Per Diem Pay – Should it be Included in My Overtime Pay Calculation?

Employees who frequently travel for work and work away from home are often given per diems as reimbursements for the cost of lodging, evening meals, and incidental travel expenses. Depending on how the per diem is determined and paid, it may need to be included when calculating an employee’s overtime pay rate and can make a significant difference in the amount of overtime pay they are owed.  While it is very common for employers to exclude per diem payments from the overtime calculation (because it saves them money), the specific facts and circumstances must be looked at to determine if this is correct and legal. Just because the practice is common in an industry or has been going on for years, do not assume that it is right. Ask questions, know your rights.

A recent court decision addressed this exact situation and determined that a heavy-construction maintenance and fabrication company and its owners improperly calculated employees’ overtime rates by excluding per diem amounts from their regular pay rates. The per diem payments should have been included in the overtime pay calculations because:

  • The per diem amounts varied by the number of hours worked and therefore the per diems did not “reasonably approximate the expenses incurred.”
  • Proportionate reductions for working less than a full day are not permitted, and
  • The per diem policy was designed to encourage work attendance, not merely compensate for expenses incurred.

The SIMMCO Case

SIMMCO’s employees were often required to travel for work, and it paid its employees per diems as reimbursements for the cost of lodging, evening meals, and incidental travel expenses. Traveling employees received an hourly wage plus a flat rate per diem for each day they worked.

The case was initiated by employees who worked as a safety lead and safety manager, on behalf of themselves and all other similar coworkers as a collective action under the Fair Labor Standards Act (“FLSA”). The case sought to recover unpaid wages, overtime, liquidated damages, attorney’s fees, and costs. Specifically, the workers claim that they were hourly, non-exempt employees entitled to overtime pay under the FLSA, but that SIMMCO failed to include their per diem amounts in their regular pay when calculating and paying overtime. They claim that because the per diem policy is tied to the number of hours worked and subject to reduction on an hourly basis, the per diem must be included as a component of their regular rate of pay for purposes of overtime…and the judge agreed.

The per diem policy in question stated:

    1. You Must Work 80% of the scheduled workday in order to receive Per Diem for that day. No Per Diem will be paid if you do not work at least 80% of your scheduled hours.

    EXAMPLE: If the scheduled hours are 10 for that day you must work a minimum of 8 hours to receive Per Diem for that day.

    2. You will be docked for any hours short of a full day.

    EXAMPLE: You are scheduled for a 10-hour day and you arrive one (1) hour late for a total of 9 hours worked. Your Per Diem Will be docked 1 hour.

    3. You can request advances on your Per Diem, $100.00 per day limit on all advances.

Under this policy, traveling employees could receive (1) a full per diem for working all of or more than their scheduled shift for that day; (2) no per diem for working less than 80% of the hours in their scheduled shift; or (3) a pro-rated per diem for working less than 100% but more than 80% of their scheduled shift.

Congress enacted the FLSA so that each employee covered by the Act would receive “[a] fair day’s pay for a fair day’s work and would be protected from the evil of overwork as well as underpay.” Under the FLSA, a non-exempt employee who works more than 40 hours in one week must be paid overtime at a rate of no less than one and one-half times his “regular rate” of pay. Thus, the rate of overtime pay an employee receives is dependent upon his regular rate.

The FLSA requires that “all remuneration for employment paid to, or on behalf of, the employee” be included in an employee’s regular rate of pay and also provides seven exceptions to this general rule. Any remuneration that does not fall within one of those seven statutory exceptions must be included in the calculation of an employee’s regular rate. The exception at issue in this case states that the regular rate does not include “reasonable payments for traveling expenses, or other expenses, incurred by an employee in the furtherance of his employer’s interests and properly reimbursable by the employer; and other similar payments which are not made as compensation for his hours of employment.” (aka “per diems.”) The law starts with a presumption and default rule that remuneration in any form is included in the regular rate calculation.

