Payments provided to employees for food—as long as they are reasonable and for the employer’s benefit—do not need to be counted as wages when calculating overtime, a federal appeals court has ruled.

While the Fair Labor Standards Act (FLSA) requires that some compensation—on-call pay, certain bonuses, meal expenses not incurred for the employer’s benefit, and others—be considered part of an employee’s “regular rate of pay,” other meal per diems don’t fall into that category, the 10th U.S. Circuit Court of Appeals—which covers Colorado, Kansas, New Mexico, Oklahoma, Utah, and Wyoming—held in Sharp v. CGG, No. 15-5113(Nov. 4, 2016).

Facts of the Case

A group of employees working for CGG Land, Inc., sued their employer, alleging that their $35 daily food allowance should have been included in their regular rate of pay for overtime purposes

CGG provides seismic-mapping services at remote locations. To do this, employees travel to sites and stay in hotels for 4 to 8 weeks at a time. They receive $35 per day for meals unless they are working from their home locations or unless food is provided at the remote location.

The employer didn’t count the per diem as part of the workers’ “regular rates of pay” when calculating overtime and they sued, alleging that the exclusion violated the FLSA.

The law generally requires that nonexempt workers be paid time-and-one-half their regular rate for all hours worked beyond 40 in a workweek. It lists compensation that must be considered part of workers’ regular rates and also compensation that can be excluded, such as travel expenses.

A federal district court granted summary judgment for CGG, finding that the $35 payments were a travel expense that doesn’t have to be included in the calculation.

Appeals Court Weighs In

On appeal, the employees argued that the district court was wrong: the per diems weren’t travel expenses, they said.

The “travel expense ” exemption refers to “reasonable payments for traveling expenses, or other expenses, incurred by an employee in the furtherance of his employer’s interests and properly reimbursable by the employer; and other similar payments to an employee which are not made as compensation for his hours of employment."

Implementing regulations say that this exception applies “[w]here an employee incurs expenses on his employer’s behalf or where he is required to expend sums solely by reason of action taken for the convenience of his employer.” The 10th Circuit said the regulations provided a relevant example of an excludable payment: “reasonably approximate amount expended by an employee, who is traveling ‘over the road’ on his employer’s business, for … living expenses away from home.”

So, the court said, the question is whether the $35 reimbursement for meals is a living expense away from home.

The employees argued that they were no longer “traveling over the road” once they reached their job sites but the court disagreed, saying that that was a “hyper-literal” interpretation of the term “traveling.”

The employees also argued that the cost of food isn’t a “living expense,” but the court found that the U.S. Department of Labor (DOL) had rejected this argument in a 2004 Opinion Letter, which stated that “the phrase ‘living expenses’ includes the cost of food, and the necessity of eating meals away from home is an additional expense that the employee incurs for the employer's benefit.”

The court said it agreed with DOL, finding that “the cost of food away from home is an additional expense that the employee incurs while traveling for the employer's benefit and is thus exempt as a living expense.”

The employees finally argued that CGG paid the $35 as part of a scheme to set an artificially low hourly pay rate to underpay overtime pay. The court, however, disagreed, noting that appeals courts that reached that conclusion were examining situations where employers tied per diem payments to the amount of hours that employees worked.

For example, both the 1st and 10th Circuits have held that employers cannot exclude per diem payments from employees’ regular rates if the per diem payments depend on the number of hours worked.

CGG employees traveled to remote job sites away from home to perform lengthy work stints for CGG, the court said; while away from home, they incurred meal expenses while serving CGG as employees and while furthering CGG’s interests. “For all the reasons stated, these travel expenses are exempt,” the court said.

Employer Takeaway

Employers should note that DOL has, in recent years, taken action against employers that it believes are using per diems to skirt the law, as the CGG employees alleged.

In 2013, a staffing company paid $2 million to resolve DOL allegations that it improperly excluded per diem payments from overtime calculations. In 2014, another staffing agency paid $1.6 million to resolve similar charges.

The agency, however, says there are times when an exclusion is permitted. “Payments reasonably approximating travel or other expenses incurred on the employer’s behalf may be excluded from the employee’s regular rate of pay when computing overtime,” DOL said, announcing the second settlement. “However, where an employee receives such payments but actually incurs no such additional expenses, such payments do not constitute bona fide reimbursements and must be included in the employee’s regular rate of pay for purposes of computing an overtime premium.”