In general, when calculating the regular rate of pay for purposes of determining overtime under the FLSA, all remuneration must be included. This rule is subject to certain limited exceptions for, inter alia, discretionary bonuses and reimbursement of legitimate expenses. But, if an employer decides to provide an hourly “per diem” and classify it as expense reimbursement, can the employer exclude the “per diem” from the regular rate of pay? In a decision issued last week, the Fifth Circuit Court of Appeals, affirming the District Court’s finding of a willful violation of the FLSA, held that an employer violated the Act by excluding such “per diem” from the regular rate of pay in an attempt to artificially lower the regular rate of pay. Gagnon v. United Technisource Inc., 2010 U.S. App. LEXIS 10880 (5th Cir. May 27, 2010).
The facts before the court were simple. The employer initially paid the plaintiff a straight time rate of $5.50 per hour, plus a per diem of $12.50 per hour for the first 40 hours worked each workweek, and an overtime rate of $20 per hour thereafter. Later on, the employer increased the plaintiff’s hourly per diem and hourly overtime rate by $1 (i.e., to $13.50 and $21.00 respectively) while leaving the straight time rate unchanged, characterizing this increase as a “raise.” When Plaintiff sued for alleged unpaid overtime, the employer asserted that its overtime payments exceeded legal obligations as the overtime rate was much greater than time and a half the hourly rate of $5.50 per hour. The employer further asserted that the per diem reasonably approximated reimbursable expenses and thus did not need to be included in the regular rate of pay.
The Court rejected the employer’s defenses. While recognizing that a per diem could be excludable from the regular rate, the Court deferred to the Department of Labor’s position, as delineated in the Field Operations Handbook, that any per diem or similar payment that is based upon hours worked must be included in the regular rate. Id. at fn. 6. The Court expressed its belief that the employer had attempted to artificially reduce the regular rate and reduce overtime costs and stated “we can conceive of no reason why a legitimate per diem would vary by the hour and be capped at the forty-hour mark, which not so coincidentally corresponds to the point at which regular wages stop and the overtime rate applies.” Id. at * 9. The Court also: (i) rejected the employer’s attempt to offset liability with allegedly overpaid per diem that the plaintiff should not have received based on a change in his home address which moved him closer to the workplace and theoretically reduced his expenses (on the basis that the per diem was actually part of the regular rate of pay and not expense reimbursement in the first place); (ii) reiterated that a counterclaim is inappropriate in an FLSA action pursuant to precedent (and must be brought separately, if at all); and (iii) stated that plaintiff’s attorneys were entitled to recover fees for their work on the appeal while vacating the initial fee award due to the District Court’s failure to explain the basis therefore (which, as an aside, was 6 times back pay and liquidated damages awarded to the Plaintiff, combined).
All employers should review their overtime calculation protocols to ensure they are paying time and a half the properly calculated regular rate of pay for all overtime hours. To the extent an employer provides a per diem for expense reimbursement, if the per diem is based on hours worked, there is a significant concern with excluding the “per diem” from the regular rate calculation.