Sixth Circuit Discredits IRS Mileage Rate as Sufficient Payment to Employee Drivers Under the FLSA

The Sixth Circuit recently considered a consolidated appeal regarding how delivery drivers should be reimbursed for the cost of providing their vehicles for work. The appeal was taken from both the Western District of Michigan and the Southern District of Ohio. In the Michigan case, the trial court held drivers should be reimbursed using the federal mileage rate. The Ohio trial court held that employers needed only pay a “reasonable approximation” of the driver’s costs. The Sixth Circuit determined neither approach was appropriate under the Fair Labor Standards Act (FLSA).

The FLSA requires employers to pay “each” employee a wage of “not less than” $7.25 an hour. An applicable regulation, in turn, provides that each employee’s minimum wages must be paid “finally and unconditionally” or free and clear of any “kick back” to the employer. The regulation further provides that, if an employer requires an employee to “provide tools of the trade” for purposes of the performance of the “employer’s particular work,” the employer violates the Act if “the cost of such tools purchased by the employee cuts into the minimum or overtime wages required to be paid to him under the Act.” The Sixth Circuit, therefore, held the FLSA requires an employer to reimburse an employee 100% of the cost of using their vehicle (or other tools).

How should the actual cost be reasonably calculated by an employer? After all, gas mileage of a vehicle depends on many variables that are likely different for each employee. The Sixth Circuit had no sympathy for the employer. When presented with the argument that paying “actual cost” would be “impossible” the Sixth Circuit stated:

But the employers themselves created this situation: First by paying their drivers the bar minimum wage; then by requiring them to provide their own vehicles to deliver pizzas on the defendants’ behalf; and finally by cutting it close (at least according to the allegations here) as to whether they have adequately reimbursed their drivers for the cost of providing those vehicles. Remove any of those elements and these cases likely do not get filed.

The court remanded the case to the trial court without much guidance. The Sixth Circuit suggested applying a similar burden-shifting regime as that used in employment discrimination matters. For example, the employee might present prima facie proof that a reimbursement was inadequate; the employer might then bear the burden of showing that the reimbursement bore a demonstrable relationship to the employee’s actual costs; and then the employee would bear the burden of proving the employer’s reasoning wrong. However, the threat of liquidated damages and attorney’s fees loom large for an employer that finds this calculation to be near impossible. The only reasonable solution to avoid a willfulness finding, and thus avoid a liquidated damages award, would be to overpay the employee by paying above the IRS rate. 

There is no question that this opinion leaves employers in an unenviable, and maybe untenable position. Given the pro-employer make-up of the Supreme Court of the United States, this case may see further review in the near future. 

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