California businesses routinely pay per diems to cover lodging, meals, and other incidental expenses for their employees who travel for work. A recent decision from the Federal Court of Appeals in California serves as an important reminder to those businesses about a potentially costly pitfall to avoid in how they structure and account for per diems paid to hourly workers.
Expense reimbursement and overtime under the Fair Labor Standards Act
As most business leaders know, the Fair Labor Standards Act (FLSA) and similar state laws mandate that non-exempt employees who work more than 40 hours per week must receive overtime pay of at least one-and-a-half times their base hourly pay rate. The question presented in the recent Appeals Court decision was: Under what circumstances should per diem pay be included in the base rate-of-pay for purposes of calculating overtime?
Normally, per diems get excluded from those calculations because they constitute non-taxable income. After all, the purpose of a per diem is to reimburse an employee for expenses, not to compensate the employee’s laborers.
But not always. Businesses cannot simply call money paid to an employee a per diem and thereby treat it as exempt from base pay when calculating overtime.
A per diem that functions as compensation is not a true per diem
As the Ninth Circuit Court of Appeals recently held in Clarke v. AMN Services, a per diem payment that in effect functions as compensation (no matter what a business calls it) must be included in the base pay calculation for overtime. Businesses that mischaracterize employee compensation as a per diem face potentially costly consequences under labor laws for paying inadequate overtime to their employees.
AMN Services is a healthcare staffing company that places medical workers on short-term assignments nationwide. Its employees receive an hourly pay rate and, also, a daily per diem whenever work takes them more than 50 miles from their homes.
Employees of AMN brought a class action against the company alleging that it had improperly excluded per diems from their base pay in calculating overtime. They argued that the per diems they received effectively functioned as compensation, rather than expense reimbursement.
The federal Ninth Circuit Court of Appeals agreed. The court found that rather than reimbursing specific travel-related expenses, the per diems AMN paid to its employees, but excluded from their overtime calculations, functioned as compensation. The court based its decision on the fact that:
- AMN prorated per diem payments based on the number of hours employees worked;
- AMN employees could avoid proration of per diems by “banking” hours from one shift to the next;
- AMN did not require its employees to document expenses; and
- AMN counted per diems as wages when it paid them to employees who did not work more than 50 miles from home.
The Appeals Court sent the case back to the trial court for further proceedings, in which AMN now faces potentially significant financial liability for having underpaid overtime to its employees.
Takeaway: evaluate expense reimbursement practices to avoid costly pitfalls
The court’s decision in Clarke v. AMN Services highlights how businesses can run afoul of labor laws, and face potentially stiff fines and liabilities, in connection with paying per diems. You can avoid those outcomes by periodically reviewing your business’s per diem practices to ensure that they truly serve their expense reimbursement purpose, rather than as a means of remunerating your employees.