The Department of Labor reminds employers that reimbursement payments to non-exempt employees may increase the employee’s overtime rate, unless the payments equal or “reasonably approximate” the actual expenses incurred by the employee on the employer’s behalf.
A November 8, 2024 Opinion Letter of the U.S. Department of Labor, Wage and Hour Division, FLSA 2024-01, reminds employers that whether payments in the nature of expense reimbursements are truly “reimbursements”–or whether they are pay in another form–matters for overtime purposes. Unions often seek to implement or increase such arrangements in collective bargaining, but when these payments bear no relationship to expenses actually incurred on the employer’s behalf it can have unintended consequences on overtime costs.
The Fair Labor Standards Act (“FLSA”) requires that most non-exempt employees be compensated at a least one and one-half times (1.5x) the regular rate for all hours worked in excess of forty (40) in a workweek. What employers and employees alike sometimes fail to appreciate is that the “regular rate” is not always as straightforward as 1.5x an employee’s base hourly rate. Nor may the regular rate be set by the parties–even by agreement–at least if that established rate is less than what is required by the statute. Instead, the regular rate is based upon the facts. Specifically, the regular rate is calculated by dividing the total pay received by the employee in a workweek by the total number of hours actually worked. Overtime pay must be at least 1.5x the result of this calculation. An employer that is compensating non-exempt employees for overtime work at something below this rate is not complying with its obligations under the FLSA, notwithstanding anything in a collective bargaining agreement to the contrary.
All remuneration for employment paid to or on behalf of an employee must be included in the calculation of the regular rate unless the payment in question qualifies for an exclusion under the FLSA. One such exclusion applies to “reasonable payments for traveling expenses, or other expenses, incurred by an employee in the furtherance of [their] employer’s interests and properly reimbursable by the employer.” To qualify under this section as an excludable reimbursement payment, the payment must equal or “reasonably approximate” an expense incurred by an employee on their employer’s behalf or a required expense by reason of an action taken for the convenience of their employer. Payments that are not made to offset expenses actually incurred by an employee for the benefit of their employer, or which are disproportionately large in comparison to such expenses, must be included in the regular rate either in their entireties or with respect to the excess amount.
Opinion Letter 2024-01 illustrates these principles. The Letter concerned inspectors in the oil and gas industry who, according to the inquiry, commonly receive reimbursement payments for the use of their cell phones, cameras, computers, vehicles, safety equipment and gear, and other tools and equipment. The employer in question paid the inspectors $25 per day for the use of these items; however, the employer intended to increase the reimbursement payments to $150 to $200 per day. The Opinion Letter expressed doubt that the reimbursement exclusion could be maintained in that scenario, emphasizing the significant increase this would represent as compared to the existing $25 payment and the lack of any “indication that [the inspectors] actually incur such significant ongoing expenses when using their ‘personal mobile phone, camera, computer, and ancillaries’ for work.” To the extent employees did incur expenses, the excess of the reimbursement payment must still be included in the regular rate.
For reimbursement payments to be excluded from the regular rate calculation, such payments must either directly reimburse, or “reasonably approximate,” expenses actually incurred by the employee on the employer’s behalf. Where the employee incurs no expenses, or when the payments exceed expenses, the payments (or the excess) are additional compensation that must be included in determining the overtime rate. The DOL does not require or endorse any specific method for determining whether reimbursements “reasonably approximate” employee expenses. It is, however, the employer’s burden to establish eligibility for an FLSA exclusion, and under the facts presented in the Opinion Letter the contemplated payments appeared to well exceed any expenses actually incurred by the inspectors.
Importantly, the reimbursement payment cannot be for an expense normally incurred by the employee for their own personal benefit. Payments (or the reasonable cost or fair market value of such benefits) that offset personal expenses are compensation in another form and must be included in the regular rate.
Takeaways:
• Expense reimbursement payments may be excluded from the regular rate for overtime purposes only if such payments
are the “actual or reasonably approximate” amount of expenses incurred by the employee on the employer’s behalf.
• Reimbursement payments which exceed actual expenses must be included in the employee’s “regular rate” with respect
to the excess, increasing overtime costs.
• Unions requesting increases to reimbursement arrangements—meals, cell phone, and tool reimbursements are common
examples—should be required to justify these asks by demonstrating actual costs in excess of the current
reimbursement amounts.
• Even if characterized as “reimbursements,” payments to offset expenses that are personal to the employee—ordinary
travel expenses, meals under normal working conditions, cell phone plans where no additional expense is incurred on
the employer’s behalf—all must be included in the regular rate.
Bottom Line:
Employers should be cautious in providing or increasing expense reimbursement arrangements under collective bargaining agreements because of the potential impact on calculating an employee’s “regular rate” for determining their overtime rate. “Reimbursements” for expenses that are personal to the employee or which exceed the actual or reasonably approximate amount of expenses incurred on the employer’s behalf will increase overtime costs. The attorneys at Campbell Durrant are available to advise you on these FLSA issues.
