On November 8, 2024, the U.S. Department of Labor (DOL) issued Opinion Letter FLSA2024-01.  This letter provides additional clarity about whether daily expense reimbursement payments can be excluded from an employee’s regular rate when calculating overtime pay under the Fair Labor Standards Act (FLSA).  

The employer in question is an oil and gas services company, with employees who perform inspection and related services on new or existing pipeline assets.  The company sought clarification on whether it could increase expense reimbursements from $25 to $150-$200 without including these payments in each employee’s regular rate of pay.  In its response, the DOL cited several decisions underscoring that the determining factor for amounts included in the regular rate of pay is whether these payments function as legitimate reimbursements or as compensation for work.  It clarified that simply labeling a payment as an expense reimbursement is not sufficient if the payment does not qualify as a bona fide expense reimbursement.  Thus, if these payments are not legitimate expense reimbursements, they must be included in the regular rate of pay.

Relevant Legal Authority

Under the FLSA, all non-exempt employees must be paid not less than one and one-half times the employee’s regular rate of pay for all hours worked beyond 40 in a workweek.  29 § U.S.C. § 207(a)(1).  Section 207(e) defines “regular rate” and provides eight statutory exclusions.  The pertinent exclusion discussed here arises under section 207(e)(2), which allows employers to exclude “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,” as well as “other similar payments to an employee which are not made as compensation for [their] hours of employment.”

Analysis of Reimbursement Amount Compared to Actual Expenses Incurred

While this latest opinion letter from the DOL does not substantively change what expense reimbursement payments can and cannot be excluded from the regular rate, it does offer insight and clarity on two key topics. First, the opinion letter clarifies that, even if an employer’s expense reimbursement payment to an employee is excessive, the employer is still permitted to exclude “the actual or reasonably approximate amount of an employee’s incurred expenses from the employee’s regular rate of pay.” Stated differently, if the amount paid as a reimbursement to an employee is disproportionately large, the actual or approximate amount of the incurred expense may be excluded from the regular rate and only the excess amount must be included in the regular rate calculation. See 29 C.R.F. § 778.217(c)(1). By way of example, if an employee incurred daily expenses totaling $25 and their employer paid them $100 per day as an expense reimbursement, the first $25 could be properly excluded from the regular rate but the additional $75 must be included in the regular rate calculation.

Second, the opinion letter notes that the DOL does not require or endorse a specific methodology for approximating employees’ expenses. Instead, the DOL indicates the FLSA’s regulations are flexible on this issue and that as long a method is capable of reasonably approximating employees’ actual expenses, it will comply with the FLSA. Importantly, this statement from the DOL does not open the door for employers to simply make up their own unreasonable or artificial approximations of expenses. The key phrase in the opinion letter is “capable of reasonably approximating actual expenses.” While reasonable approximations may vary between employers based on available data, geographic regions, or any number of other variables, some supportable methodology is still required to comply with the FLSA. By way of example, in the opinion letter, the employer proposed offering a $150 to $200 per day tool and equipment reimbursement to its employees to reimburse them for the use of their personal cell phones, cameras, computers, vehicles, and other tools. The DOL, however, noted that the employer’s decision to pay this reimbursement to its employees – despite previously reimbursing its employees only $25 per day – may not be supported as there was “no indication that [the employees] actually incur such significant ongoing expenses when using their personal mobile phone, camera, computer, and ancillaries for work.” Without anything to support the proposed expense reimbursement payment, the employer would have to include the excess amount (in this case, potentially upwards of $175 per day) in the regular rate calculation.

Employer Takeaways

This opinion letter confirmed that employers cannot utilize expense reimbursements or per diems as a means for getting extra compensation to employees while avoiding the overtime impact of those payments. Rather, only bona fide expense reimbursements are allowed to be excluded from the regular rate of pay. Employers should (1) evaluate any existing expense reimbursement stipends or per diems to ensure they are reasonably approximating actual expenses; and (2) consider performing market research and documented due diligence to support any changes to expense reimbursement stipends or per diem amounts.