Employers may not exclude daily expense reimbursements from overtime pay

Calculating the regular pay rate

The FLSA says nonexempt (“hourly”) employees must get 1.5 times their regular rate of pay when working overtime (over 40 hours a week). The regular pay rate includes all payments unless there are specific exclusions. One exclusion, for example, allows for reasonable payments for travel or other work-related expenses.

For employers to exclude a payment from regular pay as a reimbursement:

• The employee must have real expenses because of their job.

• If an employee gets expense payments but doesn’t actually have those expenses, employers must include them in regular pay.
• If the payment changes based on hours worked, it counts as regular pay.
• Employers may exclude only the actual or close-to-actual expense amount. If the payment is too high, employers must include the extra in regular pay.

DOL opinion

In a letter responding to the employer’s question, the DOL said that employers may not exclude the payments for tools and equipment from regular pay. These expenses must be included when calculating an employee’s regular rate of pay.

The employer in this instance normally paid $25 per day to employees who used their own tools and equipment but wanted to increase that to $150 to $200 per day and not include it in the regular rate. This was incorrect, based on the DOL’s opinion letter.

If the 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.

There was no proof that the employees really had such high expenses. If they are not legitimate expense reimbursements, employers must include them in the regular rate of pay.

Key to remember: Employers may not artificially inflate expense payments as a means to reduce overtime pay.