In a case involving two certified classes, the Ninth Circuit Court of Appeals concluded this week that an employer’s per diem paid to traveling employees to reimburse for the cost of meals, incidentals and housing while working away from home can constitute a “wage.” Clark v. AMN Services, LLC, Case No. 19-55784 (9th Cir., Feb. 8, 2021). As such, the per diem payments should have been included in the calculation of the employees’ “regular rate of pay” for determining overtime compensation.
Under the federal Fair Labor Standards Act (FLSA), employees are entitled to overtime pay at 1.5 times an employee’s “regular rate of pay.” An employee’s “regular rate of pay” includes the employee’s ordinary hourly rate of pay, as well as other compensation, such as non-discretionary bonuses. Therefore, an employee’s “regular rate of pay” may be higher than an employee’s ordinary hourly rate of pay. Expense reimbursements are not included in an employee’s “regular rate of pay.” Class action cases involving the regular rate are now becoming more common.
At issue in this case was a per diem payment made to employees who were assigned to work more than 50 miles from their work assignment. Under the policy, employees were paid the weekly per diem if they worked the weekly shifts required by their contract, but if they worked extra, they could “bank” the extra time for another week when they worked less than a full week, and if they worked less, their per diem would be deducted based on the hours of work missed.
The Ninth Circuit concluded that this per diem should be included in the “regular rate of pay” by applying a test looking to whether the employees were paid the per diem as reimbursement for expenses or instead to compensate for hours worked. The court found the per diem was compensation for hours worked rather than an expense reimbursement, based on three grounds:
- Under the policy, the employer was paying a default per diem for seven days of expenses, regardless of whether the employee actually incurred expenses those days.
- By being able to “bank hours,” employees were able to receive per diem payment for days not worked and therefore not incurring expenses.
- The employer paid the traveling employees the same per diem as nontraveling employees – which the employer did treat as “wages”. This suggested that the per diems therefore functioned as supplemental wages rather than expense reimbursement.
These three reasons can be distilled down to one general point: The per diem was not tied to the actual expenses each employee incurred and therefore can be construed as “supplemental compensation” which should be included in the employee’s “regular rate of pay.”
The employer in this case likely intended the per diem to be an administratively convenient way to pay employees for their expenses without requiring them to track them and account for them. As is often the case in “regular rate” cases, however, the FLSA may require the employer to use a more cumbersome process, one that likely places burdens on the employees as well.
The implications of not properly calculating an employee’s “regular rate of pay” most directly leads to potential liability for not paying overtime. As reflected in the opinion, this case was decided under the FLSA. Under California law, however, such a regular rate issue can lead to a domino effect of potential penalties. Therefore, in light of this ruling, employers should review expense reimbursement policies to see whether payments are tied to expenses actually incurred.
BOTTOM LINE: Reimbursement of employee expenses should be based on expenses actually incurred by the employee; otherwise, such payments may be considered “wages” that should be included in the employee’s regular rate of pay.