Under the Fair Labor Standards Act, overtime pay is calculated based on the employee’s “regular rate.” The regular rate includes not just base compensation, but bonuses, incentive pay, commissions and other forms of cash and even non-cash compensation. Earlier this month, the Tenth Circuit Court of Appeals concluded that employers do not have to include per diem payments made to traveling employees when calculating the regular rate for purposes of overtime pay.
In Sharp v. CGG Land (U.S.), Inc., the plaintiffs contended that the company’s $35 per diem was unreasonably large, and therefore served as an attempt by the employer to shift compensation from wages to avoid it being included in the regular rate. The Tenth Circuit disagreed, noting that DOL interpretations of the regular rate exclude living expenses while traveling, including meals. The court also rejected the plaintiffs’ argument that the DOL exclusion only applies to meals taken during actual travel, and not time spent at the remote work location.
This decision avoids a hypertechnical interpretation of DOL rules, and recognizes that a reasonable per diem represents expense reimbursement more than it does compensation to the employee. In certain circumstances, an excessive per diem could be considered wages included in the regular rate. To avoid this outcome, employers should set per diems within IRS limits for deductibility as business expenses.