The Fifth Circuit Court of Appeals affirmed that an employer willfully violated the FLSA by excluding “per diem” from the employee’s regular rate of pay and thereby avoiding increased overtime wages. In Gagnon v. United Technisource, Inc., the employer separated the plaintiff’s compensation into straight time, an hourly per diem payable up to the first 40 hours worked each week, and an hourly overtime rate. After a year of employment, the employee received a “raise” for which the employer increased both the per diem and overtime rate by $1, but not the regular rate of pay.

The employee sued for unpaid overtime under the FLSA, while the employer argued that the overtime rate already exceeded that required and that the per diem should not fall under the regular rate of pay because it equaled reimbursable expenses. Rejecting those defenses, the Court agreed that a per diem could be excluded, but reasoned a legitimate per diem would not vary based on number of hours worked. The employer also tried to offset the back overtime wages by the amount of expenses saved when the employee moved closer to work. The employee’s change in address would have resulted in fewer per diem expenses, but the Court reasoned that since the hourly per diem should have been included in regular rate of pay in the first place, the employer could not offset the overtime pay owed.

Texas employers should review their methods of calculating overtime rates to ensure compliance with the FLSA, and specifically to ensure that per diem pay is included in the regular calculation. Failure to properly calculate these rates may render employers vulnerable to significant liabilities in the form of back overtime wages, attorney fees, costs, and liquidated damages. 

The Editor thanks Chandler Craig, a third year law student at the University of Texas who is clerking for the firm, for drafting this post.