Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.
When nonexempt employees use their personal vehicles to provide delivery services, how much must their employer reimburse them to ensure that the employees are paid at least the minimum wage required by the Fair Labor Standards Act (FLSA)? That is the question that the U.S. Court of Appeals for the Sixth Circuit grappled with in Parker v. Battle Creek Pizza, Inc. (6th Cir. Mar. 12, 2024). Unfortunately, the court did not provide a clear answer, leaving employers (and lower courts) without meaningful guidance.
The FLSA does not directly require employers to reimburse employees for business expenses. If a nonexempt employee must provide their own “tools of the trade” to perform their work, however, the employer must ensure that the reasonable cost of such equipment does not indirectly deprive them of their “free and clear” receipt of the $7.25 per hour minimum wage.1 For example, if a nonexempt employee earns $9.25 per hour and works 30 hours in a week, the employee cannot be required to incur more than $60 [i.e., ($9.25 - $7.25) x 30] that week in unreimbursed business expenses. If a nonexempt employee earns exactly the minimum wage rate, then the employee cannot be required to incur any unreimbursed business expenses, since any unreimbursed expense would indirectly bring the employee below minimum wage.2
While the “free and clear” rule is straightforward enough when the reasonable cost of the equipment is easily ascertainable, what is an employer to do when the cost cannot be easily calculated? That was the question faced by the Sixth Circuit in this consolidated appeal from two conflicting district court decisions involving the appropriate amount needed to reimburse pizza delivery drivers who used their personal vehicles for deliveries. In both cases, the employers paid the drivers minimum wage, meaning that the employees could not incur any unreimbursed expense without experiencing a minimum wage violation. To cover the cost of the drivers’ use of their personal vehicles, one employer paid $0.28 per mile driven on deliveries, while the other paid a flat rate of up to $1.50 per delivery. The drivers sued, alleging that the reimbursement amounts were not sufficient to ensure that they received the “free and clear” minimum wage.
In one case, the Western District of Michigan held that the mileage rate published by the IRS should be used to determine the drivers’ expenses. In the other case, the Southern District of Ohio held that a “reasonable approximation” of the drivers’ costs would suffice. The Sixth Circuit held that both courts were wrong.
First, the Sixth Circuit rejected the employers’ argument (which relied in part on a 2020 Department of Labor opinion letter which the court deemed unpersuasive) that a “reasonable approximation” of actual costs was sufficient.3 The court explained that when an employee is paid the minimum wage, the mere approximation (reasonable or not) of the employee’s costs may fall short of the employee’s actual costs, resulting in the employee failing to earn the minimum wage “free and clear” of unreimbursed expenses.
Next, the Sixth Circuit rejected the drivers’ argument that courts must use the IRS’s standard-mileage rate. The court explained that the IRS rate is a “nationwide average” that tends to overpay drivers in states where gas taxes are relatively low, drivers of older vehicles, and drivers of vehicles that get better gas mileage (while underpaying drivers in states where gas taxes are high, drivers of newer vehicles, and drivers of vehicles that get worse mileage). The court concluded that the minimum wage requirement is an “individual entitlement” and that there was no legitimate basis to mandate a nationwide-average amount that does not measure an individual employee’s actual costs.
The Sixth Circuit was not sympathetic to the employers’ argument that it would be “impossible” to customize the reimbursement amount based on the actual cost of operating each driver’s personal vehicle: “[T]he employers themselves created this situation: first by paying their drivers the bare minimum wage; then by requiring them to provide their own vehicles to deliver pizzas on the defendants’ behalf; and finally by cutting it close ... as to whether they have adequately reimbursed their drivers for the cost of providing those vehicles.”
