Earlier this month, on February 8, the Ninth Circuit Court of Appeals held that a California employer’s per diem expense reimbursement payments functioned as compensation for work rather than business expense reimbursements. As a result, the employer was required to factor those per diem payments into employees’ “regular rate of pay.”
An employee’s “regular rate of pay” is used to calculate overtime under the FLSA and California Labor Code. It is also used to calculate double-time, sick leave, and reporting time pay in California. The decision, if adopted by other courts, could have devastating consequences for California employers with flat-sum and/or automatic expense reimbursement procedures.
The Details of the Case: Clarke v. AMN Services
AMN is a healthcare staffing company that places hourly-paid clinicians on short-term assignments. Each week AMN paid traveling clinicians a per diem amount to reimburse them for the cost of meals, incidentals, and housing while working over 50 miles away from their homes. AMN did not report these payments as wages and classified them as tax-exempt expense reimbursements.
AMN used a number of factors to calculate the per diem payment, including the extent to which clinicians worked their scheduled shifts. Notably, under the per diem policy, the payments could decrease if clinicians worked less than their scheduled shifts, and work hours in excess of those scheduled could be “banked” and used to “offset” missed or incomplete shifts. Interestingly, AMN provided “local” clinicians per diem payments under the same policy, but such payments were reported as taxable wages. It was not clear why AMN took a different position with the local clinicians
The Ninth Circuit determined that these characteristics indicate that the per diem payments to traveling clinicians functioned as compensation for hours worked, and not expense reimbursements. The court relied heavily on AMN’s decision to pay both local and traveling clinicians under the same per diem policy but treat payments to local clinicians as wages. The Court also noted that “AMN offers no explanation for why ‘banked hours’ should effect” per diem payments, and found “the only reason to consider ‘banked hours’ in calculating” per diems is to compensate clinicians for hours worked.
Potential Implications for California Employers
Many California employers implement a business expense reimbursement policy aiming to fully reimburse employees for all expenses they incur, while (1) minimizing administrative burdens and expenses, and/or (2) avoiding the creation of preferential work assignments and a perverse incentive for employees to “incur” expenses.
The process of submitting, reviewing and processing expense reimbursements is cumbersome, especially for employees who work in the field and/or travel frequently. For this reason, some employers adopt a flat-sum reimbursement policy in which the amounts paid are at least partially fixed, such as AMN’s per diem policy. They often issue these payments automatically, without obtaining documentation of the expenses from employees. This issue is especially important during the COVID-19 pandemic because California employers often use fixed expense reimbursement amounts for computer and other expenses for remote workers.
The Clarke decision should concern any employer with a business expense policy that includes such flat-sum or automatic reimbursement payments. It is unclear whether or not the holding of the Clarke case will be extended in other cases or whether it will be distinguished based on the unique facts of the case and inconsistencies of AMN’s implementation (i.e., that AMN was paying local clinicians a per diem, but treating it as part of wages under the same policy).
Significant liability can arise if reimbursement payments, in whole or in part, are deemed to function as wages that must be factored into the regular rate of pay. In addition, plaintiffs could also argue that if such payments were actually “wages” then they were not properly reimbursed for their business expenses under section 2802 of the California Labor Code. As a result of this decision, California employers should carefully review any flat-sum or automatic reimbursement policies and procedures to ensure that they do not present any of the dangers illustrated in the Clarke decision. In addition, the scope of this decision remains unclear. Therefore, employers in other states particularly those employers with employees in states covered by the Ninth Circuit (Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, Washington), should also take a close look at their per diem policies in conjunction with the Ninth Circuit holding in Clarke.