The regulations interpreting this subsection of the FLSA provide further guidance regarding an employer’s reimbursement of an employee’s work-related expenses and provides that payments made to cover an employee’s travel costs are “not included in the employee’s regular rate (if the amount of the reimbursement reasonably approximates the expense incurred).” The Department of Labor’s Handbook also discusses an employer’s reimbursement of an employee’s work-related travel expenses:

If the amount of per diem or other subsistence payment is based upon and thus varies with the number of hours worked per day or week, such payments are a part of the regular rate in their entirety. However, this does not preclude an employer from making proportionate payments for that part of a day that the employee is required to be away from home on the employer’s business. For example, if an employee returns to his/her home or employer’s place of business at noon, the payment of only one-half the established per diem rate for that particular day would not thereby be considered as payment for hours worked and could thus be excluded from the regular rate.

1. The per diems varied with the hours worked and therefore were not reasonable estimates of travel expenses

Multiple courts have recognized that a per diem that varies in amount based on the number of hours worked must be included in an employee’s regular rate. One court held that the per diems should have been included in the plaintiff-employees’ regular rate of pay because the number of hours an employee worked was the only number that varied in the formula for calculating per diem amounts. Thus, an employee who worked seven hours a day and an employee who worked 12 hours a day would earn different amounts of per diem under the defendant-employer’s formula but would earn identical amounts of per diem if the formula was based upon the number of days an employee worked.

SIMMCO’s policy did not assign per diems a set hourly value, nor were employees able to increase the amount of their per diems by working a greater number of hours. Indeed, the per diems were not reduced for every hour worked, but they were reduced or eliminated based upon the amount of hours an employee worked of his scheduled shift. Therefore, the court noted, to say that the per diems did not vary based on the number of hours worked is factually false.

Furthermore, under SIMMCO’s policy, employees who worked up to 79% of their scheduled shift would receive no per diem at all even though they incurred the same travel expenses as if they had worked 80% or more of their scheduled shift. If SIMMCO’s policy was based on the days worked instead of hours, an employee who worked 79% of her scheduled shift would receive the same amount of per diem as an employee who worked 80% of her scheduled shift. The Court found that these per diems cannot qualify as “reasonable payments for traveling expenses” because they were reduced or eliminated based on the number of hours worked rather than by any changes in travel expenses.

2. SIMMCO’s proportionate reductions are not the type approved by the Department of Labor

After stating that per diems that are “based upon and thus var[y] with the number of hours worked per day or week” are part of the regular rate, the Handbook goes on to say that an employer is not precluded from “making proportionate payments for that part of a day that the employee is required to be away from home on the employer’s business.”

In this case, SIMMCO’s error was not in the fact that it proportionately reduced the per diems but that its formula for doing so was based on hours rather than days.

The evidence demonstrated that SIMMCO reduced per diems by the hour and sometimes even by the half hour. These reductions were not based on whether the employee was at home or traveling for part of the day, as sanctioned by the Handbook, but were based on the hours worked. Therefore, the type of proportionate reduction approved by the Handbook is not present in this case.

3. The per diem policy was designed to encourage work attendance

The court found that it was clear from the owners testimony that the policy was intended to encourage regular work attendance. The per diem policy was implemented in order to prevent employees from collecting a full day’s per diem after performing less than a half-day of work.

Plaintiffs successfully argued that the payments made under the per diem policy actually functioned as attendance bonuses and should have been included in their regular rate. The overtime regulations state that “[b]onuses which are announced to employees to induce them to work more steadily . . . are regarded as part of the regular rate of pay. Most attendance bonuses . . . are in this category.”

What to Do If You Have Been Paid Paid Per Diems that Vary with Your Hours

If you have been receiving per diem payments that change based on the number of hours you work and are not included in your overtime pay calculation, there is a good chance that you and your coworkers could be missing out on significant overtime wages.

If you have questions or believe that you have been the victim of wage theft due to an improper per diem pay scheme, contact us for a free and confidential review of your situation.