With most restaurants shifting to take out and delivery over the past two months, many owners face the new challenge of properly reimbursing employees who have converted to delivering food to customers. Here is a guide to clarify the obligations and challenges of reimbursing employees for vehicle use.
First of all, 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 (and the conflicts between restaurant owners and those delivery services are well-documented).
For employees, federal law does not require reimbursement of expenses incurred in fulfilling their job responsibilities. But paying the federal minimum wage of $7.25/hr is a legal requirement. 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.
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). The IRS standard business mileage rate is typically used as a measure of average vehicle expense on a per mile basis (56 cents per mile in 2021). It is also important to make sure that employee drivers are covered under the restaurant's commercial auto insurance policy.
Many states have more stringent requirements to ensure fair compensation of employees for personal vehicle use. Thirty-one states 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. Let's look at state requirements more closely.
California has the strictest laws in the country governing reimbursement of employees. 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 not only gas but also insurance, depreciation, and state/local taxes and fees.
Other states have employee expense indemnification codes or employee friendly laws that employers must respect if they have workers operating a personal vehicle on behalf of the company. Illinois, Massachusetts, and the Dakotas are notable examples. Make sure to research the laws in your state to know what legal requirements might govern the question of whether to reimburse your delivery workers.
The COVID-19 pandemic has placed unprecedented pressure on the restaurant industry. Restaurant owners have made agonizing decisions about how and whether to stay open, how to care for laid off wait staff, how to provide a safe environment for kitchen staff, and how to equitably compensate workers who are now using their vehicles to do their job.
Employers want to treat their employees fairly, and they also want to find a way for their business to survive. Even if you operate in a state without employee reimbursement laws, or you only have to ensure that your drivers make the federal minimum wage, you may decide to prioritize paying a livable wage, which in most places is higher than the federal or state minimum wage. Vehicle reimbursement is an important part of that equation.
Let's look at the most effective ways to reimburse employees for the use of a personal vehicle.
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.
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, those payments are treated as non-taxable reimbursements, as long as the rate is equal to or less than the IRS standard business rate of 56 cents per mile for 2021.
There are other non-taxable vehicle reimbursement methods to consider as well. But first it is important to know how to cost-effectively and equitably operate a mileage reimbursement system.
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 can fall 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.
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. If your current food delivery situation is temporary, it may not be an appropriate method to explore. But if employees making deliveries becomes a longer term arrangement, FAVR is worth exploring.
While the pandemic persists and employees deliver meals, be aware of other services that could support your equitable treatment of employees. 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.