The Effect (or Non-Effect) of Expense Reimbursements on the FLSA “Regular Rate”

Recently, we have discussed certain types of special calculations for non-exempt employees who earn commissions or who receive commissions or bonuses at a later date than they earned them. These issues are all part of broader discussions about fixed payments that employer make to non-exempt employees on an other-than-hourly basis.  These types of payments often must be included in the non-exempt employee’s “regular rate” for the purposes of calculating overtime.

Over the next week, we’ll discuss two common examples: reimbursements and bonuses, while discussing some other pitfalls of excluding fixed payments like these from the regular rate.  Let’s start with expense reimbursements, which are one type of payment that employers can exclude from the regular rate calculation.  However, under the FLSA, employers may only exclude those payments made for “reasonable payments for travel expenses, or other expenses, incurred by an employee in the furtherance of his employer’s interests and properly reimbursable by the employer.”  29 U.S.C. § 207(e)(2).

The applicable regulation expands on this exclusion, providing that

[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, section 7(e)(2) is applicable to reimbursement for such expenses. Payments made by the employer to cover such expenses are not included in the employee’s regular rate (if the amount of the reimbursement reasonably approximates the expenses incurred). Such payment is not compensation for services rendered by the employees during any hours worked in the workweek.

29 C.F.R. § 778.217(a) (emphasis added).

In Sharp, the plaintiffs worked for a seismic surveying company as truck drivers and vibe operators.  Their employment required regular travel to and from remote work sites, and the employer paid for or reimbursed employees for their travel and lodging expenses. For every day that the named plaintiff worked, for example, he received a cash payment of $35.00 in addition to the pay and reimbursement otherwise owed to him.  This payment was referred to as a “hot shot,” and the company paid them regardless of the number of hours the employee worked or whether he incurred additional expenses while working.  The parties stipulated that the $35.00 “hot shot” payments were a reasonable approximation of meal expenses incurred by employees while working at a remote work site.

The critical inquiry to the court was whether these “hot shot” payments fell within the statutory and regulatory exclusion above. The plaintiff claimed (and the company disputed) that the payments were “reasonable payments for travel expenses” that were “incurred by an employee in the furtherance of his employer’s interests.”  The plaintiffs asserted that the § 207(e)(2) exclusion would not apply because the “hot shot” payments could be considered reimbursement for travel expenses, since they were reimbursements for expenses incurred at the work site, and not in transit.  However, the court rejected this argument, calling it a “hyper-literal interpretation of the term ‘traveling,’” and found that payments made for expenses–including these “hot shot” payments for meals–incurred during “time spent ‘away from home’ on an employer’s business” are excludable from the regular rate.

Upshot for Employers

The calculation of the “regular rate” under the FLSA and its regulations is one of the more nuanced and complicated areas of wage and hour law.  The Oklahoma case above turned out to be a relatively straightforward application of the expense reimbursement regulations, but only because both sides agreed that the reimbursements were reasonable approximations of expenses.  As we will discuss next week, the DOL has paid particular attention to unreasonable expense reimbursements and “per diem” calculations.  If you are paying “per diems” to or approximating expense reimbursements for employees employees, cases like this one are good reminders to carefully vet your policies and how they work in practice to ensure that you aren’t running afoul of this (or any other) FLSA provision.  We’ll look at why next week.