“Other employers should take note of this investigation.” – Frank McGriggs, Department of Labor, December 2015 (speaking about the DOL’s on-going investigation of staffing agencies and other employers who are compensating employees by “per diem” payments).
In last April’s newsletter, Cathey Botwright presented an informative article on the IRS and per diem payment audits. While focused on the tax consequences of improper per diem payments, the article mentioned the DOL’s “ongoing initiative.”
http://www.virginiashiprepair.org/Newsletter/100/1243 At the VSRA HR Committee’s December meeting, this same topic generated much discussion.
In 2015, the DOL did indeed take a hard look at companies paying employees “per diems.” Between June and December 2015, the DOL found at least seven staffing companies had used per diem payment arrangements improperly and collected over $3.5 million in back wages. Mr. McGriggs’ statement demonstrates that the DOL plans to continue investigating such payment schemes into 2016.
These schemes are often driven by the competition for qualified employees and for the subcontracts to supply them, particularly in industries that need employees only for discrete projects like construction, oil and gas, and maritime. They are tempting because the employer does not include the per diem payments in the calculations for overtime, employment taxes and other related costs. This in turn allows for lower bids on lucrative work. Employees often do not complain because the per diem is higher than travel expenses, if any, and there are no tax deductions from the per diem.
The DOL’s 2015 investigations found numerous staffing agencies in the Gulf region were paying low hourly rates with high per diem payments in an effort to minimize overtime rates and employment taxes. The schemes were deemed “illegal” and “evasive” because the per diem payments were not for legitimate travel expenses, did not meet the requirements of the federal tax code, and were improperly excluded from the workers’ hourly rates.
The DOL’s focused effort into the staffing industry’s per diem arrangements and recent warning to “take note” should cause all employers paying per diems to revisit their practices. Additionally, any contractor whose subcontractors pay per diems should monitor closely how and why the subcontractors are paying per diems and calculating hourly rates. Prime contractors can be liable for the back wages owed to their subcontractors’ employees. If the work is performed on a federal government contract, improper payments can lead not only to monetary consequences, but also to the debarment or suspension from government contracting work of both the subcontractor and the prime. The DOL has a record of seeking debarment of the prime contractor who failed to “adequately ensure” its subcontractors’ compliance with wage and overtime requirements.
This is not to suggest that a company should not pay per diems or “day rates” to employees. The DOL regulations expressly allow wages to be paid using “day rates”, and legitimate per diem payments are properly excluded from overtime calculations. If a company or its subcontractor is using these payment methods, however, it is vital to ensure that the minimum wage and overtime laws (as well as tax laws) are followed.
About the Author
Dawn L. Merkle is a partner in the Government Contracts Practice Group at Willcox & Savage. She has more than ten years’ experience representing contractors in all aspects of government contracting, at the state and federal level; and has served as in-house counsel to a national civil construction contractor. She can be reached at firstname.lastname@example.org or 757-628-5606. http://willcoxandsavage.com/attorneys/view/dawn-l.-merkle#
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