Per Diem Pay and Overtime: Two Tests
Does per diem count toward overtime? Two tests decide whether it belongs in your regular rate, plus the four-line recompute to run on your own pay stub.
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Disclaimer: This article is for educational purposes only and is not tax, legal, or financial advice. Every per diem arrangement turns on its own facts, and state law may be stricter than the federal rules described here. Check current Department of Labor guidance, or consult a qualified wage-and-hour attorney or your state labor agency.
Quick Answer: Reimbursement Out, Disguised Wages In
The FLSA requires overtime at 1.5 times your regular rate, and the regular rate captures all remuneration for employment except a short list of statutory exclusions. Travel expense reimbursement is one of those exclusions.
So a real per diem, for a real trip, in a sensible amount, stays out of your regular rate and does not change your overtime. Normal, legal, and how most per diems work.
The problem is the other kind: a payment labeled per diem that moves with the hours you work, or gets paid whether or not you spent a dime. That is a low base rate wearing a costume. It belongs in the regular rate, and folding it in raises the rate on every overtime hour.
Key Takeaways
- Two separate gates, both must pass. Does the payment function as reimbursement, and is the amount a reasonable approximation of the expense?
- Staying under the federal ceiling is not a full defense. A per diem can be reasonable in size and still be a wage.
- A per-hour per diem is the loudest red flag. Travel costs do not accrue by the hour.
- The shortfall formula: (per diem / total hours) x 0.5 x overtime hours. It scales with big per diems and heavy overtime, which is why travelers get hit hardest.
- Local “per diem” is almost never excludable. Reimbursing commuting, lunch or rent is a raise, not a reimbursement.
- You have 2 years, or 3 for willful violations, plus potential liquidated damages that double the back pay.
What the Rule Actually Says
Start with the statute. Under 29 U.S.C. 207(e)(2), an employer may exclude “reasonable payments for traveling expenses, or other expenses, incurred by an employee in the furtherance of his employer’s interests,” along with similar payments that are “not made as compensation for his hours of employment.”
Read the last clause twice. The exclusion is written with a built-in limit: payments made as compensation for hours worked never qualify, no matter what the payroll system calls them.
The implementing regulation, 29 CFR 778.217, fills in the rest. Reimbursements are excluded when the amount “reasonably approximates the expense incurred,” and paragraph (b)(3) names the traveling case directly: transportation and living expenses for an employee traveling over the road on the employer’s business.
Plenty of industry guides state flatly that per diem does not factor into overtime pay. That is only half true, and the missing half is where the underpayment lives. If you want the baseline mechanics first, our guide to the regular rate of pay covers what the rate is and how it is built.
The floor underneath everything: personal expenses
Paragraph (d) of the same regulation is short and often ignored. Reimbursing an employee’s ordinary personal expenses, specifically traveling to and from work, buying lunch, or paying rent, is not excludable and increases the regular rate.
That paragraph settles most local cases on its own. If you sleep in your own bed every night and still get a “per diem,” you are looking at wages with a different label.
Test 1: Does the Per Diem Function as an Expense or as Pay?
In Clarke v. AMN Services, LLC, 987 F.3d 848 (9th Cir. 2021), the Ninth Circuit held that a staffing company’s weekly per diem paid to traveling clinicians functioned as compensation for work rather than reimbursement, and could not be excluded from the regular rate. The Supreme Court declined to review the case in December 2021, so it stands.
The court’s framing is the test worth memorizing. The question “turns on whether the payments function to reimburse employees for expenses or instead operate to compensate employees for hours worked.” The goal, quoting an earlier case, is “to pierce the labels that parties affix to the payments and instead look to the realities of the method of payment.”
Run your own arrangement through this list:
- Does the per diem go down when you miss a shift or work short hours? That points toward wages. In Clarke, deductions were taken for shifts not worked regardless of the reason, even though the worker’s hotel bill did not shrink.
- Does the amount move with your hours at all, up or down? Same answer. The First Circuit reached that result in Newman v. Advanced Technology Innovation Corp., 749 F.3d 33 (1st Cir. 2014), where the employer cut the per diem for an early end to the work week and based those reductions on the exact number of hours worked that week. Clarke flagged the mirror image: a “banking hours” system that let extra hours in one week protect the per diem in another.
- Is it paid whether or not you incurred any cost, with no attestation from you? Reimbursement responds to an expense. A default weekly payment does not.
- Do local coworkers who never travel receive the same payment? In Clarke, they did, and the company booked it as wages for them. Paying the identical amount two different ways is hard to defend.
- Is it tethered to days actually spent away from home? If yes, that points toward genuine reimbursement, which is the outcome the employer wants and the law allows.
One caution so you do not overstate the rule. The Ninth Circuit called the tie to hours “a relevant factor in that determination, often a particularly relevant one,” but it expressly declined to hold that every hours-varying per diem is automatically a wage. This is a totality test, not a single trigger.
The same instinct shows up in a trucking case. As the Ninth Circuit described the Eighth Circuit’s reasoning in Baouch v. Werner Enterprises, a per diem tethered to miles driven is tied to a metric poorly linked to whether the driver has to be away from home, and so it looks like a wage rather than true per diem reimbursement.
