Fire Law: Overtime, Meal Per Diems and Expense Reimbursements

Departments and members often reach out to me to pose a query regarding a crucial issue that’s vexed them and for which an answer is vital. One such recent request (below) concerned member costs for traveling to sanctioned events and assignments and whether any of that can affect those members’ compensation.

Question: Our firefighters routinely travel for training and wildland deployments. We give them a meal per diem of $50 while they travel, and we do not require them to submit receipts. We heard that when you pay employees an expense reimbursement that exceeds what they actually incur as expenses, the excess must be included as compensation for purposes of calculating overtime. Is that true? If so, how does that make sense? How can an employer possibly manage the problem, because by not spending the $50 per day, the employee has the ability to increase their overtime rate?

Answer: The Fair Labor Standards Act (FLSA) requires that an employee’s overtime compensation be based upon their “regular rate” of pay, and that their regular rate must include all remuneration paid unless it qualifies under one of several exceptions. The good news for your situation is that there is an exception for expense reimbursements, provided it is reasonably approximate to the amount actually incurred. While this may seem a little confusing, if you understand the “why” that underlies the rule, the rule will make sense.

The FLSA and most state law wage and hour equivalents require that overtime be paid based upon an employee’s regular rate of pay. The term regular rate is a legal term of art, with a very precise meaning. It includes the employee’s normal hourly wage plus any additional amounts paid to the employee above and beyond their normal hourly wage. These additional payments, commonly referred to as wage augments, include things such as shift differentials, longevity pay, step-up or acting-out-of-rank pay, educational incentives and specialty pay for things including paramedic certification or for being a hazmat technician. Benefits, such as health insurance, do not need to be included in the regular rate, because they are not paid to the employee.

The intent behind this definition of regular rate is to prevent unscrupulous employers from artificially lowering their overtime costs by making side payments to employees. For example, an employer might try to pay an employee a base rate of $10 per hour, plus $5 per hour as a performance incentive, plus $5 per hour as a shift differential, with the hope that by doing so the employee’s overtime rate would be $15 per hour. Under the FLSA, the employee’s regular rate would be $20 per hour ($10 per hour base rate plus $5 per hour for the performance incentive plus $5 per hour for the shift differential), and the overtime rate would be 1.5 x $20 = $30 per hour.

The same rule applies if the employee receives $10 per hour plus $50 per day in performance incentives and $50 per day as a shift differential for a 10-hour day. The employee’s regular rate would be $20 per hour and their overtime rate would be $30 per hour. Otherwise, unscrupulous employers could exploit various wage augments to minimize the overtime they have to pay their employees.

Reimbursement for meals
The calculation of wage augments can get tricky, particularly when the payments are not directly attributable to hours. For example, if an employee receives a monthly or annual payment for longevity, a factual question arises as to how much is attributable to the employee’s regular rate on an hourly basis. That subject could easily be a multi-article series in and of itself, but in this column, I’ll focus more narrowly on the question that’s relative to meal reimbursements.

There are exceptions to the above general rule that all payments that are made to an employee must be included in that person’s regular rate. The exception that’s applicable to the question of the person who reached out to me pertains to expense reimbursements.

An employer who reimburses an employee for expenses actually incurred need not include the amount of the reimbursement in the employee’s regular rate. The FLSA does not mandate a penny-for-penny or dollar-for-dollar documentation of every reimbursed expense for the exclusion to apply. Rather, an employer must be able to show that the amount paid is “reasonably approximate” to the cost actually incurred by the employee.

Thus, so long as the $50 per day meal reimbursement is reasonably approximate to the meal expenses incurred by employees, there would be no effect on the employee’s regular rate.

However, if the facts were to change, the outcome will also change. For example, if during a wildland deployment, employees are assigned to work out of a base or camp where meals are provided at no cost to the employees, the $50 per day meal per diem would pose a regular rate problem. The $50 per day would no longer be reasonably approximate to the expenses that actually were incurred by the employee. Under those circumstances, the $50 per day would appear to be a wage augment as opposed to an expense reimbursement.

A method to manage this FLSA concern is to: 1) ensure that the department can prove that $50 per day is reasonably approximate for the cost of their employees’ meals; and 2) require that employees inform the department whenever their meals are provided, in which case they will not be reimbursed. Paying employees an additional $50 per day for meals when their meals are provided at no cost would likely constitute remuneration and would need to be included in their regular rate.

Unfortunately, this process of requiring employees to inform the department if meals are provided may complicate a fire department’s overtime calculations. The handling of days on which some but not all meals are provided would need to be addressed. However, such a process will likely still prove easier to accomplish than the alternative of tracking meals receipts every day for each employee and reimbursing for the actual expense incurred.

Wage augment?
To summarize the lengthy explanation above, employees who are deployed and receive a flat sum meal per diem of $50 per day cannot increase their overtime compensation by claiming they did not spend the entire $50 on meals, provided the per diem is reasonably approximate to the costs they actually incur. However, where their meals are actually provided for free each day, providing them with a $50 per day payment for meals will likely constitute a wage augment that must be factored into their regular rate for overtime purposes.