The US Department of Labor (DOL) has released an opinion letter addressing whether per diems for tools and equipment can be excluded from the hourly rate when calculating overtime pay under the Fair Labor Standards Act (FLSA). (FLSA 2024-018 November 2024).

While the opinion letter does not break new ground, it is an important reminder to employers about when such reimbursements should be factored into the regular rate. Per diem reimbursements are widely used by employers, but their treatment under the FLSA is difficult and easy to get wrong.

Reimbursement of expenses and regular fare

The FLSA requires that “all wages” be included in the regular rate when calculating overtime pay. However, there are certain exceptions to this requirement, including reimbursement of expenses incurred by an employee on behalf of the employer. The FLSA regulations state that only “the actual or approximately approximate value of the expense is excluded.”

Actual scenario

A company serving clients in the oil and gas industry is hiring pipeline inspectors to work on remote job sites. The company pays inspectors $25 a day to use their personal cell phone, camera, computer and “appendices” for their work in the field. The company is considering increasing this amount to $150-$200 per day and wants to exclude some of these payments from the inspectors’ normal rate of pay. It sought an opinion from the Wage and Hour Division on whether this approach is permissible under the FLSA.

Wage and Hour Division Administrator Jessica Looman advised that the employer’s proposed payments of $150-$200 are likely not excluded from the regular rate. The proposed payments are six to eight times higher than the current $25 a day the company pays. Therefore, they do not appear to be a reasonable approximation of the expenses incurred by employees. Also, the employer did not present any documentation attesting that the inspectors actually incurred these ongoing expenses.

Determining reasonable expenses

If an employer reimburses employees at a rate higher than the actual cost of expenses, it may still exclude the actual or approximate amount of an employee’s expenses from the regular rate. The opinion letter does not, however, provide guidance on how to determine whether the refund amount is reasonable. It merely states that the method “will depend on the circumstances of each case.” The letter also unhelpfully states: “If a method reasonably approximates the actual business expenses incurred by employees on behalf of their employer, it will comply with the FLSA. If a method fails to reasonably approximate such expenses, it will not.”

Take away

When an employer reimburses employees at an inflated rate, the payment is not a legitimate expense reimbursement. The opinion letter warns that such payments cannot be used “to artificially reduce employees’ regular rates of pay in an attempt to reduce the amount the employer must pay its employees for overtime.” This is the reason for including employee overage reimbursements in the regular rate.

To be excluded, a reimbursement must reflect expenses actually incurred. Employers must keep detailed records of reimbursed expenses to demonstrate that they are legitimate costs incurred by employees in the performance of their jobs. The FLSA’s recordkeeping provisions require employers to document “the amount and nature of each payment” to be excluded from the normal rate calculation.