Sixth Circuit: Should the IRS Mileage Rate be Used for Expense Reimbursement?
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APPLIES TO All Employers with Employees in KY, MI, OH, TN |
EFFECTIVE March 12, 2024 |
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Discussion
In Parker v. Battle Creek Pizza, Inc., the Sixth Circuit Court of Appeals said that the IRS mileage rate may not be sufficient for expense reimbursement in some cases, suggesting that employers evaluate their pay and expense reimbursement strategies to ensure compliance with the Fair Labor Standards Act (FLSA). The FLSA states that no wage deductions can be made for expenses for “tools of the trade” if doing so would reduce an employee’s earnings below the required minimum wage or overtime pay. Determining expense reimbursement is clear when the cost amount is fixed. However, the court was asked to address expense reimbursement when the cost amount isn’t clear. Unfortunately, the answer itself was not entirely clear.
Here, there were two lower court cases addressing mileage expense reimbursement where the employees were using their own vehicles for pizza delivery and either receiving a fixed rate for mileage reimbursement or an amount lower than the IRS mileage rate. Both employees were paid minimum wage, which meant that they could not incur any amount of business expense as it would cut into their guaranteed wages. One lower court said that the IRS mileage rate should be used to determine expense reimbursement, while another lower court said that a “reasonable approximation” of the drivers’ costs may be used. The Sixth Circuit said that neither standard was appropriate under the circumstances!
Rather, the Sixth Circuit said that using a burden-shifting analysis could be appropriate to determine what amounts employees should have been reimbursed. Specifically, the employee would have the initial burden to show that reimbursement was inadequate. The burden would then shift to the employer to show that the reimbursement bore a demonstrable relationship to the employee’s actual costs. Finally, the employee would have the burden to prove the employer’s reasoning wrong. However, this test is not hard and fast; the court said that “the parties and the district courts might want to consider these or other ideas on remand.”
The court’s ruling focused on the inaccuracy of measuring expense reimbursement using approximation or the IRS mileage rate. Importantly, “an employee is entitled to the minimum wage specified [in the FLSA]—period.” An approximation of costs would mean that the obligation to pay minimum wage and overtime may not be fulfilled. Additionally, the “IRS’s standard-mileage rate for business deductions … is a nationwide average, which tends to overpay drivers in states where gas taxes are relatively low (like Ohio) and underpay drivers where gas taxes are high (like California). In addition, the estimation of depreciation costs in the IRS rate is weighted toward newer vehicles, which tends to overpay drivers of older vehicles. Moreover, some vehicle models (like the Toyota Tacoma) depreciate more slowly than other models do. And of course some vehicles get better gas mileage than others. The IRS rate also favors low-mileage drivers and disfavors high-mileage ones, like delivery drivers.”
While this case creates more questions than concrete answers, it is a cautionary tale for employers. The court highlighted the fact that the employers created this problem by paying their employees minimum wage, requiring them to use their own vehicles, and cutting it close as to whether they have adequately reimbursed their drivers for the cost of providing those vehicles. Presumably, if the employers paid more than the federal minimum wage, provided delivery vehicles, or gave a proper reimbursement amount, this would not be an issue. While the IRS mileage rate may still be used as a method of determining expense reimbursement, it should be looked at in a larger context in connection with the employee’s pay.
Moreover, this case has larger implications than just mileage reimbursement. Any time expense reimbursement is provided for a reasonable approximation of a cost, an employer may be exposing itself to liability. Employers should be looking at their wage strategies and expense policies to ensure that appropriate reimbursement methods are used, as well as including a process whereby employees can claim actual cost amounts if an employer provides a set rate rather than an individualized rate. Employers may even consider having employees verify in writing whether their actual cost does or does not exceed the reimbursement amount, to allow the employer the opportunity consider and pay the employee’s claimed cost amount.
Action Items
- Review expense reimbursement policies for compliance.
- Evaluate minimum wage rates for impact when paid in combination with expense reimbursement.
- Implement an employee verification process to confirm receipt of actual cost reimbursement.
Disclaimer: This document is designed to provide general information and guidance concerning employment-related issues. It is presented with the understanding that ManagEase is not engaged in rendering any legal opinions. If a legal opinion is needed, please contact the services of your own legal adviser. © 2024 ManagEase