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Are Per Diem Payments Part of Payroll?

If a payment to an employee is reimbursement for expenses the employee incurred on behalf of the employer it is not wages, and not taxable. Because it can be burdensome to track and reimburse small expenses exactly, many employers pay employees a flat per diem amount to be used for expenses. If the per diem payment is not reasonably related to the expenses it will be considered wages. Because the characterization has ramifications for various taxing and regulatory agencies, employers who pay per diems must make sure that they are aware of the standards.

The California Court of Appeal recently consider the distinction in a case arising out of the State Compensation Insurance Fund’s audit of an employer’s payroll records to determine the premium on an employer’s workers compensation insurance policy. ReadyLink was a staffing agency that supplied temporary nurses to medical facilities in California. For the 2005-06 policy year, it paid a minimum wage of $6.75 per hour plus a “much higher stipulated per diem amount.” More than 50 percent of the nurses’ payments from ReadyLink camd from the per diems. The Court of Appeal ruled that the insurer properly included the per diems in payroll for purposes of computing the premium. The $6.75 hourly wage was well below the market rate for nurses. ReadyLink had used the per diem payments as a scheme for making up the difference while avoiding the tax and other consequences of paying the market rate. ReadyLink Healthcare, Inc. v. Jones, Case No. B234509 (Nov. 6, 2012). The applicable Insurance Department regulation is found at 10 Cal. Code Regs. § 2318.6.

ReadyLink argued that its payments were legitimate expense payments because they were within the guidelines established by federal regulation for payments to federal employees and employees of federal contractors while traveling. See 41 CFR Chapter 300. The Court of Appeal rejected the argument because the federal regulation dealt with a different issue. The IRS allows employees to exclude from their income per diem payments that meet the standards found in 41 CFR Chapter 300. However, the payment must be [r]easonably calculated not to exceed the amount of the expenses or the anticipated expenses. See Internal Revenue Bulletin 2011-42.

For purposes of the Fair Labor Standards Act, the U.S. Department of Labor considers payments that are reasonably approximate to the actual amount expended by the employee to be excludable from the regular rate of pay used to calculate overtime. See 29 CFR 778.217. Per diem payments that are based on the number of hours worked, for example, are not reimbursement for expenses. See Gagnon v. United Technisource, Inc., 607 F.3d 1036 (5th Cir. 2010).