Per diem payments affect overtime pay

Many employers struggle to manage overtime costs paid to employees. One approach employers have tried is to keep the hourly rate low while supplementing pay with other types of payments. This strategy was recently disapproved of by the Fifth Circuit Court of Appeals in Gagnon v. United Technisource, Inc., 607 F.3d 1036 (5th Cir. 2010).

In Gagnon, United Technisource, Inc. (“UTI”) paid its employees a low hourly rate and always paid overtime when earned. In addition, UTI supplemented its pay to employees with per diem payments. The per diem payments made up a significant part of employee compensation and were calculated on a per-hour basis, capped at 40 per week. UTI argued that its per diem payments were made to approximate the amount of its employees’ daily expenses and therefore should not be included as part of the base pay used to calculate overtime.

The Fair Labor Standards Act (“FLSA”) requires that all non-exempt employees be paid one and one-half times their “regular rate” of pay for every hour over forty worked in a given workweek. 29 U.S.C. § 207(a)(1). The Act states that “reasonable payments for traveling expenses, or other expenses, incurred by an employee in the furtherance of his employer’s interests and properly reimbursable by the employer” are not included within the “regular rate” used to calculate overtime. 29 U.S.C. § 207(e)(2). UTI relied on that provision to structure its compensation.

While the Fifth Circuit did not dispute the existence or meaning of the law, the court held that an employer cannot get around overtime simply by declaring that a portion of the employee’s pay is excluded from the regular rate. The court was persuaded by the following facts in reaching its decision: (1) most of the employees’ pay came in the form of per diem payments, (2) the per diem pay was calculated on an hourly basis, (3) the per diem pay was capped at 40 hours per week, (4) on one occasion the per diem pay was raised while the hourly wage rate stayed low, and (5) the Department of Labor’s internal Field Operation Handbook states that when per diem pay varies by hour, it must be included in pay used to calculate overtime. Id.

In holding that the per diem payments must be included in the “regular rate” of pay used to calculate overtime, the court focused on the fact that “regular rate” is defined by statute to include all remuneration the employee receives for his employment.

This case is a reminder that employers should carefully review each element of an employee’s compensation before deciding whether to exclude part of an employee’s compensation from the overtime calculation. The penalties for violations of wage and hour laws are severe, and employers who make mistakes often end up paying 200-300% of what they would have paid by doing it right in the first place.