Over the past several years, employers have faced significant litigation over how they reimburse hourly employees for use of their own vehicles for company-related operations. Disputes centered on whether employers are obligated to reimburse employees at the IRS mileage rate or pay for actual expenses, or whether they may “reasonably approximate” the fixed and variable expenses associated with operating their vehicles for business purposes. The latter practice often led to reimbursement rates below the IRS rate.
On August 31, 2020, the Department of Labor issued Opinion Letter FLSA2020-12, which addressed several questions regarding reimbursements for hourly delivery drivers. This Opinion Letter follows the Colorado federal court’s opinion in Kennedy v. Mountainside Pizza, Inc., No. 19-cv-01199-CMA-STV (D. Colo. Aug. 26, 2020), which held that reimbursement of delivery drivers at a “reasonably approximate” rate is sufficient. The Department of Labor’s Opinion Letter covered four specific topics:
- Whether employers who reimburse their delivery drivers for either actual or reasonable expenses incurred for the employer’s benefit are complying with applicable law;
- Whether the IRS’s annual standard mileage rates are the only method for employers to determine the reasonably approximate expenses for the driver’s personal vehicle;
- Whether certain alternative methods for estimating expenses are appropriate; and
- Whether drivers who use their personal vehicles may only be reimbursed for variable expenses or if certain fixed expenses should also be reimbursed.
On the first question, the Department pointed to the plain language of its Wage and Hour Division regulation, which allows employers to reimburse employees for a reasonable approximation of expenses incurred for the employer’s benefit rather than the actual amount of expenses incurred. The Department explained that the reason behind the regulation is that precise calculations may not be practical or even possible in some scenarios. The Opinion noted that while the regulations require employers to keep records of deductions from employees’ wages, they do not mandate that employers track employees’ actual expenses.
On the second and third questions, the Department stated that the regulations do not require employers to utilize the IRS’s annual standard mileage in calculating reasonable expenses. First, the Department explained that the IRS’s annual standard rates themselves constitute an estimate and the IRS regulations likewise permit employers to reach a lower rate than the IRS standard rate. Second, because the Department requires only that employers establish a method of calculating reasonable expenses and apply that method across the board, it cannot endorse any particular method (including data supplied by other federal agencies or insurers). On that issue, the Department succinctly opined that if a method reasonably approximates an employee’s expenses, it complies with the Act; if a method does not reasonably approximate expenses, it does not.
On the last topic, the Department explained that employers are not required to reimburse employees for expenses “normally incurred by the employee for his own benefit,”see 29 C.F.R. § 778.217(d). The Department stated that the ultimate question is whether the employee owns and operates the vehicle primarily for the employee’s benefit or the employer’s. Similar to the analysis of the IRS’s standard rate, the issue of whether an employer must reimburse an employee for fixed vehicle expenses rests on whether the employee uses the vehicle as a tool of the trade, much like a welder’s torch or a required uniform. If an employee’s vehicle is not used solely as a tool of the trade, the employer may only be required to reimburse variable costs associated with the use of the vehicle for the employer’s benefit. The Department offered the following example: if an employee drives an extra 250 miles for the employer’s sole benefit, then the employer would need to reimburse the employee for the gasoline, maintenance and depreciation costs associated with those 250 miles, but it may not be required to reimburse for fixed expenses since the employee otherwise uses the vehicle primarily for personal reasons.
This Opinion Letter is a significant development for employers in a variety of sectors who employ personnel to use their own vehicles for business operations, such as delivery drivers. It likewise provides much needed guidance to employers going forward on how to develop and maintain and appropriate reimbursement model.