Food delivery has become a mainstay since the days of the pandemic. Here is a guide to the obligations and challenges of reimbursing food delivery employees for the use of a personal vehicle.
Do food delivery drivers need to be reimbursed?
This article addresses employees that make food deliveries, rather than drivers for third-party services like GrubHub, Uber Eats, and DoorDash. As independent contractors, those drivers fall under different guidelines. They can deduct business mileage on their tax returns at the IRS standard rate.
Employees, on the other hand, cannot deduct business mileage on their tax returns. The Federal Labor Standards Act (FLSA) does not require mileage reimbursement for employee drivers. However, the FLSA does require employees to receive at least the federal minimum wage of $7.25/hour.
A recent federal court case clarified that vehicle expenses for pizza delivery drivers cannot cut into their wages to the point that their pay is reduced below the minimum wage.
Parker v. Battle Creek Pizza (6th Circuit, 2024)
On March 12, 2024, the Sixth Circuit Court of Appeals found that, under the FLSA, if an employer requires a minimum-wage employee to provide a personal vehicle for deliveries, then the employer must reimburse 100% of the cost of using that vehicle for work.
Previously, a Michigan federal district court had found that employers should reimburse pizza delivery drivers using the IRS standard business rate, which is 67 cents-per-mile for 2024. However, an Ohio district court had concluded that employers needed only to meet the criterion of "reasonable approximation of expenses." The appellate court vacated both decisions, requiring a different method of determining 100% of the cost of making deliveries with a personal vehicle.
There is a long history of lawsuits by pizza delivery drivers in cases where they could prove that they made less than the minimum wage after tips, wages, and delivery compensation were added up and vehicle expenses subtracted out. Let's examine the implications of this recent court decision.
How to properly reimburse food delivery drivers employed by a restaurant or caterer
The first key distinction is whether the driver is required to provide a personal vehicle. You need to make sure employees using their personal vehicle for deliveries are making at least the minimum wage once their vehicle expenses are factored in (or state minimum, if higher – more on that later).
The IRS standard business mileage rate is typically used as a measure of average vehicle expense on a per mile basis. However, the Sixth Circuit Court of Appeals found in Parker v. Battle Creek Pizza that the IRS mileage rate is not a suitable reimbursement rate. This is because it over-reimburses employees in less expensive states like Ohio and under-reimburses employees in more expensive states like California.
One form of vehicle reimbursement that will likely meet the court's criterion of 100% of costs is a FAVR plan. Fixed and variable rate reimbursement (FAVR) uses localized cost data to derive rates, unlike the IRS rate, which uses national averages. This method is designed specifically to deliver accurate reimbursements tax-free – as long as the business has at least five drivers in the program.
State labor laws and reimbursement of restaurant delivery workers
Many states have stringent requirements to ensure fair compensation of employees for personal vehicle use. Thirty-four states and territories have a higher minimum wage than the federal minimum wage. And many states legally require full reimbursement of business expenses, including vehicle use and mobile phone use.
California has the strictest reimbursement laws in the country. CA Labor Code, Section 2802, prohibits businesses from passing along expenses to employees. This means that employees who make deliveries using a personal vehicle must be fully reimbursed for all business vehicle expenses, including gas, insurance, depreciation, maintenance, and all taxes and fees.
Illinois and Massachusetts have similar employee expense indemnification codes. Six other jurisdictions have employee friendly laws that employers must respect if they have workers operating a personal vehicle on behalf of the company. Make sure to research the laws in your state to know what legal requirements might determine how much to reimburse your delivery workers.
Reimbursement vs. compensation for vehicle use
Once you have determined that you are meeting the legal requirements for compensating employees who deliver for your business, you need to also be familiar with how the tax code treats payments for vehicle expenses. Some restaurants pay a fee per delivery, while others pay a mileage reimbursement, and some pay a stipend to cover deliveries, which gets around the minimum wage problem.
Whatever model you use, any payments that cannot be tied to business mileage will be considered taxable compensation rather than a non-taxable reimbursement. Both the employee and the employer pay taxes on the payments. If your drivers keep track of their mileage, however, and you pay them a cents-per-mile rate at or below the IRS rate or a FAVR rate, those payments are treated as non-taxable reimbursements.
Challenges with mileage reimbursements for employee drivers
The first challenge with paying a non-taxable mileage reimbursement is keeping track of mileage. The IRS requires up-to-date records of mileage. That means the driver either needs to record the mileage for each trip right after it occurs or use a mileage tracking app.
Today's mileage tracking apps like mLog, TripLog, and MileIQ are free to download from the Apple Store and the Google Play Store, and easy to use, eliminating extra time spend recording trips and mileage.
The second challenge is that mileage reimbursements at the IRS rate or lower often do not sufficiently reimburse drivers whose jobs consist of short, local trips. This is because they often do not drive enough miles to keep up with the larger costs of vehicle ownership, such as insurance, depreciation, and maintenance, employee expenses that the employer is now benefiting from due to the employee's use of his or her vehicle.
The IRS rate also falls short because it represents only a nationwide average of vehicle expenses, and many regions, especially urban areas, face higher expenses for fuel, maintenance, and insurance than the nationwide average. This is the reason the Sixth Circuit Court of Appeals found the IRS rate to be an inappropriate way to reimburse delivery drivers.
FAVR reimbursement for food delivery workers
The most flexible and equitable way to reimburse employees who deliver food is to pair a mileage tracking app with a fixed and variable rate reimbursement. Fixed and variable rate, or FAVR, takes into account the typical gap between standard mileage rates and expenses for low-mileage drivers, localizes the reimbursement rate, and ensures full compliance with federal and state wage and payment regulations.
FAVR reimbursement requires at least five drivers and is more complicated than a standard mileage reimbursement. But if your business has enough drivers, FAVR is worth exploring.
Contact mBurse today to find out ways we can support your reimbursement of employees for their vehicle expenses or check out our list of professional services that could help you.
