Delivery drivers became the heroes for many businesses during the pandemic. The demand for drivers skyrocketed, and many restaurants and beverage shops couldn’t have survived if they hadn’t had access to an abundance of low-cost local drivers.
Recently, the 6th U.S. Circuit Court of Appeals ruled that minimum-wage drivers must be 100% compensated when using their own cars to make deliveries. We’ll take a look at how this came about and what it means for businesses.
It’s Starts in Michigan
In Michigan, drivers for a restaurant who were paid minimum wage filed a lawsuit alleging that the way they were compensated for driving their own cars violated the Fair Labor Standards Act (FSLA). A separate lawsuit was brought by minimum-wage drivers against a Domino’s franchise in Ohio.
In the Michigan case, the local court ruled that employees should be reimbursed using the IRS’s standard mileage rate. The Ohio court ruled that employers could use a “reasonable approximation” of their expenses.
The 6th U.S. Circuit Court of Appeals ruled that both standards were wrong and sent both cases back to their respective lower courts.
The Rules of Minimum Wage & Employee Reimbursement
The FLSA was established in 1938 and created the right to a minus wage, overtime over 40 hours, and prohibits child labor. Under the law, as of 2023, employers are required to pay a minimum wage of $7.25 an hour. The U.S. Department of Labor regulations also require employers to provide “tools of the trade”; otherwise, if the employee must provide tools, it would mean cutting into the minimum wage.
The court’s bottom line was: “If an employer requires a minimum-wage employee to provide his own ‘tools’ for work, the employer must reimburse him for 100% of the cost of doing so.” 1.
The Michigan court ruled that employees could be compensated based on the IRS mileage rate. The appeals court ruled that this was not a good basis for compensation. The IRS rate is based on a national average of costs, so it tends to underpay in states where costs and taxes are high, like California, but underpay in states where costs and taxes are low, like Ohio.
The Ohio court ruled that employers could use a “reasonable approximation” of expenses, which, in theory, could make up for the inequities of the IRS rate.
The 6th U.S. Circuit Court of Appeals acknowledged the challenge of fairly determining expenses but found that any shortage of reimbursement fell entirely on the employer.
“But the risk of financial harm from borderline reimbursements — the risk, specifically, that even ‘reasonable approximation’ reimbursements might be inadequate ones for some employees — must fall solely on the employer,” the 6th Circuit emphasized. 1.
The 6th U.S. Circuit Court of Appeals only holds jurisdiction over Michigan, Ohio, Tennessee, and Kentucky. The ruling currently only affects businesses in those states but could certainly establish a precedent for the rest of the country if the order holds up. Unfortunately, the appeals court didn’t provide a method for fairly calculating these expenses, so the lower courts will have to take another stab at it and see what happens.
In the meanwhile, employers of minimum-wage drivers across the country will have to examine how they compensate drivers, so they are confident the reimbursements are adequate enough that they don’t violate minimum-wage standards. … Keep tuned in.
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