Seyfarth Synopsis: The U.S. DOL has confirmed that there is no per se violation of the FLSA’s minimum wage requirement when low-wage employees are reimbursed for their use of a personal vehicle at a reasonable rate that is less than the IRS standard mileage rate and clarified that, in many cases, not all vehicle-related expenses need to be reimbursed.
While employers often view the requirement to pay employees at least the minimum wage rate for each hour worked to be straight-forward, lawsuits under the Fair Labor Standards Act’s minimum wage requirement remain common even among certain hourly-paid employees who make more than the minimum wage rate. Why? Because if employees who are paid at a relatively low hourly rate use personal tools or equipment to do their job, they may contend that the cost they personally bear for such items is great enough to cause their net take-home pay to be less than the minimum wage rate. One of the most common situations in which this claim arises is when an employee uses a personal vehicle for work-related activities. In most such cases, the employees earn above the minimum wage rate and the employer has in fact reimbursed the employee using a method that it believes fairly compensates the employee for the business use of a vehicle that the employee also uses for personal reasons. Thus, these lawsuits tend to turn on the question of how reimbursements must be calculated and what car expenses (such as depreciation, fuel, oil, repairs, insurance, license fees, and registration fees) must be reimbursed. On August 31, 2020, the U.S. Department of Labor, Wage & Hour Division issued an Opinion Letter (FLSA2020-12) to provide guidance on these two questions, and in doing so, provided helpful clarifications for employers.
How May Expense Reimbursements Be Calculated?
In answering how to calculate expenses, the DOL explained that an employer may pay a reasonable approximation of expenses instead of attempting to calculate actual, difficult-to-quantify vehicle-related expenses, such as depreciation and fuel. Importantly, contrary to the argument employees often make, the DOL also confirmed its regulation, 29 C.F.R. § 778.217, “explicitly allows employers to approximate expenses at a rate lower than the IRS standard [mileage] rate.” Thus, its regulations “cannot be read to require employers to use the IRS standard rate” simply because the employer chose to approximate expenses rather than track and pay for actual expenses. Rather, alternative approximation methods may also be reasonable.
Unfortunately, the DOL declined to opine on the reasonableness of alternative approximation methods suggested by the employer who requested the opinion letter. It instead stated that what would be reasonable will depend upon the circumstances in each case. Nonetheless, the fact that a rate as high as the IRS standard mileage rate (currently, $0.575 per mile) need not be used is significant for employers because employees often must argue for application of the IRS standard rate in order to show that their net hourly rate fell below the minimum wage rate.
What Expenses Must Be Reimbursed?
In answering what expenses must be reimbursed, the DOL divided the types of vehicle expenses into two categories: fixed and variable. It described fixed costs as those “that do not vary with the way or amount that an asset is used,” such as insurance, sales and use taxes, vehicle registration and license fees, and driver’s license fees. Variable costs, on the other hand, vary with the amount of use or mileage driven, such as fuel, periodic maintenance (like oil changes and tire rotations), and depreciation of the vehicle.
The DOL explained that fixed costs need only be reimbursed when the expense is incurred primarily for the employer’s benefit. And a vehicle that is driven for both personal and business purposes is not likely to be primarily for the employer’s benefit unless a specific vehicle is mandated by the employer. The analogy the DOL drew was to an employer’s uniform requirements. Where the employer requires that a certain style of dress be worn by an employee at work but does not mandate a specific outfit that would be uncomfortable or inappropriate for everyday use, it is not a “tool of the trade” that the employer must pay for as primarily for its own benefit. Similarly, where an employee readily uses a vehicle for personal reasons as well, it is not a tool of the trade, and the employer need not reimburse the employer for any fixed costs because the fixed costs are primarily for the employee’s convenience.
In addition, while the employer will usually be responsible for the employee’s variable vehicle expenses, the employer is only responsible for the business portion of the variable expenses. For example, if the employee drives 1,000 miles in one month and only 250 of those miles were driven for business-related reasons, the employer would only be responsible for that portion of the variable costs (such as fuel, maintenance, and depreciation) that are attributable to the 250 miles that the employee drove for the employer’s benefit.
The DOL’s opinion letter offers employers a powerful tool in combatting employees’ efforts to use the maximum IRS reimbursement rate to approximate expenses when actual expenses are not tracked. Through its limitations on the types of expenses that may be subject to reimbursement and its confirmation that only the business portion of expenses need be reimbursed, it also provides employers with a defense to employees’ efforts to have the employer effectively pay the full cost of owning their personal vehicle. Please note, however, that employers should remain mindful of state reimbursement laws, which may deviate from the FLSA’s standards.