Per diems, stipends, and allowances, are commonly used by employers to reimburse their employees for lodging, meals, and incidental expenses incurred when travelling. For certain industries, such as travelling nurses, these payments have become an integral component of compensation and employee retention. However, recent court rulings and legislative changes have held that such payments may be actual wages rather than reimbursement. As explained below, the consequences of this holding are substantive.
How Can Providing Per Diems, Stipends, or Allowances to My Employees Result in Underpayment?
In short, depending on how they are used, per diems, stipends, and allowances may constitute wages that must be included an employee’s “regular rate of pay” for the purpose of calculating an employee’s overtime pay. Failing to include such compensation in the regular rate of pay results in the employee being underpaid for overtime wages earned.
Federal law holds that overtime compensation is based on an employee’s “regular rate of pay.”[1] Under the Federal Labor Standards Act (“FLSA”), the regular rate of pay at which an employee is employed includes all compensation paid to employees, subject to only a few exceptions.[2] While “regular rate” is an hourly rate, it is not necessarily the same as the hourly rate that an employee was offered when hired or that the employee is paid per “regular” (non-overtime) hour. Yes, this can be confusing, but the following example should provide clarity.
Example:
Imagine an employee works for an hourly wage of $20.00, paid on a weekly basis. This employee works 45 hours in a particular week. If this employee earns a $90.00 commission or production bonus and works overtime in the same week, how much should this employee be paid for overtime hours? It is not as simple as multiplying the employee’s hourly rate of $20.00 by 1.5x. Rather, the employee’s regular rate of pay must be determined including the commission/bonus – it is not the same as the employee’s hourly pay rate of $20.00.
The regular rate includes almost all forms of pay that the employee receives, including: (1) hourly earnings; (2) salary; (3) commissions once earned; (4) production bonuses; (5) piece work earnings; (6) the value of meals and lodging; and (7) cash payments in lieu of health benefits. The FLSA provides exactly seven payment exceptions from the regular rate. These exceptions are: (1) holiday gifts; (2) payments that are not compensation for work; (3) discretionary bonuses; (4) contributions to third parties for benefits; (5) overtime premium rate; (6) weekend overtime premium rate; and (7) contractual extra compensation.[3]
Returning to our example:
This employee’s regular rate would be calculated as follows: 45 hours worked x $20.00 per hour = $900.00. The $90.00 in additional compensation the employee earned that week would then be added: $900.00 + $90.00 = $990.00. Dividing $990.00 by 45 (the number of hours worked that week) results in $22.00. This employee’s regular rate during this week is $22.00 and as such, this employee’s overtime rate, for this week, is $33.00. “This week” is bolded to bring to your attention that this regular rate calculation must be conducted for each pay period and a different regular rate (and therefore, a different overtime rate) may result from pay period to pay period. To make matters worse, the regular rate calculation varies depending on the type of incentive pay received and the time period to which the incentive pay relates!
What does that example have to do with per diems, allowances, or stipends?
Many employers pay per diems, allowances, or stipends to their employees with the belief that such payments fall under the exception for “payments that are not compensation for work” and therefore do not have to be included in the regular rate for overtime rate calculation.[4] Unfortunately, recent case law (discussed below) has held that under certain circumstances, per diems, allowances, or stipends are in fact compensation for work in disguise and should not be excluded from the regular rate—this is especially the case when per diems, allowances, or stipends are adjusted based on the number of days, shifts, or hours worked by the employee or do not correlate to actual travel-related expenses incurred by employees.
For industries that provide per diems, stipends, and allowances (e.g., housing or travel allowances) to their employees, caution must be taken to ensure that these items qualify for exemption from inclusion in an employee’s regular rate. As set forth above, failing to account for such payments in the regular rate of pay results in an underpayment of compensation when an employee works overtime. Measures like (1) prorating per diems and allowances based on an employee’s number of shifts worked or number of hours worked, (2) paying per diems without regard to whether an employee is traveling or not, and (3) paying per diems without regard to whether expenses were actually incurred, are problematic factors that likely will cause such payments to be considered compensation that must be included in the worker’s regular rate for overtime rate calculation purposes. While this issue may be especially relevant to businesses that provide traveling nurse services (this was the industry at issue in the Ninth Circuit’s most recent ruling), other industries that provide per diems and allowances should be on notice and review their policies.
