Groundbreaking—IRS makes things complicated
Employers who adhere to certain IRS guidelines may face much lower indemnity payments for employees who traveled for work pre-injury
Myres v. Strom Aviation, Inc. (16-558)
In companies where employees regularly travel away from home to work, a big-ticket item on an employee’s paycheck is almost always the reimbursement they are paid for meals, travel, and lodging expenses. Employees often view these “per diem” payments as part of their income—after all, money is money when it’s going into their pocket at the end of the day. But in the context of workers’ compensation, there is a heated debate about whether per diem payments should be factored into an average weekly wage calculation. To find out the solution, the true purpose of per diem compensation is unearthed by digging deep into the IRS Code, and the answer has proven to be a hard pill for many employees to swallow.
Are per diem payments—for reimbursement of an employee’s meal, travel, or lodging expenses—considered compensation that is “in lieu of wages”?
In Myres, the Employer provided contract labor and temporary staffing to companies in the aviation industry. Employees were paid a straight hourly rate, for overtime, and via an expense reimbursement program (“per diem”).
Plaintiff’s injury was accepted as compensable, and the issue between the parties was whether to include his per diem payments (for travel, meals, and lodging expenses) in the average weekly wage calculation.
Plaintiff argued to include the per diems, as he considered these payments part of his income. The inclusion or exclusion of these payments greatly affected his average wage: without the per diem, his hourly wage was $7.25—federal minimum wage; when the per diem was included, his hourly wage equaled $20.50.
In determining whether the per diem payments were “in lieu of wages”, the Court found answers in studying how the Employer treated per diems for accounting and tax purposes.
The IRS guidelines indicate businesses have a couple options for expense reimbursement to employees. One option is paying the actual expenses, with employees submitting receipts. This method is not practical for large companies, such as the Employer in Myers.
Another expense reimbursement option available to businesses, the “deemed substantiation method”, is when a business pays employees a per diem rate based on the federally established rate, which is tied to the specific location within the Continental United States (CONUS). In this method, the per diem rates are established for each county in the U.S., and they are found on the Government Services Administration (“GSA”) website.
The IRS has established IRS guidelines concerning this second reimbursement arrangement. Per diems paid according to these rules fall under an “accountable plan” and are deemed substantiated, even without proof of receipts.
These guidelines provide three rules for per diem payments, in order for them to be deemed substantiated:
- The per diem must be paid “with respect to ordinary and necessary business expenses incurred or which the payor reasonably anticipates will be incurred;”
- The per diem be reasonably calculated not to exceed the amount of the expenses or the anticipated expenses; and
- The per diem is paid at or below the federal per diem rate.
In Myres, testimony from the Employer showed adherence to the IRS rules:
(1) The employees traveled away from their homes, thus, it was reasonably anticipated that expenses were incurred for lodging, meals, incidental expenses and travel; (2) The maximum daily rate for expenses, as listed by geographical location, would be obtained on the GSA website. The Employer would then informally review the lodging and meal costs in each city, and reduce the per diem paid; and (3) The Employer reduced the GSA federal per diem rate (found on the website) by 20% to formulate the per diem rate for the city in which a job was located.
Where an employer follows these guidelines, the IRS does not consider the payments to be wages/compensation, and therefore, the payments are not subject to employment or withholding taxes.
Based on these findings of fact, the Court of Appeals determined the per diem payments were not made in lieu of wages, but instead were coordinated with a reimbursement for Plaintiff’s business-related living expenses, and therefore should not be factored into the average weekly wage.
This method of “deemed substantiated” is commonly used in the aviation and trucking industries, as well as companies that staff traveling nurses.
If an insured company pays a hefty sum of per diem compensation to its employees and the employee is arguing that amount should be included in the average weekly wage, a phone call to the insured’s payroll/accounting department will likely tell you how the issue will unfold. If the company complies with the IRS guidelines for having the per diems treated as non-taxable—(and the payroll/accounting specialist will know the answer to this)—there is a good chance the per diems will be viewed as exactly what they are: reimbursement for work expenses, not in lieu of wages.
How each company complies with the IRS rules may be different, and parsing through tax and payroll records can be time-consuming and tedious. Ultimately, though, proof of deemed substantiation will have a huge effect on an employee’s compensation rate and the claim’s ultimate payout, so the effort is time well spent.