Delivery drivers are a tricky bunch to pay, aren’t they? Do tips count as taxable wages? What if they don’t make enough in tips to reach minimum wage? How should we pay Driver Maintenance Reimbursement (DMR)?
Delivery Driver comp is regulated by the Fair Labor Standards Act (FLSA) and I don’t know about you, but that is definitely a law I don’t want to mess with. The Department of Labor doesn’t make a habit of going easy on employers so, in my opinion, it makes sense to do things right when it comes to paying your drivers.
Tipped Minimum Wage
Let’s start with minimum wage. Most states, NOT ALL, allow you to pay your drivers less than the state minimum wage. The problem is you have to make sure that, if you do that, you are also doing a calculation to confirm that the wage you pay, plus the tips the driver reports, makes the total hourly wage at least the state minimum wage for non-tipped employees.
So, if you pay your driver $5.50/hour in Illinois and for whatever reason, they only make $8 in tips for their 3 hour lunch shift, you have to make up the difference to get them to the $8.25 minimum wage in that state for non-tipped employees because their hourly rate is only $8.17 in this scenario. If you’re using a payroll company to process payroll, this is an automatic process.
Do your drivers report all of their cash tips? Probably not! However, according to the IRS, that’s not your problem. Your only obligation as the employer is to collect income tax, social security tax and Medicare tax based on the tips your drivers report to you. However, the more they report the less likely you’ll have to make up the tip credit if you pay a tipped wage.
Dual Jobs (in states that allow a tipped minimum wage)
Did you know that the FLSA defines which jobs can be classified as a tipped wage job? It’s based on the amount in tips the employee regularly and customarily earns (more than $30/month under federal law, more in some states). The problem arises when your drivers spend more than 20% of their shift doing something OTHER than delivery (their tipped-wage qualified position). In that case, the DOL does not allow you to pay a tipped wage for all hours worked during that shift. Therefore, if your drivers are like most drivers in this industry in that they do a lot of non-tipped jobs during their shift (like, making sandwiches or cleaning the restaurant) you have two options if you are in a state that allows a tipped minimum wage:
- Skip the tipped wage completely and pay the state minimum wage for all hours.
- Pay a different rate for each job – tipped wage when they’re on a delivery and minimum wage when they are doing non-tipped jobs. Your POS should be able to handle this automatically. Just remember that if the employee works overtime to calculate an average weighted overtime rate.
Driver Maintenance Reimbursement (DMR)
DMR is where it gets really confusing. The reason it is required is because the DOL has determined that wear and tear on the driver’s vehicle reduces the wage you pay them, thus dropping them below the federal or state required minimum wage. The tricky part is figuring out how much that wear and tear actually costs.
Here’s the thing, if you are unfortunate enough to receive a visit from the DOL, they will use the prevailing IRS mileage reimbursement rate to calculate DMR. The problem is that, although this is the benchmark the DOL uses, the FLSA does not require you to use this number, it simply requires you to pay minimum wage.
There are three ways the DOL will allow you to pay DMR:
- Actual expenses: the driver submits receipts for gas, oil changes and other routine maintenance and you reimburse them accordingly.
- Pay the IRS reimbursement rate for mileage: currently $.585 for 2022.
- Pay a significantly reduced mileage rate based on the actual vehicle (Fixed and Variable Rate “FAVR”): there is a formula for paying less, but it’s pretty complicated and you have to continually analyze and change rates based on inflation and other variable costs – plus, you have to be able to pull your documentation that supports your number so you have to keep excellent records. There are lots of vendors to help you with this, some may even be specific to your industry.
The FAVR method has saved AmplifedHR clients tens of thousands of dollars a year in DMR expenses, so it’s definitely something to consider if you use a reputable vendor. Going it alone is fraught with risk, so do so with caution.
Keep in mind, tips do not count towards mileage reimbursement and DMR is required by law. Any calculation you do that is not the prevailing IRS mileage reimbursement rate will meet scrutiny, but if you are willing to put in the work, confirm your method is 100% compliant and are able to keep excellent records, you can save a lot of money with your DMR strategy.
Can’t get enough IRS/DOL regulations? Check out the IRS Field Operations Handbook.
The landscape for employing delivery drivers is certainly not the smoothest road for companies, but it’s pretty critical to comply with these laws in order to protect your company from serious penalties and avoid time-consuming and life-draining DOL audits.
Confused? Overwhelmed? We can help. Don’t worry, we’ve got this.
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