Case Law Addressing the Inclusion or Exclusion of Per Diems, Stipends, or Allowances from the Regular Rate[5]
On February 8, 2021, in Clarke v. AMN Services LLC, the Ninth Circuit Court of Appeals (covering Alaska, Arizona, California, Guam, and Hawaii) issued a unanimous decision holding per diem payments made to nurses and technicians that varied depending on how much they worked were part of the workers’ regular rate of pay under the Federal Labor Standards Act and California law.[6] The defendant, a travel nurse staffing company, had a practice of deducting a portion of the per diems paid to employees when they missed shifts. The defendant also paid per diems to employees who did not travel. The Ninth Circuit held that the defendant’s per diems actually functioned as compensation, similar to bonuses for good attendance, as opposed to reimbursement to employees for travel expenses. As such, these payments should have been included in employees’ regular rate of pay for determination of overtime rate of pay. The Court considered the following factors: (1) “the tie of the per diem deductions to shifts not worked regardless of the reason for not working”; (2) “a ‘banking hours’ system”; (3) “the default payment of per diem on a weekly basis, including for days not worked away from home, without regard to whether any expenses were actually incurred on a given day”; (4) “and the payment of per diem in the same amount, but as acknowledged wages, to local clinicians who did not travel.”
Other circuits have also considered the effect of prorating per diems and allowances. In Newman v. Advanced Technology Innovation Corp., two engineers were hired to work away from their homes. [7] Their employment agreements listed a set hourly wage and a weekly per diem payment based on hours worked. The engineers sued their employer, arguing that the per diems operated like an hourly wage and must count as part of the regular rate for purposes of calculating overtime. The First Circuit Court of Appeals (covering the districts of Maine, Massachusetts, New Hampshire, Puerto Rico and Rhode Island) agreed, concluding that the employer “impermissibly” reduced the employees’ regular wage by labeling part of their compensation as a “per diem,” because those payments were “based upon and thus varie[d] with the number of hours worked[.]”
California District Court rulings went a step further holding that proration based on hours and/or based on days/shifts both must be included in the regular rate.[8] The California District Court decision in Clarke v. AMN Servs., LLC [9] had been the exception, holding that per diem payments that varied with the number of hours worked need not be included in the regular rate – until the Ninth Circuit’s recent reversal.[10]
What Now?
Unfortunately, the damages and penalties associated with unpaid wages are severe. Going forward, businesses should review their policies and practices governing the payment of per diems, stipends, and allowances to determine whether these payments are exempt from inclusion in an employee’s regular rate of pay.
While reviewing such policies, ask:
- Do we pay a per diem, allowance, or stipend that is not included in regular rate and overtime rate calculations?
- Do we pay a per diem, allowance, or stipend that is prorated based on the number of hours, days, or shifts worked by an employee?
- Do we pay a per diem, allowance, or stipend to employees regardless of whether employees are traveling for work or incurring travel related expenses?
If the answer to any of these questions is “yes,” it may be necessary to amend your pay practices to ensure compliance with the FLSA and potentially with your state’s wage and hour laws, as well.
Please reach out to Travis Jang-Busby or Janna Jamil with any questions.
[1] 29 U.S.C. § 207
[2] 29 U.S.C. § 207
[3] 29 U.S.C. § 207(e)(1)-(7).
[4] U.S.C. § 207(e)(2)
[5] Note, this overview does not include a comprehensive review of case law addressing every jurisdiction.
[6] Clarke v. AMN Services LLC, 9th U.S. Circuit Court of Appeals, No. 19-55784.
[7] Newman v. Advanced Technology Innovation Corp., 749 F.3d 33, 35 (1st Cir. 2014)
[8] Dittman v. Med. Sol., L.L.C. 2019 WL 4302752 (E.D. Cal. Sept. 11, 2019)
[9] Clarke v. AMN Servs., LLC, No. 16-4132 DSF, 2018 WL 3357467 (C.D. Cal.)
[10] Clarke v. AMN Services LLC, 9th U.S. Circuit Court of Appeals, No. 19-55784.