A recruiting company’s formula for calculating the per diem component of consultants’ wages violated the Fair Labor Standards Act’s overtime provision, the 1st U.S. Circuit Court of Appeals has ruled.

A U.S. District Court judge had awarded the company summary judgment.

“[T]he company’s formula, as guidance from the Department of Labor puts it, was impermissibly ‘based upon and thus varie[d] with the number of hours worked’ per week,” Judge Kermit V. Lipez wrote for a unanimous 1st Circuit panel. “We therefore reverse the summary judgment for the employer and remand for entry of partial summary judgment in plaintiffs’ favor as to liability.”

The 14-page decision is Newman, et al. v. Advanced Technology Innovation Corp.

Phillip B. Leiser of Virginia argued the appeal on behalf of the plaintiff consultants. Boston attorney Thomas J. Gallitano represented the defendant company.

Remote work assignments

Plaintiffs Eric Newman and Nestor Patague both found engineering jobs in 2010 at a General Dynamics Land Systems plant in Woodbridge, Virginia, through defendant Advanced Technology Innovation Corp., a recruiting firm. Although General Dynamics supervised the plaintiffs and set their job tasks, they were paid by Advanced Technology.

Newman lived in West Virginia, about 65 miles away. Patague lived in California.

Each plaintiff signed a consulting agreement and offer letter with the defendant. Both agreements listed an hourly wage, an overtime rate more than one-and-a-half times that hourly wage, and a “per diem expense reimbursement” in light of their remote work assignments.

For the per diem, each plaintiff signed a “Consultant Per Diem Certification” that provided for reimbursement “for any business expenses on a per diem basis” using the relevant Internal Revenue Service Federal Travel Reimbursement rate.

“Because a per diem either can be excluded from, or counted as, a regular wage depending on how it operates, plaintiffs assert that here the per diem operated like an hourly wage,” Lipez noted. “Plaintiffs contend the per diem should count as part of the regular wage, and thus they should have been paid at least one-and-a-half times this wage for overtime, meaning at least $90 per hour.”

‘Shadow wage’

The Fair Labor Standards Act requires that when non-exempt employees work more than 40 hours in a work week, they must be paid for overtime hours at a rate of at least one-and-a-half times the “regular rate” of pay.

“[T]he regular rate does not include ‘reasonable payments for traveling expenses, or other expenses, incurred by an employee in the furtherance of his employer’s interests and properly reimbursable by the employer; and other similar payments to an employee which are not made as compensation for his hours of employment,’” Lipez explained.

The plaintiffs contended that the employer wrongly labeled part of their regular hourly wage a “per diem” expense reimbursement and excluded that per diem when calculating the rate for overtime, thus depriving them of overtime pay. The proof, they claimed, was in the numbers.

When they worked a full 40-hour week, the per diem and hourly wage added up to $60 per hour, the regular wage that they claimed they were promised when recruited. But when the plaintiffs worked less than 40 hours in a week, the per diem payment was reduced.

“Plaintiffs contend that this scenario unmasked the scheme: the reductions show the per diem was tied to hours worked in a week and thus, in reality, was a shadow wage,” Lipez wrote.

The 1st Circuit treated the Department of Labor Wage and Hour Division’s Field Operations Handbook as persuasive authority.

The Handbook “notes that it is a permissible result for an employer to reduce a day’s per diem, such as by paying half of a day’s worth of per diem where an employee worked for half of the day,” Lipez observed. “Yet it also states that the per diem is part of the regular rate of pay if it is based upon, and varies with, hours worked in a week or day.”

The “animating concern of the FLSA statutes, regulations, and DOL Handbook is to examine the substance of a purported per diem payment and to ensure that it is actually used to offset expenses an employee incurs due to time spent away on the employer’s business,” Lipez stated.

“Here, even if Advanced Technology reduced the per diem only for an early end to the work week, it still based those reductions on the exact number of hours worked in the week,” the court concluded. “The description of the defendant’s formula from [the] company treasurer … “makes clear that the only factor that mattered in calculating the weekly per diem was the number of hours worked.”