flow from the provision of the vehicle, and in particular fringe benefits tax on the provision of the car fringe benefit and/or the travel allowance. Likewise employers providing vehicle use may also be required to pay fringe benefits tax on the provision of the vehicle. Employers should only allow for restricted private use. That is to say private use for a limited distance, for example, work to home travel . Private use before, during and after work hours should be limited to a 20 km radius. A vehicle use agreement should also detail: Whilst the provision of a vehicle is also a reward for good performance in most circumstances, the legal rights and responsibilities should be addressed in the Vehicle Use Agreement. In the event that the employee is involved in an accident which was not their fault such as a hit and run or third party negligence, there is ordinarily no cover by the employer for the damage to the vehicle (unless the employer is liable vicariously), and in the case of innocent third party negligence normally only the compulsory CTP will apply. However, insurers may consider the actions of the employee in the event they are responsible for an accident. In the event that the vehicle is written off by the insurer, this can lead to the employee being required to pay the balance of the residual outstanding on a lease should the cost of the new vehicle not be sufficient to cover the lease (understandably creating significant distress by the employee). It is preferable that organisations set a suitable limit on the cost of a vehicle and are adequately insured.
Tips for Drafting Vehicle Use Agreements
A company’s vehicle use agreement should be drafted as clearly and comprehensively as possible, keeping in mind the specific circumstances of the company and its employees. The most important component is transparency; if an agreement exists to protect a company’s interest (such as protecting against liability issues or protecting the company’s interests in any way that may affect the company), this needs to be clear. Any limitations on the acceptance or use of the vehicle should be spelled out clearly, as well.
If the vehicle is company owned and the employee is specifically forbidden from using the vehicle for any personal reasons, this needs to be included explicitly. Best practices also dictate that the agreement be reviewed and updated regularly. Updating can occur as frequently as once per year or twice per year, depending on the number of employees and the nature of any relevant changes. If new information or conditions arise that warrant an update, such as further restrictions to use or new types of vehicles being provided, these should be addressed at the time the change arises.
It is essential to keep the language in the agreement free of legalese or jargon as much as possible. Further, although the agreement may specifically prohibit outside persons who are not designated as a driver of the vehicle, some companies may want to take additional steps to ensure the vehicle is not used by unauthorized people. In that case, the agreement may specifically identify the people who are not allowed to drive. If it is a small enough group, it could be advisable to write out "Except for drivers set forth in Schedule C", with a full list of names provided. Providing a full list of names rather than simply writing "and others" may help to prevent confusion and hopefully enforceability issues that could arise if an unauthorized person gets behind the wheel.
Finally, it can be helpful to have company personnel review the agreement prior to it being distributed to current and new employees. Getting buy-in from high-ranking employees may help to promote a greater awareness among company personnel that the agreement is necessary and has the company’s interests in mind.
Pitfalls to Avoid
When it comes to vehicle use, companies should ensure their interests are protected and that their employees have the right to do what the employee is authorized to do. So long as the type of use does not exceed the authority granted to them, the use will usually be permitted. It is up to the company to decide how to formulate these vehicle use agreements. Here are commonly overlooked items to avoid when creating your vehicle use agreement:
Failing to define the type of use allowed. It is one thing to say an employee can use a vehicle for any business purpose, but another to say specifically for "business purposes other than commuting to and from work." This seems like an obvious addition, but it can be missed if you are not adequately completing the agreement to describe the type of use and also to exclude certain types of use .
Not having coverage for particular types of use. If an employee chooses a personal-use vehicle after being given the choice between a company-owned fleet vehicle or a personal-use vehicle, there may be no coverage to drive the company-owned vehicle as the employee drives home. Make sure you include all use, including commuting to/from the workplace.
Not updating agreements periodically. Events change, and making sure your vehicle use agreements are up to date is important. You should review them regularly, and with every update. Drafting them correctly, and updating at least annually, can protect otherwise company-owned vehicles from comingling with personal use, which may void the insurance policy.