Can I Classify Payments to Employees for Work as Per Diem Payments or Reimbursements to Avoid Payroll Taxes and Overtime Compensation?
I appreciate outside-the-box thinking and strategy, but no. As a rule, non-exempt employees are entitled to compensation in an amount of at least minimum wage for all hours worked up to forty, in a workweek, and at a rate of 1.5x their regular rate of pay for hours worked thereafter. While it might sound appealing to refrain from classifying monies paid to employees as wages which would be used to calculate the overtime premium or from which payroll taxes might be withheld, such a practice violates the Fair Labor Standards Act (FLSA).
Fortunately several larger staffing agencies working on the Gulf Coast tried and failed at this cost-savings strategy so the remainder of the nation’s employers can learn from their mistake (though the illegal nature of their “mistake” should have been self-evident). This week the Department of Labor (DOL) announced a settlement (almost $3,500,000) with six staffing agencies that misclassified wages for approximately 3,000 workers. Instead of classifying employees’ compensation for working time as wages these staffing agencies classified wages as per diem expenses, thereby avoiding compensating these employees fully for overtime wages, payroll taxes, unemployment insurance and workers compensation. Per diem payments to employees are not illegal by any means and are appropriately paid to reimburse employees for legitimate expenses incurred and reimbursed by employers. Reclassifying wages as per diem expenses, however, violates the FLSA and as these staffing agencies discovered can be costly once back pay and liquidated damages are calculated.
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