With more workers operating from home, it is common for employers to reimburse remote employees for the business use of their personal cell phones, computers, office supplies, and other work-related equipment or to provide a per diem to cover out-of-pocket business-related expenses. On November 8, 2024, the U.S. Department of Labor (DOL) Wage and Hour Division issued Opinion Letter FLSA2024-01 opining on when such payments may be excluded from non-exempt employees’ regular rate of pay for purposes of calculating overtime.
Specifically, the opinion letter addressed a question from an oil and gas company that was reimbursing its field inspectors for the use of their tools and equipment at the rate of $25 per day. The company inquired whether it would be permissible under the Fair Labor Standards Act (FLSA) to make significantly higher tool and equipment payments of up to $150 to $200 per day and exclude those payments from their non-exempt employees’ regular rate.
The DOL explained that a non-exempt employee’s regular rate of pay must include “all remuneration for employment paid to, or on behalf of, the employee,” subject to certain exclusions. Among the items that may be excluded from the regular rate of pay are reasonable payments for expenses “incurred by an employee in the furtherance of [their] employer’s interests.”
The regular rate of pay cannot simply be agreed upon by the employer and employee, however. Any excludable expense payment must have a reasonable relationship to the actual amount expended by the employee. The determinative question is whether the payments are legitimate reimbursements for amounts the employee was required to spend or are, instead, additional compensation for work. To legitimately exclude any such reimbursement from a non-exempt employee’s regular rate of pay, the employer has the burden to prove that the amounts reimbursed reasonably reflect the amounts the employee spent.
Takeaway for Employers
If an employee receives a per diem or expense reimbursement but has not incurred an expense on their employer’s behalf, the entire amount of the per diem or reimbursement must be included in the regular rate of pay. If an expense payment is based on the number of hours worked, rather than actual expenditures, the entire amount must be included in the regular rate. Likewise, if the amount paid is disproportionately large, any excess amount must be included in the regular rate. And the FLSA requires that employers document the amount and nature of each payment that is excluded from an employee's regular rate of pay.
Given the above, the DOL concluded that it did not appear that the oil and gas company could permissibly exclude daily payments of $150 to $200 from their inspectors’ regular rates of pay as such an increase was six to eight times what they were currently reimbursed and there was no suggestion that the inspectors actually incurred expenses in such amounts. The DOL’s Opinion Letter affirmed that “expense reimbursement 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.”
If you have questions about calculating employees’ regular rates of pay and are a Consulting or Enterprise member, contact an Employers Council attorney for guidance.
Barbara Bagdon is an attorney for Employers council.