Test 2: Is the Amount a Reasonable Approximation?
Passing Test 1 is not the end. Section 778.217(c)(1) says only the actual or reasonably approximate amount of the expense is excludable, and if the amount paid as reimbursement is disproportionately large, the excess is pulled into the regular rate.
Only the excess comes in, not the whole payment. A genuine reimbursement that runs generous gets trimmed, not disqualified.
The safe harbor, without the annual number
Paragraph (c)(2) hands employers a shortcut. A travel reimbursement is per se reasonable if it is at or below the maximum allowance for that expense type under the Federal Travel Regulation (41 CFR subtitle F) or IRS guidance under 26 CFR 1.274-5(g) and (j).
Those allowances reset each October 1 with the new federal fiscal year, so there is no point memorizing a figure. If you need today’s number for your city, look it up at gsa.gov/travel/plan-book/per-diem-rates.
Paragraph (c)(3) adds a fairness valve that cuts the other way: exceeding the federal allowance creates no inference that the payment is unreasonable. Going above the ceiling costs the employer the automatic presumption, nothing more.
Where the burden sits
DOL Opinion Letter FLSA2024-01 is the cleanest recent statement. An oil-and-gas services company wanted to raise daily tool-and-equipment payments to $150 to $200 per day and keep them out of the regular rate. The Wage and Hour Division said no.
The employer bears the burden of showing the exclusion applies, and only amounts capable of reasonably approximating actual expenses qualify. A round number picked because it is convenient is not a methodology, and excess reimbursements cannot be used to artificially reduce the regular rate.
Every law-firm alert blurs the two together. Clarke does not. It says a payment “can both be reasonable in amount as reimbursement for an employee for her expenses and still function as a wage.” Amount does not settle function. Clearing the federal ceiling test does nothing for you on Test 1.
The Recompute: What Your Overtime Should Have Been
If the per diem fails either test, the arithmetic is four lines. Use one workweek at a time, since the FLSA works week by week.
- Add all pay for the week that counts as remuneration, including the per diem.
- Divide by all hours actually worked to get the regular rate.
- Add half that rate on top for each overtime hour.
- Compare the total to what your stub actually paid.
Example A: the modest case
$20 per hour, a $90 weekly per diem, 45 hours worked.
| Step | Calculation | Result |
|---|---|---|
| Straight-time pay | 45 x $20.00 | $900.00 |
| Per diem folded in | + $90.00 | $990.00 |
| Regular rate | $990.00 / 45 hrs | $22.00 |
| Half-time premium on OT | 5 x ($22.00 / 2) | $55.00 |
| Total owed | $990.00 + $55.00 | $1,045.00 |
Now the version where the employer excluded the per diem: 40 x $20 plus 5 x $30 is $950, plus the $90 per diem, for $1,040.00. That is $5.00 short.
Five dollars sounds like nothing. Hold that thought.
Example B: the traveling clinician
$20 per hour, a $500 weekly per diem, 50 hours worked.
- Regular rate: (50 x $20 + $500) / 50 = $1,500 / 50 = $30.00 per hour
- Half-time premium on 10 overtime hours: 10 x $15.00 = $150.00
- Total owed: $1,650.00
- What the excluded version pays: 40 x $20 plus 10 x $30 is $1,100, plus the $500 per diem, for $1,600.00
That is $50.00 short every week, roughly $2,500 across a year on that schedule. Same base wage as Example A, ten times the gap.
The formula shows why:
Weekly shortfall = (per diem / total hours worked) x 0.5 x overtime hours
The shortfall scales with the size of the per diem and the number of overtime hours. A big stipend paired with a heavy schedule is the travel-assignment profile, which is why traveling nurses, inspectors, welders and storm crews are the workers who find this.
Run your own numbers with the regular rate of pay calculator, then check the premium with the overtime calculator. If several weeks are affected, the back pay calculator totals the gap. TimeClock44 tracks hours and overtime per job with a per-shift rate override, so you can re-log the affected weeks at the corrected rate and export the timesheet as a PDF or CSV to hand to payroll.
The Stub Check: Five Red Flags
Turn the two tests into things you can see on paper.
- A per diem quoted per hour. In Gagnon v. United Technisource, Inc., 607 F.3d 1036 (5th Cir. 2010), the contract read $5.50 per hour straight time, $20 per hour overtime, and a per diem of $12.50 per hour. At 40 hours that is $220 plus $500, a real regular rate of $18.00, so lawful overtime was $27.00 per hour rather than the promised $20.00. Travel expenses do not accrue by the hour.
- A base rate far below the going rate for your trade, with the difference made up in per diem, allowance, stipend or subsistence.
- The per diem drops when you miss a shift, or is prorated by hours rather than by days away from home.
- You get the same per diem on weeks you never left town, or your local coworkers get it too.
- The overtime line is exactly 1.5 times a small base rate, with the per diem parked untouched in a separate non-taxable column.
