Last year, the DOL announced an eye-popping $2 million Fair Labor Standards Act (FLSA) settlement with Hutco, Inc, a labor services firm, for Hutco’s miscalculation of “per diem” payments to temporary workers and contractors. The DOL found that Hutco “mischaracterized certain wages as ‘per diem’ payments and impermissibly excluded these wages when calculating overtime premiums, thus denying employees earned overtime compensation.” This month, the same New Orleans District Office of the DOL’s Wage and Hour Division announced a $1.6 million settlement with another employment agency, B&D Contracting, for “per diem” violations for employees under the FLSA. The continued virtual “perp walks” highlight the heightened scrutiny that DOL is giving per diem payments.
Both settlements were the result of Wage and Hour Division determinations that the employers had failed to include certain “per diem” amounts in workers’ wages when calculating the amounts of overtime pay due. It is not just the WHD getting into the act. The First Circuit affirmed summary judgment for a group of plaintiffs in a per diem lawsuit back in April.
Why Are Per Diems an Issue under the FLSA?
The FLSA requires that employers must pay their non-exempt employees who work more than 40 hours in a workweek overtime wages of one and one-half times their “regular rate” of pay (29 U.S.C. § 207(a)(1)). Where employers run into trouble is with the definition of “regular rate.” Logically, employers might consider the “regular rate” to be the stated hourly, straight time rate that they pay to employees for work. However, the FLSA defines “regular rate” much more broadly. Instead of the basic hourly rate alone, Section 207(e) requires employers to include “all remuneration for employment” that they actually pay to employees. In other words, the regular rate must reflect all payments, not just the basic hourly rate, that an employer and employee agree will be paid regularly during the workweek (excluding overtime payments themselves and other specifically identified payments, such as gifts, capital gains on stock options, or bona fide profit sharing payments…).
However, per diem payments—defined by the regulations as “reasonable payments” made to reimburse employees for certain work-related expenses—may be excluded from an employee’s “regular rate.” Simple enough, right? Per diems are out. As Lee Corso might say: Not so fast, my friend! If it was that easy, why did the DOL extract more than $3.5 million from just two employers on this topic? Here’s why: you can only exclude these reimbursements if they “reasonably approximate” the employee’s work-related expenses (29 C.F.R. § 778.216(a), (b)(3), (c)). For example, if you reimburse an employee for airfare and lodging expenses that he or she incurs when traveling to perform work out of town, then this reimbursement is probably excludable from the FLSA regular rate.
However, not all employers pay reimbursements this way. Some employers base a reimbursement or subsistence payment on the number of hours the employee works. The DOL views these kinds of hours-based per diem payments as part of the regular rate. Even more commonly, you might pay your employee a “per diem” for expenses on a flat rate (per day) regardless of whether the employee actually incurs those expenses. Or, that “per diem” payment might be a disproportionately large amount compared to employees’ actual expenses (for example, $100 or $200 per day for meals and incidentals). As the press releases linked above explain, these situations “do not constitute bona fide reimbursements and must be included in the employee’s regular rate of pay for purposes of computing an overtime premium.”
How Per Diems Affect the FLSA’s “Regular Rate” Calculation
As with many wage and hour situations, failing to account for per diem payments in the regular rate can add up quickly. To use an example from a recent case, take an employee making $15 per hour who receives a $50 daily per diem while working out of town ($250/week) and regularly works 50 hours per week (10 hours of overtime):
(50 hrs. × $15/hour) = $750 in straight time pay
($15 ÷ 2) × 10 overtime hours = $75 for the overtime premium
Without counting the per diem, you would pay the employee $825 per week.
However, if your employee never actually incurs any expenses or costs, or incurs far less than $250 per week, the DOL could treat the per diem as wages. The employee’s $15 per hour straight-time rate then becomes $20 per hour:
(50 hrs. × $15/hour) + ($250 per diem) = $1,000
($1,000 ÷ 50 hrs.) = $20 per hour
This means you owe the employee $100 each week in overtime premiums, not $75 (($20 ÷ 2) × 10 overtime hours = $100). Technically, since you didn’t pay the $250 per diem as wages, either, the DOL could lump that in as well, calculating that you should have paid your employee $1,100 each week, not $825. A $275 per week shortage adds up quickly: $14,300 per employee, per year…plus another $14,300 for liquidated damages…plus your employees’ attorney’s fees…plus civil fines from the DOL—all for our very simple example. That’s how the DOL can get to $3.5 million plus with just two employers.
Insights for Employers
The DOL’s continued focus on per diem miscalculations is only one part of the story. As in the two press releases linked above, the DOL also refers these matters to state agencies for separate investigations. Obviously, payroll shortages to employees also mean payroll tax shortages to the IRS and state tax agencies. The DOL has inked cooperation agreements with the IRS and many states and, as the cases above demonstrate, will not hesitate to share their investigative findings. Of course, employees can file their own private lawsuits, too, driving the costs for you even higher. If you are paying “per diems” to your employees, these settlements are a good reminder to check your practices in consultation with wage and hour counsel to ensure that you aren’t running afoul of this (or any other) FLSA provision.