9th U.S. Circuit Court of Appeals rules that employer per diem payments may function as wages rather than reimbursement for purposes of calculating an employee’s overtime rate of pay in accordance with the Fair Labor Standards Act (FLSA).

• Mar 04, 2021
• By: Scott McLeran

Plaintiffs worked as traveling clinicians for Defendant’s healthcare staffing company.  In addition to receiving designated hourly wages, Plaintiffs also received a weekly per diem benefit, which Defendant claimed was provided as a reasonable reimbursement for work-related expenses while traveling, thus were not wages.  Plaintiffs sued Defendant, claiming that their weekly per diem benefits operated as wages and were improperly excluded from their regular rate of pay under the FLSA, thereby decreasing their wage rate for purposes of calculating overtime.   Defendant contended that the per diem benefits were not wages but, instead, reasonable reimbursement for work-related expenses the employees incurred while on work-related travel assignments, and therefore properly excluded under the FLSA for overtime rate calculation purposes.  The district court entered summary judgment in Defendant’s favor.  Plaintiffs appealed.  The 9^th Circuit reversed the district court’s grant of summary judgment, ruling that Defendant had not demonstrated the per diems were properly excluded for purposes of calculating the Plaintiffs’ regular rate of pay for overtime in accordance with the FLSA.

Generally, the regular rate of pay under the FLSA includes “all remuneration for employment paid to, or on behalf of, the employee.” (29 U.S.C. § 207(e).) Non-exempt employees who work more than forty hours in a week are required to be paid overtime for those additional hours worked at an hourly rate that is at least one-and-a-half times their regular rate. (29 U.S.C. § 207(a)(1).) 

The FLSA provides exceptions that allow employers to exclude certain payments from an employee’s regular rate of pay, including: “payments made for occasional periods when no work is performed due to vacation, holiday, illness, failure of the employer to provide sufficient work, or other similar cause; 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 to an employee which are not made as compensation for his hours of employment.” (29 U.S.C. § 207(e)(2).).

In the present case, the 9th Circuit held that the per diem payments to Plaintiffs "functioned as compensation for work rather than as reimbursement for expenses incurred," and therefore should have been included in the calculation of the employees’ regular rates of pay for overtime purposes. 

The Court noted that an important indication of whether employer payments to employees for vacation, sick time, reimbursement for travel, and other similar expenses are properly deemed reimbursements as opposed to compensation for FSLA overtime rate-of-pay calculations, is whether the payments increase, decrease, or both, based on time worked. 

The Court recognized that in determining whether per diem pay functions as compensation or reimbursement, this “function test” requires a case-specific inquiry based on a number of factors, including the particular formula used for determining the amount of the per diem.  Along with the monetary relationship between payment and hours, other relevant, although not dispositive considerations, include whether the payments are made regardless of any costs actually being incurred, and whether the employer requires an attestation that costs were incurred by the employee.  In the present case, the Court noted that both traveling and non-traveling clinicians received the per diem payments, and that Defendant treated the local non-traveling clinician per diems as wages, not as reimbursement for travel-related expenses.  

The Court concluded that because both local and traveling clinicians received the per diem pay as part of their expected pay package regardless of whether expenses were incurred, this functioned as compensation for hours worked.   Accordingly, Defendant had not demonstrated the per diem pay was properly excluded from the FSLA’s regular rate of pay under 29 U.S.C. § 207(e)(2). 

What this means for our clients moving forward.

In light of the 9th Circuit’s ruling, employers are encouraged to carefully review and make any necessary amendments to their employee compensation and per diem pay policies to clarify whether and/or under what circumstances per diem pay is intended to be part of their employee compensation package, or as reimbursement for actual authorized employment-related expenses incurred by the employee.  In accordance with the 9th Circuit’s ruling, if the per diem pay functions as compensation for actual work performed, rather than reimbursement for employment-related expenses incurred by the employee, it should be treated as compensation under the FLSA for purposes calculating the employee’s regular rate of pay for overtime.  Conversely, if per diem pay is provided to employees as reimbursement for actual expenses incurred in furtherance of the employer’s interests, as outlined above in accordance with 29 U.S.C. § 207(e)(2), such pay is not included in the calculation of the employee’s regular rate of pay for overtime.

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