None of these is proof by itself. Together they describe an arrangement built to shrink the overtime premium, and the second and fifth almost always travel together.
The tax deduction shrinks too
Under IRC section 225, added by the One Big Beautiful Bill for tax years 2025 through 2028, the “no tax on overtime” deduction applies to qualified overtime compensation, meaning the premium portion required by FLSA section 7, the amount paid in excess of your regular rate.
So an understated regular rate costs you twice: smaller overtime dollars in the check, and a smaller qualified-overtime figure reported for the deduction. Our guide to no tax on overtime covers the caps and phase-outs.
What to do next
Ask payroll in writing how your regular rate was computed and whether the per diem was included. Most of these are payroll configurations nobody has audited, not deliberate schemes, and a clear question with the arithmetic attached often ends the matter.
Keep your own hour records in parallel, because a claim is only as good as the hours behind it. Our guide on how to prove hours worked with no time clock covers reconstruction methods if you are starting cold.
If payroll will not move, the FLSA limitations period is 2 years, or 3 for a willful violation, with liquidated damages that can double the back pay. See back pay and the statute of limitations for how the windows work, and how to file a wage claim for the Wage and Hour Division process, which is free and does not require a lawyer. Section 15(a)(3) of the FLSA makes retaliation for raising a wage complaint its own violation.
Related Reading
- Regular Rate of Pay: What Counts for Overtime. Bonuses, differentials and commissions that raise the same rate.
- How to Read Your Pay Stub, Every Line Explained. Where the per diem column sits and what it means.
- Travel Time Pay: When Your Commute Counts as Work Hours. The hours side of travel assignments.
- Back Pay and the Statute of Limitations on Unpaid Overtime. How far back a claim reaches.
References
- 29 U.S.C. 207(e): The Regular Rate and Its Statutory Exclusions
- 29 CFR 778.217: Reimbursement for Expenses
- DOL Fact Sheet #56A: Overview of the Regular Rate of Pay Under the FLSA
- DOL Opinion Letter FLSA2024-01 (Nov. 8, 2024)
- Clarke v. AMN Services, LLC, 987 F.3d 848 (9th Cir. 2021)
- Gagnon v. United Technisource, Inc., 607 F.3d 1036 (5th Cir. 2010)
- Baouch v. Werner Enterprises, Inc., 908 F.3d 1107 (8th Cir. 2018)
- DOL Final Rule: Regular Rate Under the FLSA (2019)
- GSA: Per Diem Rates
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Frequently Asked Questions
Is per diem included in overtime pay?
Only if it is not a genuine expense reimbursement. A per diem that reasonably approximates real travel costs stays out of the regular rate under 29 CFR 778.217. One that varies with the hours you work, is paid whether or not you incurred a cost, or goes to employees who never travel is compensation, and it has to be folded into the regular rate. That raises the rate your overtime premium is built on.
Can my employer use per diem to avoid paying overtime?
No. Section 778.217(c)(1) pulls the excess portion of a disproportionately large reimbursement back into the regular rate, and DOL Opinion Letter FLSA2024-01 says expense payments cannot be used to artificially reduce the regular rate. Federal appeals courts in the First, Fifth and Ninth Circuits have all rejected per diems that operated as pay.
My per diem is paid per hour. Is that legal?
A per-hour per diem is the clearest sign the payment is really wages, because travel expenses do not accrue by the hour. That was the exact structure the Fifth Circuit rejected in Gagnon v. United Technisource, where $5.50 per hour straight time plus a $12.50 per hour per diem produced a true regular rate of $18.00 per hour.
My per diem is under the federal per diem ceiling. Doesn't that make it safe?
It settles the amount question only. Paying at or below the Federal Travel Regulation or IRS allowance makes the payment per se reasonable in size under 29 CFR 778.217(c)(2). But the Ninth Circuit held in Clarke v. AMN Services that a payment can be reasonable in amount and still function as a wage. Both tests have to pass, not just one.
How do I calculate my regular rate when I get a per diem?
Add all pay for the workweek including the per diem, if the per diem fails either test. Divide by all the hours you actually worked. Then add half that rate on top for each overtime hour. Example: $20 per hour plus a $90 weekly per diem across 45 hours is $990 divided by 45, which is $22.00 per hour, not $20.00.
Is per diem taxable, and does that answer the overtime question?
Tax treatment and FLSA treatment are separate questions decided under separate rules. A per diem can be non-taxable to you under an IRS accountable plan and still count as wages for regular-rate purposes. Clarke involved exactly that combination. Do not read a non-taxable column on your stub as proof the payment is properly excluded from overtime.
Should local employees who never travel receive a per diem?
They should not, and if they do it is strong evidence the payment is a wage rather than a reimbursement. In Clarke, the staffing company paid local clinicians the same amount but recorded it as wages, one of the facts that defeated the exclusion for the traveling clinicians.
How far back can I recover overtime underpaid because of a per diem?
The FLSA limitations period is 2 years, extended to 3 years for a willful violation, and liquidated damages can double the back pay. Keep your own hour records while the weeks are fresh, because the clock generally runs separately on each unpaid payday.