Calculating Vehicle-Related Expenses Under The FLSA
By: John A. Bruno
At the end of August, the Department of Labor (DOL) issued an opinion letter discussing the Fair Labor Standards Act’s (FLSA) requirement that employers reimburse certain non-exempt employees for expenses related to the use of personal vehicles during the course of employment. An employer violates the FLSA if the employee’s wages, minus any expenses incurred for the benefit of the employer, fall short of the federal minimum wage.
The DOL’s opinion letter clarifies the permissible methods for calculating expenses under the FLSA. Specifically, the letter clarifies (1) whether employers can use a “reasonable approximation” to reimburse expenses, (2) whether the Internal Revenue Service’s (IRS) annual standard mileage rates are the only way for employers to determine a “reasonable approximation” of expenses, (3) which alternative methods could be used to estimate expenses, and (4) whether drivers who use personal vehicles for deliveries must be reimbursed for fixed vehicle expenses in addition to variable expenses.
1) Whether employers can use a “reasonable approximation” to reimburse expenses
The DOL’s regulations expressly authorize the use of “reasonable approximations” for calculating reimbursements because many of the expenses associated with vehicle usage cannot feasibly be calculated to an exact amount. For example, determining the exact amount of fuel used by a delivery driver for business purposes cannot be accomplished without the use of disproportionate and unreasonable measures.
2) Whether the IRS’s annual standard mileage rates are the only way for employers to determine “reasonable approximate” expenses
According to the DOL, the IRS’s business standard mileage rate is an acceptable method, but not the only method, of calculating a reasonable approximation of an employee’s mileage expenses, because the FLSA regulations expressly require the amount to be “the same or less than the maximum reimbursement payment” permitted by the IRS rate. According to the DOL, “a regulation that explicitly allows employers to approximate expenses at a rate lower than the IRS standard rate cannot be read to require employers to use the IRS standard rate.”
3) Which alternative methods could be used to approximate expenses
The DOL refused to endorse any alternative proposed methods for calculating vehicle expenses, which included (1) a flat rate per delivery based on average miles driven, (2) a mileage rate customized to the employer based on average costs, (3) a fixed and variable allowance, and (4) a percentage of the net sales of a driver’s deliveries. Similarly, the DOL refused to endorse the use of alternative data sources for calculating expenses, such as (1) data supplied by government agencies, (2) data supplied by insurers and other entities, (3) vehicle expenses calculated by companies regularly engaged in the business of calculating such rates, or (4) periodically conducted surveys of a company’s delivery drivers regarding actual expenses.
In refusing to approve or disapprove of any specific alternative method of approximation, the IRS stated only “[t]o the extent that some or all of these methods may reasonably approximate actual business expenses incurred by employees under certain circumstances, they will comply with the Act. To the extent that these methods fail to reasonably approximate such expenses, they will not.” The DOL emphasized that the reasonableness of using specific sources to approximate costs depended largely on regional factors, as costs such as gas prices may vary significantly among states. Moreover, the DOL noted that the use of a percentage of the net sales of a driver’s deliveries “is unlikely to be a bona fide approximation of a driver’s vehicle expenses” because drivers’ sales typically do not directly correlate to their expenses.
4) Whether drivers who use personal vehicles for deliveries must be reimbursed for fixed vehicle expenses
An employer will only have to reimburse employees for fixed expenses, such as vehicle registration fees and insurance costs, where the vehicle is used primarily for the benefit of the employer as a “tool of the trade.” Determining whether a vehicle constitutes a “tool of the trade” is a fact-specific inquiry that is akin to determining whether an employee’s work uniform is a “tool of the trade.” If an employer requires employees to wear a specific uniform to work, the uniform may be considered a “tool of the trade.” However, if an employer simply enforces a dress code and thus allows clothes that could be worn for everyday use, the uniform would not constitute a “tool of the trade.” Similarly, whether a vehicle is a “tool of the trade” depends on whether it is likely to be used for personal purposes outside the scope of employment.
Businesses should have methods in place for determining a reasonable approximation of costs incurred by their employees on personal vehicles to avoid a FLSA violation. The safest method is to utilize the IRS’s standard business rates. While other methods may be permissible and even cheaper, this is the only method expressly authorized by the DOL, and there is no clear guidance for determining the circumstances under which alternative methods are reasonable. This is especially true for businesses located in markets where the costs of maintaining a vehicle significantly exceed the national average, as they run the risk of utilizing data that do not accurately provide a reasonable estimation of localized costs.
For more information on this opinion letter, contact the author of this post. Read about several other recent DOL opinion letters in our alert, “DOL Provides Clarification for Employer FLSA Compliance in Recent Opinion Letters,” from September 16, 2020.