First Circuit Reverses District Court-Per Diem Should Have Been Included in Regular Rate

Posted on May 9, 2014

Overtime under the Fair Labor Standards Act (“FLSA”) is calculated based upon an employee’s regular rate of pay.  But the issue of whether that regular rate of pay includes a per diem can be a challenging one.  Just last month, the First Circuit found that a district court improperly awarded summary judgment to an employer because the per diem paid to employees was based upon based upon and varied with the number of hours worked per week and thus should have been included in the regular rate of pay for purposes of determining overtime. See Newman, et al. v. Advanced Technology Innovation Corp., No. 13-1132 (1st Cir. April 18, 2014).

The two plaintiffs in Newman claimed that their employer improperly labeled part of their regular hourly wage a per diem, excluding it when calculating the rate for overtime and thereby depriving them of overtime pay. The plaintiffs were engineers who entered into a consulting agreement with Advanced Technology. The agreements listed an hourly wage, an overtime rate more than one and one half times that hourly rate and a “per diem expense reimbursement” because of the plaintiffs’ remote work assignments. One of the plaintiffs was eligible for that per diem expense figure for each day actually worked up to seven days with a per diem paid for Saturdays and Sundays if work was performed on those days or on the immediately preceding work day. The other plaintiff’s agreement set the same per diem but capped it at a weekly maximum for five days if each day was actually worked.

A per diem is either included in or excluded from the regular rate of pay for determining overtime pay depending on how it operates. Here, the plaintiffs took the position that the per diem operated like an hourly wage. Basically, their argument was that they had been promised certain hourly rates which were made up of the regular rate stated in their contracts and the per diem if broken down by the hour.

After reviewing affidavit from the chairman and treasurer of Advanced Technology describing the formula used for determining per diem, the district court found that this affidavit disproved the plaintiffs’ contention that the per diem was calculated simply by multiplying the numbers of hours worked in a week by an hourly per diem supplement and so the per diem rates were reasonably approximated work related expenses and properly excluded from determination of the regular rate. The plaintiffs appealed, arguing that the per diem rate was tied to hours worked.

The First Circuit agreed with the plaintiffs. For purposes of determining overtime, “the regular rate does not include ‘reasonable payments for traveling expenses, or other expenses, incurred by an employee in the furtherance of his employer’s interest and properly reimbursable by the employer; and other similar payments to an employee which are not made as compensation for his hours of employment.’” Newman, p. 7 (emphasis in original) (quoting from 29 U.S.C. § 207(e)(2)). Moreover, the First Circuit pointed out, the parties cannot stipulate to the regular rate, but the rate is based on what actually happens under the contract. See id., p. 8. The court looked to Section 32d05a(c) of the Department of Labor Handbook, pointing out that it “states that the per diem is part of the regular rate of pay if it is based upon, and varies with, hours worked in a week or day” and concluding that its “teaching is that the method of calculating the per diem . . . must use a day as its measuring unit, and not an hour.” Id, p. 9.

The formula relied upon by the company to prorate pro diem reimbursement described as: [(# of hours ÷ 40) x 7] x $141. The First Circuit found that that formula made “clear that the only factor that mattered in calculating the weekly per diem was the number of hours worked.” Id., p. 11. The court concluded that the formula “neatly falls within the Handbook’s concern: it is ‘based upon and thus varies with the number of hours worked per day or week.’” Id., p. 13 (quoting Handbook § 32d05a). The First Circuit thus ruled that there was no material dispute of fact after examining this formula and that not only was summary judgment for the employer proper, but that the proper outcome was partial summary judgment in plaintiffs’ favor as to liability. Id., p. 14.

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