For years, employers across the country, including franchisors (and their franchisees), have been besieged with myriad collective wage-and-hour actions claiming their delivery driver reimbursement policies violate the Fair Labor Standards Act (FLSA). These claims are based on the theory that employers must reimburse their drivers at the IRS Standard Mileage Rate (or pay "actual expenses" incurred) for the use of their personal vehicles, and that the failure to do so results in illegal kickbacks that drop employees below the FLSA’s minimum wage requirements. Employers, on the other hand, consistently have argued there is no legal requirement to reimburse drivers at the IRS Standard Mileage Rate, but that the FLSA’s requirements are flexible and permit employers to use various methodologies to calculate reimbursement rates. This includes the right to "reasonably approximate" vehicle-related expenses due to the inability to calculate precisely actual expenses incurred by employees who use their vehicles for both work and personal use.
On August 31, 2020, the US Department of Labor’s Wage and Hour Division (WHD) agreed with these employers’ long-stated position, issuing Opinion Letter FLSA 2020-12, which provides employers with substantial latitude when it comes to reimbursing employees who use their personal vehicles in connection with their jobs. In so doing, the WHD made clear that employers can utilize an array of calculations to determine appropriate reimbursements, rejecting entirely the notion that reimbursing employees at the IRS Standard Mileage Rate is the only method for calculating an employee’s vehicle expenses.
Broadly, the FLSA requires employers to reimburse employees for business-related expenses in cases where such expenses drop an employee’s pay below the minimum wage rate. In Opinion Letter FLSA-2020-12, the WHD principally considered whether the IRS’s mileage rates were the "only way" to calculate a reasonable approximation of expenses for personal vehicle use, if alternative calculations could be appropriate, and if an employer must reimburse both fixed and variable costs.
Rejecting out of hand the suggestion that reimbursing actual expenses was required, the WHD examined the appropriate methodology for determining reasonably approximated vehicle-related costs. Initially, it rejected the premise that the IRS Standard Mileage Rates set a proverbial floor for estimating reimbursements, explaining that its regulations expressly hold that vehicle reimbursement may be lower based on myriad factors, including geographic location (eg, gas prices vary widely by state, as do the costs of maintaining and insuring a vehicle). It further explained that the WHD does not endorse any specific method for calculating reasonable expenses; instead, it indicated that the regulations are intentionally flexible and circumstance dependent. While not expressly endorsing any particular method of reimbursement – such as a flat per-mile reimbursement based on average miles or a mileage rate customized to the employer and averaging costs across employees – the WHD noted that these methods could be reasonable based on the circumstances.
Lastly, the WHD examined whether an employer’s approximation of costs includes only variable costs (eg, fuel, wear and tear), or fixed costs as well (eg, lease payments). Relying on the oft-used "tools of the trade" analysis, the WHD took the position that it is only when an employee’s personal vehicle is used "primarily for the benefit of the employer" that an employer may be obligated to reimburse for fixed costs. Thus, the WHD greatly limited the scope of potentially reimbursable expenses for employees who use their personal vehicles for work.
Ultimately, this Opinion Letter affirms that employers have substantially greater leeway in determining a reasonable vehicle reimbursement rate, while also reducing the scope of potentially reimbursable expenses. While the battles in the courts may continue, it is expected that many such claims either will be voluntarily dismissed or reasonably settled; with respect to cases that continue, the Opinion Letter provides significant ammunition to employers defending such claims, inasmuch as courts likely will give deference to the WHD’s position on vehicle reimbursement requirements under the FLSA.