Per diem pay practices can shortchange workers and the tax man

Some companies put a portion of wages under a category for daily expenses to get around compensation rules, but a crackdown is underway

It adds up

Employees, at least those not represented by labor unions, tend to like it, he said, because it's tax-free money in addition to their regularly taxed wages. However, if they stop to realize what they're losing, it's staggering."

Companies have come up with a variety of techniques to avoid paying overtime, from misclassifying employees as independent contractors to forcing employees to work off the clock to telling salaried folks they're not entitled to overtime.

The latest way some companies are trying to get around paying 1½ times regular pay when employees put in more than 40 hours a week is by shifting a significant portion of wages into a "per diem" rate. The per diem rate - traditionally a way companies pay for lodging, meals and other travel expenses - is then not included in calculating overtime.

Government regulators discovered the pay practice during an investigation into the temporary staffing industry. And they're cracking down on industries, including construction, that have embraced the method, saying it cheats workers and shortchanges government coffers of tax revenue.

Two years ago, the U.S. Department of Labor launched an initiative out of its New Orleans district office that was focused on the temporary staffing industry. It found "evasive per diem schemes" in which companies misclassified a portion of employee wages as per diem payments.

Consequently, when the companies would calculate overtime pay, they did it on an artificially low regular rate of pay. Workers aren't the only ones who lose because when employers don't include per diem as part of the wage package, state and federal taxes aren't collected on the earnings.

Construction trade unions report a growing use of per diem payments to control wage rates during the ups and downs of the local economy.

The South, including Texas, has traditionally had lower pay and benefits. Union membership isn't as dense in the South, and contractors use per diem payments to control their costs yet provide a way to attract workers quickly when they need them, said Sean McGarvey, president of the North America's Building Trades Unions, who discussed the pervasive practice when he visited Houston earlier this year.

In Houston, the going per diem rate is about $150 a day for nonunion contractors, McGarvey said. But when work slows down, contractors cut the per diem rate or eliminate it all together, he said.

At the moment, demand is high for skilled construction workers along the Gulf Coast, and companies are stealing workers from their competitors by increasing their per diem rate rather than their hourly pay, said Michael Cunningham, executive director of the Texas Building & Construction Trades Council for the AFL-CIO in Austin. The practice seems to be especially prevalent in welding, steel fabrication and scaffold building.

It adds up

Employees, at least those not represented by labor unions, tend to like it, he said, because it's tax-free money in addition to their regularly taxed wages. However, if they stop to realize what they're losing, it's staggering.

Cunningham did some back-of-the-envelope calculations on a fictional employee who works 50 hour a week, earns $25 an hour and receives $100 per diem. If the employer doesn't include the per diem payments in calculating overtime, the employee loses $60 a week in overtime pay that week.

"It's another form of wage theft," Cunningham said. The building trades have been letting employees know they're entitled to overtime pay on the per diem portion of their wages.

He's glad to see the Labor Department cracking down on the practice. In the past two years, three staffing companies in Louisiana have paid millions in back overtime wages to thousands of employees after the Labor Department found wage violations.

It turns out that investigators don't have to look far to find evidence of per diem pay practices for jobs that don't appear to involve overnight travel.

What's posted now

A quick check of online job openings around Houston revealed several that pay an hourly wage along with a per diem amount. Of course, it's impossible to know from the listings whether the companies include the per diem amount when calculating overtime.

A staffing company, for example, has posted openings for pipe fitters/sprinker fitters that pay $26 an hour plus $100 per diem. The jobs require 48 hours or more each week.

Another company is looking for journeyman-level nuclear pipe welders. The job pays $38 an hour plus per diem of at least $100.