Can Per Diem Payments Affect Employee's Regular Pay Rate?

Payroll on Bloomberg Tax is built to get you to the right answer faster and more efficiently. Get all the payroll intelligence you need with Bloomberg Tax expert analysis, perspectives and...

By Keith M. Hill

“This overtime payment was calculated wrong,” Stephen, an hourly employee, said to Gary, his employer's payroll manager. “It doesn't include the daily meal payment I received.”

“The payment was calculated properly,” Gary said. “We exclude meal payments when calculating your overtime pay.”

FACTS: Employees of a company that provides seismic-mapping services at remote locations across the country were required to travel away from home and stay in hotels near remote job sites for intervals of four to eight weeks. The company produces maps for companies that are engaged in oil, gas and coal operations.

Employees often worked more than 40 hours a week while at the remote work sites and the company paid them overtime based on their regular rates of pay. When the employees worked away from home, the employer also provided them a $35 per diem for meals, including on days spent traveling to and from the remote job locations. The company did not pay the $35 when food was provided at the remote locations.

In determining the employees’ regular rates of pay, the employer did not include the daily $35 per diem payments. Former hourly employees filed a collective action against the company contesting the calculation method used. They claimed that the employer violated the Fair Labor Standards Act by calculating overtime pay on undervalued regular rates of pay.

A federal district court ruled in favor of the employer, agreeing that the $35 payments were exempt from the regular rates of pay. The employees appealed the ruling.

ISSUE: Did the employer properly exclude the meal payments from its regular rate of pay calculations?

DECISION: The employer properly excluded the employees' meal payments from the regular rate of pay calculations, a federal appeals court said.

The proper determination of the regular rate is of critical importance in calculating the amount of overtime wages due because employers must compensate overtime hours “at a rate not less than one and one half times the regular rate” at which an employee is employed, the court said.

The regular rate “shall be deemed to include all remuneration for employment paid to, or on behalf of, the employee,” subject to eight exceptions, the court said. An exception exempts reasonable payments for traveling expenses “incurred by an employee in the furtherance of his employer's interests and properly reimbursable by the employer,” the court said.

The exception includes the “reasonably approximate amount expended by an employee” who is traveling ‘over the road’ on business for away-from-home living expenses, the court noted.

The parties agreed that the company’s $35 payments were reasonable amounts to compensate employees for estimated meal expenses while away from home and that they received the payments only when they were required to work out of town, the court said.

The phrase “living expenses” includes the cost of food, and eating meals away from home is an additional expense that the employee incurs for the employer’s benefit, the court said, citing an opinion from the Labor Department's Wage and Hour Division.

The court rejected the workers’ argument that travel only includes periods in transit between the usual work area and a remote location by saying that the term traveling includes time away from home, not just time in transit.

The $35 payments were properly excluded because they were for reimbursement of travel expenses incurred in furtherance of the employer’s interests and the payments were not tied to the amount of hours that employees worked, the court said ( Sharp v. CGG Land (U.S.) Inc., 10th Cir., No. 15-5113, 11/4/16 ).

POINTERS: Employer reimbursements for any expense that an employee incurs on an employer's behalf are not included in the employee's regular rate. Travel, lodging and meal expenses are among those for which employees commonly are reimbursed.

Only the actual or estimated amount of the expense may be excluded from the regular rate, the Wage and Hour Division said. An amount that is disproportionate to the expenses incurred must be included in the regular rate.

If an employer reimburses an employee for other personal expenses, these must be added to the regular rate.

For employees who are compensated solely by an hourly wage, the regular rate is the same as the hourly wage. The FLSA also allows overtime compensation to be calculated using a basic rate, or a rate that is substantially equivalent to the employees' average hourly earnings and has been agreed to by the employer and employees.

A basic rate must meet several general conditions and must be derived using one of five approved methods or approved by the administrator of the Wage and Hour Division.

For more information, see PAG's “Regular Rate Determination” chapter.

By Keith M. Hill

For More Information

This analysis illustrates how courts resolve pay-related disputes. The names and dialogue are fictitious.

Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.

Request Payroll