Can Employers Exclude Large Expense Reimbursements from Overtime Pay?

Employers can only exclude business expense reimbursements from overtime calculations if the amount paid “reasonably approximates” an employee’s actual incurred expenses, according to a recent U.S. Department of Labor (DOL) opinion letter. This guidance is critical for HR professionals calculating the regular rate of pay—the foundational rate used to compute overtime premiums under the Fair Labor Standards Act (FLSA). Overestimating reimbursements can lead to compliance violations and back pay liabilities.

What Are the Rules for Excluding Reimbursements from the Regular Rate of Pay?

The FLSA allows employers to exclude certain payments from the regular rate of pay, which is essential for accurate overtime calculation. Among these exclusions are payments made to reimburse employees for specific expenses incurred while performing their jobs, such as using a personal vehicle, cell phone, or computer for business purposes. However, the DOL emphasizes that this exclusion is not a blank check. The reimbursement amount must be a reasonable approximation of the actual expense. In a recent case, the DOL reviewed a company’s proposal to increase daily equipment reimbursements from $25 to as much as $200 per day. Because the proposed amount was six to eight times the current rate and the company provided no evidence that inspectors actually incurred such high ongoing costs, the DOL opined that excluding the full $200 from the regular rate would likely violate the FLSA.

How Can Employers "Reasonably Approximate" Actual Expenses?

The DOL states the FLSA is “flexible” and does not mandate a single method for approximating expenses. The key standard is whether the method used produces a figure that reasonably reflects the costs employees actually bear. Commonly accepted methods include:

• Flat Rate: A fixed daily or weekly amount.
• Standard Mileage Rate: Using the IRS business standard mileage rate or a company-customized rate for vehicle use.
• Averaging Costs: Calculating an average cost based on data from a group of the employer’s drivers or employees.
• Fixed and Variable Allowance (FAVR): A more complex method that combines a fixed cost component with a variable mileage rate based on local data.

Based on our assessment experience, the chosen method’s validity depends entirely on the specific circumstances. For instance, a flat rate of $10 per day for incidental personal cell phone use may be reasonable, while the same rate for specialized software subscriptions would not be. Employers must be prepared to demonstrate the rationale behind their approximation method.

What Happens If an Employer Overpays for Reimbursements?

If an employer provides a reimbursement that exceeds a reasonable approximation of actual expenses, the compliance solution is straightforward, though often overlooked. The DOL clarifies that the employer may still exclude the portion of the payment that represents the actual or reasonably approximate expense. The excess amount must be included in the regular rate of pay. For example:

As the table illustrates, paying $150 per day is not illegal in itself; the violation occurs only if the entire $150 is improperly excluded from the overtime calculation. Correcting this by including the $125 excess ensures compliance.

To ensure FLSA compliance, employers should audit their reimbursement policies, document the method used to approximate expenses, and train payroll staff to properly classify reimbursement payments. This proactive approach minimizes the risk of costly wage and hour disputes.