Appeals court rules overtime pay does not include per diem amount

Recently, the Tenth Circuit Court of Appeals – the federal court of appeals that covers Oklahoma – ruled that employers do not have to include reimbursement payments for daily meals for traveling employees as part of the “regular rate” when calculating overtime pay.

Collective action alleges FLSA violations

In 2014, a group of hourly employees who regularly travelled as part of their jobs sued their former employer, CGG Land, for alleged violations of the Fair Labor Standards Act. CGG Land provided seismic-mapping services at remote locations. Because much of the work was done in remote locales, employees were required to travel and stay in hotels near remote job sites for four to eight weeks at a time. Employees then returned home for two to four weeks before being sent to the next location. Employees often worked more than 40 hours a week while at the remote locations, and CGG paid them overtime based on their regular rate of pay. When they were away from home, CGG also provided employees with a $35 per diem for meals. The employees agreed that $35 was a reasonable amount for meals. CGG did not pay the $35 amount when the employees were working from their home locations or when food was provided at the remote locations.

Under the FLSA, non-exempt hourly employees must be paid one-and-a-half times their regular hourly rate for all hours worked in excess of 40 per week. The regular rate is usually calculated by dividing an employee’s total compensation for employment in any workweek by the amount of hours actually worked. In calculating this regular rate, CGG Land did not include the $35 per diem. If included, it would have resulted in higher overtime payments for the employees. The employees sued in a collective action under the FLSA, alleging that CGG Land violated the FLSA by calculating their overtime pay based on a regular rate that was too low.

Overtime calculations and per diems

A federal court in Oklahoma ruled that CGG was correct to exclude the per diem amount from the regular rate. Under the FLSA, an employee’s regular rate includes “all remuneration for employment” paid to the employee – with eight exceptions. 29 U.S.C. § 207(e). One exception exempts “reasonable payments for traveling expenses,” including a reasonable amount for “living expenses away from home” for employees “traveling ‘over the road’” for their employer’s business. 29 C.F.R. § 778.217(a). Therefore, the issue for the trial court became whether the $35 meal reimbursement was a living expense away from home. The trial court concluded that, of course, food is a living expense.

The employees next argued that the regulation did not apply because they were not literally traveling over the road once they reached the job site. The trial court rejected this “hyper-literal” interpretation of the word “traveling,” holding that “traveling” must be read more broadly as time away from home, not just time in transit.

The employees’ final argument was basically a fairness argument. They argued that the employer paid the $35 per diem as a part of a scheme to set an artificially low hourly rate of pay. However, the employees had already agreed that $35 was a reasonable amount to reimburse them for meals. Nor was the per diem payment tied to anything, like the amount of hours worked by the employees. This showed that it really was a reimbursement for food costs while traveling, not part of a scheme to pay employees less.

In granting CGG Land’s motion for summary judgment, the trial court ruled that because the per diem was used for living expenses while the employees were away from home, the exception applied. Upon appeal, the 10th Circuit Court of Appeals agreed with the trial court’s decision that the $35 per diem did not have to be included in the calculation of the overtime rate.

Mixed bag of news for employers

This case provides both good news and bad news for employers. The good news is for employers who use per diem payments of this kind for traveling employees. So long as such payments are a reasonable estimate of the amount needed for meals and not tied to the hours worked by the employees, such payments are properly excluded from the regular rate calculation. However, the fact that the employees brought this collective action lawsuit in the first place – even they were properly paid overtime and were given additional compensation in the form of what they admitted was a reasonable per diem – illustrates the fact that wage and hour lawsuits of all kinds are on the rise across the country. Even well-compensated employees are challenging the ways their employers calculate their pay. It is more important than ever for employers to ensure that their pay plans are in complete compliance with the FLSA.

Sharp v. CGG Land (U.S.) Inc., No. 15-5113 (10th Cir. Nov. 4, 2016).