By Gerald L. Maatman, Jr., Jennifer A. Riley, and Kathryn Brown
Duane Morris Takeaways: On March 12, 2024, in Parker v. Battle Creek Pizza, Inc. No. 22-2119 (6th Cir. Mar. 12, 2024), a three-judge panel of the Sixth Circuit addressed the issue of what standard applies for calculating reimbursements of vehicle expenses owed under the FLSA to delivery drivers who use their own vehicles for their jobs. The consolidated appeal arose from dueling opinions of U.S. District Courts in Michigan and Ohio on the same issue.
The Sixth Circuit concluded that neither the IRS standard mileage rate (the approach of the court in Michigan), nor an employer’s “reasonable approximation” of vehicle costs (the approach of the court in Ohio), satisfies an employer’s minimum wage obligations under the FLSA. The Sixth Circuit vacated the district court opinions and sent the cases back to their respective courts for further proceedings on remand. The Sixth Circuit’s decision is essential reading for all businesses with delivery drivers, particularly those defending minimum wage claims involving drivers’ expenses, a hot-button litigation issue percolating in courts across the country.
Case Background
To set the stage, the FLSA requires payment of the minimum wage (currently $7.25 an hour) to employees “free and clear.” In the U.S. Department of Labor regulations interpreting the statute, 29 C.F.R. § 531.35 states that employers cannot shift business expenses to their employees if doing so causes the employees’ wages to drop below the minimum wage. In another section of the FLSA regulations, the DOL addresses how to calculate an employee’s “regular rate of pay” for overtime calculations when the employer reimburses an employee’s business expenses. In that regulation at 29 C.F.R. § 778.217(c), the DOL says employers may “reasonably approximate” the amount of the expenses to be reimbursed. The DOL regulations say nothing, however, about how to calculate such an approximation, and whether the analysis applies to wages owed other than overtime wages.
The district court in Parker v. Battle Creek Pizza, Inc., 20-CV-00277 (W.D. Mich. Apr. 28, 2022), held that use of the IRS mileage rate satisfied the FLSA. The court deferred to the DOL’s Field Operations Handbook, the internal manual that guides investigators for the Wage and Hour Division. In the Field Operations Handbook. The DOL takes the enforcement position at § 30c15(a) that employers may, in lieu of reimbursing an employee’s actual expenses, use the IRS standard business mileage rate to determine the amount of reimbursement owed to employees for FLSA purposes. By contrast, the district court in Bradford v. Team Pizza, Inc., 20-CV-00060 (S.D. Ohio Oct. 19, 2021), rejected the IRS mileage rate in favor of an employer’s “reasonable approximation” of the drivers’ expenses.
The IRS standard business mileage rate, currently $.67 a mile, is intended to represent gasoline, depreciation, maintenance, repair and other fees pertaining to vehicle upkeep. Employers’ “reasonable approximation” of an employee’s costs in using their personal vehicles to perform work typically is lower than the IRS rate.
The Sixth Circuit’s Ruling
The Sixth Circuit highlighted the basic requirement of the FLSA to pay employees at least the minimum wage for hours worked. As the Sixth Circuit stated, when an employee’s hourly wage is the minimum $7.25 an hour, any underpayment of the employee for costs they expended to benefit the employer necessarily causes them to receive less than the minimum wage.
Although it acknowledged the difficulty of calculating vehicle expenses on an employee-by-employee basis, the Sixth Circuit reasoned that any “approximation” of an employee’s personal vehicle costs — whether it be the employer’s own calculation or the IRS’s standard business mileage rate — is contrary to the FLSA where it results in an employee receiving less than the minimum wage.
The Sixth Circuit declined to defer to the DOL’s interpretation in the FLSA regulations or the agency’s Field Operations Handbook. It emphasized that the FLSA regulation supporting the “reasonable approximation” method — 29 C.F.R. § 778.217(c) — addressed overtime calculations, not minimum wage. The Sixth Circuit also found use of the IRS standard business mileage rate to be fatally flawed. As it explained, the IRS’s rate, though more generous in application than the “reasonable approximation” method, disfavors high-mileage drivers like delivery drivers and fails to account for regional and other differences inherent in maintaining a vehicle. Id. at 6.
The Sixth Circuit did not announce a new standard to replace the two approaches it rejected. However, it offered a three-part framework for the district courts to consider on remand. Similar to the burden-shifting framework in Title VII disparate treatment cases, the Sixth Circuit suggested that an FLSA plaintiff might present prima facie proof that a reimbursement was inadequate. The employer would then bear the burden to show that the amount it reimbursed bore a reasonable relationship to the employee’s actual costs. The plaintiff would have an opportunity to attack the employer’s reasoning while bearing the ultimate burden to prove failure to receive minimum wages.
Implications For Employers
Although the Sixth Circuit’s ruling in Parker is binding only on federal courts in Ohio, Michigan, Tennessee and Kentucky, the opinion may prompt courts around the country to reconsider reliance on the DOL’s “reasonable approximation” standard and the IRS’s standard business mileage rate when evaluating minimum wage claims of delivery drivers. Considering that FLSA claims asserting underpayment for vehicle expenses already is a favorite topic of the plaintiffs’ class action bar, we expect the opinion to unleash a flood of new lawsuits in this area. All businesses with delivery drivers ought to keep a close watch on how the Michigan and Ohio district courts apply the Sixth Circuit’s ruling on remand.
A silver lining in the decision may well be the notion that as calculating the appropriateness of reimbursement is required on a driver-by-driver basis, such claims seem difficult to ever certify.
The opinion in Parker is also significant in light of the Supreme Court’s forthcoming ruling on the viability of the Chevron doctrine, the framework in which courts generally defer to agencies’ interpretation of federal statutes. In rejecting the DOL’s interpretation of the FLSA, the reasoning in Parker may be a harbinger of future rulings under the FLSA and a panoply of other statutory schemes if the Supreme Court abandons Chevron deference.