In a recent decision, the Ninth Circuit Court of Appeals held that a weekly per diem paid to clinicians employed by a healthcare staffing agency needed to be included in the regular rate used to calculate clinicians’ overtime pay. (Clarke v. AMN Services, LLC (9th Cir., Feb. 8, 2021, No. 19-55784) 2021 WL 419473.) The court held that because the per diem functioned as compensation for work performed rather than as reimbursementfor work-related expenses, it was improperly excluded from the calculation of clinicians’ “regular rate of pay” for overtime purposes under the Fair Labor Standards Act (FLSA).

The case involved AMN Services, a healthcare staffing company that places hourly workers on short-term assignments throughout the country. AMN paid traveling clinicians a per diem intended to reimburse them for costs such as meals, incidentals, and housing while working away from home. The clinicians were not required to provide proof of these costs, but rather received the per diem whenever their work assignment was further than 50 miles from their residence. Clinicians were required to work three 12-hour shifts per week. If a clinician worked less, their per diem was reduced. However, they could “bank” excess hours from previous weeks, which would then off-set any missed shifts. Local clinicians also received per diem payments, but for those employees, the per diems were included as part of their wages for overtime purposes. The district court granted summary judgment for AMN, and the Ninth Circuit reversed.  

In coming to this conclusion, the Ninth Circuit stated that the relevant test, the “function” test, requires a case-specific inquiry based on the particular formula used to determine the amount of the per diem benefits. Other relevant, but not dispositive, factors include whether (i) the payments increase or decrease based on the time worked, (ii) payments occur irrespective of incurring any actual costs, (iii) the employer requires any attestation that costs were incurred, and (iv) payments are tethered to days or periods spent away from home or instead occur without regard to whether the employee is away from home.

In applying these factors in the present case, the Ninth Circuit noted that the employer made pro rata deductions in the per diem payments that were unconnected to whether the employee remained away from home incurring expenses for its benefit (such as for clinicians who were too ill to work), which indicated that the deductions were connected to the amount paid for hours worked while away from home. Further, the Ninth Circuit found it relevant that the clinicians were permitted to offset missed or incomplete shifts with hours they “banked” on days or weeks in which they worked more than the minimum required hours. The court noted that there was no plausible connection between working extra hours one week and incurring greater expenses the next. Finally, the Ninth Circuit held that the strongest indicator that the payments were in fact compensation for hours worked was that the company paid local clinicians and traveling clinicians the same per diem payments and considered the local clinician’s per diem payments as wages. In sum, the court found that the per diem was not tied to the actual expenses each employee incurred and therefore could be construed as “supplemental compensation” which should be included in the employee’s “regular rate of pay.”

The ruling marks a significant win for hourly workers and confirms that courts must consider the function and purpose of the excluded payments rather than defer to the employer’s label or categorization.  Although the Ninth Circuit has not yet addressed holiday-in-lieu exclusions, several district courts have applied similar reasoning, most recently in a case our office filed for Richmond fire fighters. (see, Padilla v. City of Richmond (N.D. Cal., Dec. 23, 2020, No. 20-CV-04597-PJH) 2020 WL 7643235.)  Further, although the case was decided under the FLSA, the Ninth Circuit stated its understanding that the same general analysis applied under the California Labor Code.