Employees paid a per diem stipend may be owed overtime pay for hours worked in excess of forty hours a week. The First Circuit Court of Appeals held in favor of employees whose per diem stipend was calculated and prorated based on the number of hours worked each week.

The Fair Labor Standards Act requires employers to pay their employees an overtime rate of at least one and a half times their regular rate of pay for hours worked in excess of forty hours a week. Plaintiffs argued that their employer misclassified a portion of their regular hourly wage as a per diem stipend and omitted the per diem when calculating their rate for overtime.

The two employees in this case signed agreements that listed an hourly wage, an overtime rate, and a per diem expense reimbursement. The court focused on the formula the employer used to calculate the per diem payment when the plaintiffs worked less than forty hours in one week since it explains how the employer accounted for prorating the per diem expense and subsequently whether the per diem varied simply by hours worked. The employees argued that the per diem was calculated based on hours worked and therefore should count as part of their regular wage, while the employer maintained that they abided by the Department of Labor Wage and Hour Division’s Field Operations Handbook allowing “an employer to reduce a day’s per diem.”

The court noted the FLSA and the DOL Handbook’s focus is on ensuring that a per diem payment is used to actually offset an employee’s expense. The court is not to be misguided by the “labels that parties affix to the payments and instead look[ed] to the realities of the method of payment.”

The court ultimately found that although the handbook allows for a discounted per diem rate, “it does not permit an employer to set this discount as a reduction of a fixed amount for each missing hour in the weekly total.” The per diem must be calculated by using the day as its measuring unit, and not an hour.

Employees may have recourse against their employer for owed overtime pay when an employer prorates per diem stipends based on hourly work. If your employer has deducted payments from your per diem stipend based on hours worked, your employer may also be required to classify that per diem stipend as a portion of your regular hourly wage and pay overtime based on that per diem rate.

Newman v. Advanced Tech. Innovation Corp., 749 F.3d 33 (1st Cir. Apr. 18, 2014)