Previous reports suggest that lipid droplets (LDs) in the hepatocyte can be catabolized by a direct engulfment from nearby endolysosomes (microlipophagy). Further, it is likely that this process is compromised by chronic ethanol (EtOH) exposure leading to hepatic steatosis. This study investigates the hepatocellular machinery supporting microlipophagy and EtOH-induced alterations in this process with a focus on the small, endosome-associated, GTPase Rab5. Here we report that this small Ras-related GTPase is a resident component of LDs, and its activity is important for hepatocellular LD-lysosome proximity and physical interactions. We find that Rab5 siRNA knockdown causes an accumulation of LDs in hepatocytes by inhibiting lysosome dependent LD catabolism. Importantly, Rab5 appears to support this process by mediating the recruitment of early endosomal and or multivesicular body compartments to the LD surface before lysosome fusion. Interestingly, while wild-type or a constituently active GTPase form (Q79L) of Rab5 supports LD-lysosome transport, this process is markedly reduced in cells expressing a GTPase dead (S34N) Rab5 protein or in hepatocytes exposed to chronic EtOH. These findings support the novel premise of an early endosomal/multivesicular body intermediate compartment on the LD surface that provides a "docking" site for lysosomal trafficking, not unlike the process that occurs during the hepatocellular degradation of endocytosed ligands that is also known to be compromised by EtOH exposure.