Per Diem Pay Based on Hours Worked Must Be Included in the Regular Rate: First Circuit | Practical Law

Per Diem Pay Based on Hours Worked Must Be Included in the Regular Rate: First Circuit | Practical Law

In Newman v. Advanced Technology Innovation Corp., the US Court of Appeals for the First Circuit reversed the district court's grant of summary judgment in favor of the employer and granted partial summary judgment for the plaintiffs. The court found the employer liable in the plaintiffs' claim that their employer violated the Fair Labor Standards Act (FLSA) when it mislabeled part of their regular hourly wage a per diem and unlawfully excluded it when calculating their overtime pay. The First Circuit held that the plaintiffs' per diem pay should have been included as regular wages because it was based on and varied with the number of hours they worked per day or week, and the employer incorrectly calculated their per diem rates when they reduced the weekly maximum per diem rates by hours worked instead of by days or partial days worked.

Per Diem Pay Based on Hours Worked Must Be Included in the Regular Rate: First Circuit

by Practical Law Labor & Employment
Published on 22 Apr 2014 • USA (National/Federal)
In Newman v. Advanced Technology Innovation Corp., the US Court of Appeals for the First Circuit reversed the district court's grant of summary judgment in favor of the employer and granted partial summary judgment for the plaintiffs. The court found the employer liable in the plaintiffs' claim that their employer violated the Fair Labor Standards Act (FLSA) when it mislabeled part of their regular hourly wage a per diem and unlawfully excluded it when calculating their overtime pay. The First Circuit held that the plaintiffs' per diem pay should have been included as regular wages because it was based on and varied with the number of hours they worked per day or week, and the employer incorrectly calculated their per diem rates when they reduced the weekly maximum per diem rates by hours worked instead of by days or partial days worked.
On April 18, 2014, in Newman v. Advanced Technology Innovation Corp., the US Court of Appeals for the First Circuit reversed the district court's grant of summary judgment in favor of the employer and granted partial summary judgment for the plaintiffs. The court found the employer liable in the plaintiffs' claim that their employer violated the Fair Labor Standards Act (FLSA) when it mislabeled part of their regular hourly wage a per diem and unlawfully excluded it when calculating their overtime pay. The First Circuit held that the plaintiffs' per diem pay should have been included as regular wages because it was based on and varied with the number of hours they worked per day or week, and the employer incorrectly calculated their per diem rates when they reduced the weekly maximum per diem rates by hours worked instead of by days or partial days worked. (No. 13-1132 (1st Cir. Apr. 18, 2014).)

Background

The plaintiffs were hired in 2010 as remote employees by the recruiting firm Advanced Technology Innovation Corporation to work as engineers at a General Dynamics Land Systems plant in Virginia. The plaintiffs both signed consulting agreements and offer letters with Advanced Technology that listed their:
  • Hourly wages.
  • Overtime rates.
  • Per diem expense reimbursement rates.
The plaintiffs also signed Consultant Per Diem Certifications that provided for reimbursement "for any business expenses on a per diem basis" using the relevant IRS Federal Travel Reimbursement Rate. The agreements provided for their maximum per diem rates.
In January 2012, the plaintiffs filed suit against Advanced Technology in the Eastern District of Virginia claiming that:
  • The per diem pay should be included as regular wages because the employer's formula calculated the weekly per diem rate based on the number of hours worked per week, rather than number of days or partial days worked, as required by the Department of Labor's (DOL) Field Operations Handbook.
  • The company violated 29 U.S.C. § 207(a)(1)-(2) by failing to pay overtime wages on their full regular wages, which included both the regular rates and the per diem rates.
After the case was transferred to the District Court of Massachusetts, Advanced Technology moved for summary judgement and the plaintiffs cross-moved for partial summary judgment on the employer's liability. The district court granted Advanced Technology's motion, holding that Advanced Technology properly paid the plaintiffs overtime based on the hourly rates agreed to in their contracts and the per diem rates as provided by the relevant IRS Federal Travel Reimbursement Rate. The plaintiffs appealed the decision to the First Circuit.

Outcome

The First Circuit:
  • Reversed the district court's grant of summary judgment in favor of Advanced Technology.
  • Granted partial summary judgment to the plaintiffs on the employer's liability for failure to pay overtime at the correct rates.
The court first found that, under the FLSA, the plaintiffs' regular wage rates as remote employees are questions of fact because their regular wage rates:
  • Do not include payments for reimbursable expenses incurred in furtherance of their duties, such as travel expenses.
  • Include payments for expenses normally incurred for their own benefit, for example, living expenses such as food and rent.
  • Must be based on the employer's actual payment practices, not the language of their employment contracts.
The First Circuit then evaluated Advanced Technology's payment practices against the guidance in Section 32d05a(c) of the DOL Wage and Hour Division's Field Operation Handbook, on which both parties rely for their arguments, to hold that:
  • When the plaintiffs did not work a full day or week, Advanced Technology was permitted to reduce their per diem pay proportionately, but could only use a day as its measuring unit, not an hour. For example, Advanced Technology could pay them half of a day's worth of per diem when the plaintiffs only worked half of a day.
  • Although Advanced Technology could have reduced their per diem rates for partial days worked, it could not make fixed hourly reductions from their per diem rates.
  • Despite Advanced Technology's assertions that it did not make fixed hourly reductions from the plaintiffs' per diem rates, the formula it applied did in fact reduce the plaintiffs' per diem pay by hours and not days.
  • The plaintiffs' per diem pay should have been included in their regular wages because the formula applied was based on and varied with the number of hours the plaintiffs worked per day or week.

Practical Implications

In this case, the First Circuit provides helpful guidance to employers on complying with the FLSA for per diem employees, by:
  • Instructing that the proper formula to apply when determining per diem rates of pay allows for proportional reductions, but only by days or partial days worked and not by hours worked.
  • Explained that it is a question of fact whether per diem pay should be classified as regular wages, noting that:
    • the classification is not based on the language of the contract, but on the employer's actual payment practice;
    • payments for living expenses are ordinarily part of regular wages;
    • payments for reimbursable expenses, such as travel arrangements, are typically not included in regular wages; and
    • when the formula applied to calculate per diem pay is based on and varies with the number of hours the employee works per day or week, the per diem pay should be classified as regular wages.