The U.S. Department of Labor (DOL) has released an opinion letter addressing whether per diem expense payments for tools and equipment may be excluded from the hourly rate when calculating overtime pay under the Fair Labor Standards Act (FLSA). (FLSA 2024-01, Nov. 8, 2024).

While the opinion letter doesn’t break new ground, it’s an important reminder for employers about when such reimbursements must be factored into the regular rate. Per diem expense reimbursements are widely used by employers, but their treatment under the FLSA is tricky, and it is easy to get it wrong.

Expense Reimbursement and Regular Rate

The FLSA requires “all remuneration” to be included in the regular rate when computing overtime pay. There are certain exceptions to this requirement, however, including reimbursement for expenses incurred by an employee on the employer’s behalf. The FLSA regulations state that only the “actual or reasonably approximate amount of the expense is excludable.”

Factual Scenario

A company that services oil and gas industry clients employs pipeline inspectors who work at remote jobsites. The company pays inspectors $25 per day for the use of their personal mobile phone, camera, computer, and “ancillaries” for their work in the field. The company is considering increasing this amount to $150-$200 per day and wants to exclude a portion of those payments from the inspectors’ regular rate of pay. It requested an opinion from the Wage and Hour Division on whether this approach is allowed under the FLSA.

Wage and Hour Division Administrator Jessica Looman advised that the employer’s proposed $150-$200 payments are not likely to be excludable from the regular rate. The proposed payments are six to eight times greater than the current $25 per day that the company pays. Therefore, they do not appear to be a reasonable approximation of the expenses employees incurred. Also, the employer presented no documentation that the inspectors actually incurred these ongoing expenses.

Determining Reasonable Expenses

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

Takeaway

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

To be excludable, a reimbursement must reflect expenses actually incurred. Employers must keep detailed records of expenses reimbursed to show they are legitimate costs incurred by employees in performing their work. FLSA recordkeeping provisions require that employers document “the amount and nature of each payment” to be excluded from the regular rate calculation.