Wage and Hour Update:
Employer’s Per Diem Pay Scheme
Violates Overtime Rules
By Christopher W. Olmsted
Overtime pay rules are deceptively simple. It isn’t just enough to know to pay employees time and a half of the regular rate for hours over 40 in a week (or also, in California, over 8 in a day). Take the concept of the “regular rate.” The regular rate isn’t always just the employee’s hourly rate of pay. Sometimes it can include other pay. For example, in a recent federal Fifth Circuit Court of Appeal case titled Gagnon v. United Technisource, Inc., an employer got burned in an overtime lawsuit for paying an improper “per diem” which should have been included in the employee’s regular rate.
Skilled Craftsman, Low Pay
Tim Gagnon is a skilled craftsman in prepping and painting the exterior and interior of aircrafts. When Mr. Gagnon began working for UTI, he signed executed a contract in which UTI agreed to pay Mr. Gagnon in the following manner:
$5.50 per hour for “straight time”
$20.00 per hour for overtime.
$12.50 per hour “per diem” up to 40 hours/week or $500 maximum.
Note that the hourly rate of $5.50 was significantly lower than the average rate paid to aircraft painters in the area.
About one year after he started, Mr. Gagnon received a $1.00 per hour raise. However, UTI did not increase his straight time rate. Rather, UTI increased his “per diem” rate. This increase in hourly per diem was not based on any reasonably approximated increase in Gagnon’s expenses.
Gagnon worked overtime hours, and was paid the agreed upon $20/hour rate. But he believed that this rate was too low and that he had been cheated out of overtime pay. He figured that the proper overtime rate should have been $27/hour, not $20/hour. That is, his OT rate was: ($5.50 + 12.50 per diem = $18 regular rate) x 1.5 OT premium = $27. He sued under the federal Fair Labor Standards Act (FLSA) for the unpaid overtime.
UTI argued that Mr. Gagnon received the proper overtime pay. The company argued that the payment scheme did not violate the FLSA because the FLSA only requires employers to pay overtime at a rate of time and a half, and UTI paid Mr. Gagnon overtime at a rate ($20) more than three times his base pay ($5.50). UTI also argued that Mr. Gagnon’s per diem reasonably approximated his reimbursable expenses and should therefore be excluded from the determination of Mr. Gagnon’s regular rate for the purposes of overtime pay.
The district court ruled in Mr. Gagnon’s favor. It awarded him back overtime pay in the amount of $4,266.82, along with $55,908 in attorney’s fees and $3,568.57 in costs. UTI appealed this ruling.
What “Counts” As The Regular Rate?
On appeal, the Fifth Circuit court considered the meaning of the “regular rate.”
The FLSA requires that non-exempt employees who work more than forty hours in a work week must be paid one and one-half times their “regular rate” of pay. (Note: California has daily overtime for hours in excess of 8). What is the regular rate?
The FLSA broadly defines “regular rate” as the hourly rate actually paid the employee for “all remuneration for employment.” Quoting precedent cases, the court noted that “the regular rate by its very nature must reflect all payments which the parties have agreed shall be received regularly during the workweek, exclusive of overtime payments.”
There are a number of court cases, agency regulations, and opinion letters at the state and federal level addressing questions concerning what compensation is included or excluded from the regular rate calculation.
The debate in this case centered on only one of these questions: per diem payments. The issue was whether or not the $12.50/hour per diem should have been included in the “regular rate” calculation.
What “Counts” As a Per Diem?
A per diem traditionally means money paid to an employee intended to offset travel or other expenses. It is commonly provided where the employee is required to work at a distant or isolated location and must live away from home.
The U.S. Department of Labor takes the position that when figuring overtime rates, per diem payments may be excluded from the regular rate of pay to the extent that they do not exceed a reasonable approximation of actual additional expenses involved in such situations. On the other hand, where an employee receives such payments but actually incurs no such additional expenses, the entire amount of the payments should be included in determining the regular rate. “This would be true, for example, where such payments are made to an employee who is not required to live away from home or where he establishes a new residence at or near the place of work,” states the DOL’s Field Operations Handbook.
The DOL also takes the position that if the amount of the per diem is based upon and thus varies with the number of hours worked per day or week, such payments are a part of the regular rate in their entirety. The DOL Field Operations Handbook notes: “However, this does not preclude an employer from making proportionate payments for that part of a day that the employee is required to be away from home on the employer’s business. For example, if an employee returns to his home or employer’s place of business at noon, the payment of only one-half the established per diem rate for that particular day would not thereby be considered as payment for hours worked and could thus be excluded from the regular rate.”
In this case, the court adopted the DOL’s position regarding per diem pay. Because Mr. Gagnon’s per diem payment was based on the number of hours he worked, it had to be counted as part of his regular rate, and thus, included in the overtime calculation. UTI shortchanged Mr. Gagnon by excluding the per diem pay from the OT calculation.
The court’s decision was influenced by suspicion of the employer’s pay scheme. The employer’s claim that the per diem was legitimate did not ring true. The low hourly wage rate was one problem. “It is difficult to believe that a skilled craftsman would accept a wage so close to the minimum wage when the prevailing wage for similarly skilled craftsmen was approximately three times the minimum wage,” observed the court. The court was also troubled by the fact that the straight time plus per diem hourly rates together matched the regional prevailing wage for aircraft painters (i.e. $18/hour). “Further, it is suspect that a ‘raise in all pay’ was effectuated by increasing the hourly ‘per diem’ rate rather than the ‘straight time’ rate.” “Finally, 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.”
Make It Legit. Employers paying per diem compensation should carefully consider whether the payment is a reasonable approximation of additional expenses that the employee will incur.
Avoid Hourly Per Diem. The DOL and this court discredited an hourly per diem arrangement. Consider a flat daily rate instead.
Learn About Regular Rate. Figuring regular rate is trickier than you may think. Get smart on what counts and what can be excluded. For a head start, ask for Barker Olmsted & Barnier’s Regular Rate Reference Chart. Email Chris Olmsted at email@example.com
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Download entire June 2010 Legal Update in PDF format.
This article is intended as a brief overview of the law and are not intended to substitute as legal advice. Any questions or concerns regarding any statute or case law should be addressed to a licensed attorney. Copyright © 2010 by Barker Olmsted & Barnier, APLC. San Diego, California. All rights reserved.