The Sixth Circuit’s decision comes at a time when district courts across the country have been struggling to articulate a universal rule to apply in this scenario.4 Unfortunately, despite acknowledging that this issue presents a “dilemma” because actual costs were “undisputedly hard to calculate,” the court failed to provide any practical guidance. Instead, the court borrowed from the McDonnell Douglas burden-shifting framework used in Title VII cases, suggesting that: (a) the employee might present prima facie proof that a reimbursement was inadequate; (b) the employer might then bear the burden of showing that the reimbursement bore a demonstrable relationship to the employee’s actual costs; and (c) the employee would then bear the burden of proving the employer’s reasoning wrong. Immediately after proposing this burden-shifting approach, however, the court called it into question, acknowledging that “perhaps such an arrangement might not be appropriate.” Instead, the court ended its opinion with a noncommittal shrug: “the parties and the district courts might want to consider ... other ideas on remand.”
So, what is an employer to do? While we await further guidance from the courts, employers (at least those in the Sixth Circuit) may want to consider a hybrid approach for their employees who are not paid substantially above minimum wage who use their personal vehicles for work: (a) set a reimbursement rate based on the standard mileage rate published by the IRS or some other formula designed to achieve a reasonable approximation of actual expenses5; and (b) instruct employees to certify each week whether their actual expenses exceeded the established reimbursement amount (giving them an opportunity to submit evidence of such actual expenses). Employees who fail to seek (or provide support for) additional reimbursement at the time the expenses are incurred may have a more difficult time persuading a court, years later, that they did not receive the “free and clear” minimum wage.
Finally, while the Sixth Circuit’s decision was limited to personal vehicle expenses, employers should also take this opportunity to evaluate their approach for reimbursing other expenses as to which a reasonable approximation is used, such as lodging, meals, and remote work expenses.
See Footnotes
1 29 U.S.C. § 206(a)(1)(C); 29 C.F.R. § 531.35.
2 There are other scenarios in which an employer may be required to reimburse an employee’s necessary and reasonable business expenses that are beyond the scope of this update. For example, exempt employees paid on a salary basis may have an argument that the failure to reimburse them for business expenses indirectly violates the “salary basis” requirement set forth in 29 C.F.R. Part 541. In addition, certain state and local jurisdictions require expense reimbursement for certain business expenses, including California, Illinois, Iowa, Massachusetts, Minnesota, Montana, New Hampshire, North Dakota, and South Dakota, as well as Seattle, Washington and Washington, D.C.
3 U.S. Dep’t of Labor, Wage & Hour Div., Opinion Letter FLSA2020-12 (Aug. 31, 2020) (employers may reimburse a “reasonable approximation” of expenses rather than the actual expenses, and while IRS rate is presumptively reasonable, it is not required).
4 See, e.g., Holmes v. Stetson Courier, Inc., No. 4:20-cv-191-DPM, 2023 U.S. Dist. LEXIS 175431 (E.D. Ark. Sept. 29, 2023) (holding that Arkansas’s state mileage reimbursement rate was appropriate because “[t]he federal rate would create a windfall”); Edwards v. PJ Ops Idaho, LLC, No. 1:17-cv-283-DCN, 2023 U.S. Dist. LEXIS 133633 (D. Idaho July 31, 2023) (holding that employer may choose to use either IRS mileage rate or a “reasonable approximation of expenses”); Rodriguez v. GC Pizza LLC, No. 4:20-cv-3106, 2022 U.S. Dist. LEXIS 170920 (D. Neb. Sept. 21, 2022) (while employers may use “reasonable approximation” method, if plaintiffs offer evidence to support reasonable inference that reimbursement rate was not sufficient, burden would shift to defendant to rebut that inference and show that reimbursement rate was reasonable, and that while not dispositive, IRS rate could be “probative” of what is reasonable); Matias-Rossello v. Epoch LLC, No. 19-1307, 2022 U.S. Dist. LEXIS 61781 (D.P.R. Apr. 1, 2022) (granting summary judgment to employer who reimbursed $1 per delivery because “reasonable approximation” method is adequate, IRS rate is not required, and plaintiff did not provide evidence that his actual or approximate expenses exceeded the reimbursement amount).
5 It is recommended that employers that use a “reasonable approximation” that is lower than the IRS mileage rate be able to validate that approach with objective data (such as that provided by a neutral third-party vendor).
