DOL Offers Guidance on When Per Diem Expense Reimbursements May Be Excluded from Employee’s Regular Rate
This month, the U.S. Department of Labor issued an opinion letter on the issue of when daily expense reimbursements may be excluded from an employee’s regular rate of pay under the Fair Labor Standards Act. As discussed in our article on the FMLA opinion letter that was also released this month, the DOL issues opinion letters to respond to an inquiry from an employer or other entity. These letters set forth the DOL’s official position and provide guidance to other employers on that particular issue.
Expense Reimbursement Under the FLSA. Under the FLSA, employers must pay non-exempt employees at 1½ times their regular rate for all hours worked over 40 in a workweek. The regular rate includes all compensation that an employee receives for their employment, subject to specific statutory exclusions – one of which is “reasonable payments for traveling expenses, or other expenses, incurred by an employee in the furtherance of [their] employer’s interests and properly reimbursable by the employer,” as well as “other similar payments to an employee which are not made as compensation for [their] hours of employment.”
In assessing whether per diem or reimbursement payments are excludable, the issue is “whether such payments function as legitimate reimbursements or as compensation for work.” If the employee receives expense payments without actually incurring expenses, or if the payment varies with the number of hours worked, the payment must be included in the regular rate. The burden is on the employer to establish that the expense payment is used to offset actual expenses and may therefore be excluded from the regular rate. Moreover, only the actual or reasonably approximate amount of the expense may be excluded; if the reimbursement amount “is disproportionately large, the excess amount will be included in the regular rate.” Employers must document any excluded payments, but need not use any specific method to approximate employees’ expenses. Whether a particular method provides an approximation of actual expenses will depend on the circumstances of each case.
The Current Case. In the opinion letter, the employer had previously paid $25 per day in tool and equipment payments to its employees for their use of such items in the field. The employer questioned whether it could significantly increase such payments – as high as $150-200 per day – and still exclude them from the regular rate. However, the employer provided no indication that the employees actually incurred such significant expenses. Thus, only the portion of such payment that reasonably approximates the actual expenses incurred could be excluded from the regular rate.
Lessons for Employers. It is important for employers to ensure that any per diem or expense reimbursement is tied to a reasonable approximation of the actual expenses incurred by the employee – if not, then any payment in excess of such actual expense must be included in the regular rate for purposes of calculating overtime. The DOL specifically warns employers that such reimbursements “cannot be used to artificially reduce employees’ regular rates of pay, in an attempt to reduce the amount an employer must pay employees for overtime work.”
