Shifting Gears: The Sixth Circuit’s Ruling on Employee Vehicle Reimbursement

On March 12, 2024, the U.S. Court of Appeals for the Sixth Circuit vacated two lower court decisions regarding how employees should be reimbursed for using their personal vehicles on the job. This decision has important implications for small and medium-sized business owners across Michigan who employ workers driving their own vehicles for work purposes.

The court’s decision challenges longstanding practices and introduces new complexities in how employers must approach vehicle expense reimbursement, particularly for employees compensated at or near minimum wage. Whether you’re running a local service company, managing a sales team, or overseeing any operation where employees use personal vehicles for work, understanding this ruling is crucial to avoid potential legal pitfalls and ensure fair compensation for your workforce.

Background

The Fair Labor Standards Act (FLSA) is a federal law that establishes minimum wage, overtime pay, recordkeeping, and youth employment standards. While the FLSA doesn’t explicitly require employers to reimburse employees for vehicle expenses, it does mandate that an employee’s earnings must not fall below the minimum wage after accounting for work-related expenses.

The Sixth Circuit’s ruling stems from a consolidated appeal of two separate cases:

1. Parker v. Battle Creek Pizza, Inc. (Western District of Michigan): In this case, the district court held that drivers should be reimbursed based on the standard IRS mileage rate, which was 54 cents per mile at the time of the lawsuit.
2. Bradford v. Team Pizza, Inc. (Southern District of Ohio): Here, the court found that reimbursement of a “reasonable approximation” of the drivers’ costs was sufficient to comply with the FLSA.

Both cases involved employees who used their personal vehicles for work and alleged that their employers’ reimbursement practices resulted in their actual wages falling below the federal minimum wage. The plaintiffs argued that the IRS reimbursement rate should be the standard, while the defendants contended that a “reasonable approximation” of expenses was adequate.

These conflicting lower court decisions set the stage for the Sixth Circuit to address a critical question: How should employers calculate and reimburse vehicle-related expenses to ensure compliance with the FLSA’s minimum wage requirements?

The Sixth Circuit’s Decision

In its ruling, the Sixth Circuit rejected both the IRS standard mileage rate and the “reasonable approximation” method for reimbursing employee vehicle expenses. The court’s decision centered on three main points:

1. Rejection of the IRS standard mileage rate: The court found that using the IRS rate, which is a national average, does not accurately reflect individual drivers’ actual costs. These costs can vary significantly based on factors such as location, type of vehicle, and driving habits. The court noted that using this rate could result in both underpayment and overpayment of drivers’ expenses.
2. Rejection of the “reasonable approximation” method: The court also dismissed the notion that a “reasonable approximation” of drivers’ vehicle expenses is sufficient for minimum wage compliance. This approach, which had been approved by the Department of Labor in a 2020 opinion letter, was deemed inadequate for ensuring that employees’ wages meet the minimum wage requirement after accounting for vehicle expenses.
3. Emphasis on actual costs: The court stressed that the FLSA requires employers to reimburse employees for the actual costs incurred when using personal vehicles for work purposes. The court acknowledged that these costs are “undisputedly hard to calculate” due to the variability in factors affecting vehicle expenses.

Importantly, while rejecting both proposed methods, the Sixth Circuit did not provide a specific formula for calculating reimbursements. Instead, it remanded the cases back to the lower courts, suggesting they might consider a burden-shifting approach similar to that used in discrimination cases. This approach would require employees to make an initial showing that their reimbursement was inadequate, followed by the employer demonstrating a relationship between the reimbursement and actual costs, with the burden then shifting back to the employee to disprove the employer’s reasoning.

Implications for Michigan SMB Owners

The Sixth Circuit’s ruling presents several significant challenges and considerations for Michigan SMB owners:

1. Increased complexity in reimbursement calculations: The rejection of both the IRS standard mileage rate and the “reasonable approximation” method means that employers can no longer rely on these simpler approaches. Instead, they must now grapple with the complex task of determining each employee’s actual vehicle-related costs. This could involve considering factors such as fuel efficiency, maintenance costs, depreciation, and insurance – all of which can vary widely among employees.
2. Potential for increased liability: With the emphasis on reimbursing actual costs, employers face a higher risk of inadvertently violating minimum wage laws. If reimbursements are found to be inadequate, resulting in an employee’s effective wage falling below the minimum, employers could be liable for back wages, liquidated damages, and attorney’s fees.
3. Administrative burden: Implementing a system to accurately track and reimburse individual employee vehicle expenses may require significant changes to payroll and expense reporting processes. This could be particularly challenging for smaller businesses with limited administrative resources.
4. Need for individualized assessments: The court’s emphasis on actual costs suggests that a one-size-fits-all approach to reimbursement may no longer be sufficient. Employers may need to consider individual factors for each employee who uses a personal vehicle for work, which could be time-consuming and complex.
5. Uncertainty in compliance: Without a clear formula provided by the court, employers are left in a state of uncertainty regarding what exactly constitutes adequate reimbursement. 

These implications underscore the need for Michigan business owners to carefully review and potentially revise their vehicle reimbursement policies to ensure compliance with this new interpretation of the FLSA requirements.

Conclusion

The Sixth Circuit’s ruling introduces new complexities for Michigan employers. Business owners now face the challenge of ensuring that reimbursement practices comply with this new interpretation of the FLSA. It’s important to consult with experienced legal counsel to ensure that this and other workplace policies are compliant with state and federal laws. If you have any questions or require assistance, please contact Zana Tomich.