Employment Law | Expert Legal Commentary

January 30, 2009

B&D Contracting: Per Diem Payments Are “Wages” for Benefits Calculations

B&D Contracting v. Pearley

By Jeremy J. Gray of Zuber & Taillieu

B&D Contracting: Per Diem Payments Are “Wages” for Benefits Calculations

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In B&D Contracting v. Pearley, 548 F.3d 338 (5th Cir. 2008), the U.S. Court of Appeals for the Fifth Circuit agreed with the Benefits Review Board’s finding that per diem payments should qualify as “wages” for the purpose of calculating disability benefits under the Longshore and Harbor Workers’ Compensation Act. Specifically, the BRB had determined that because the per diem payments were paid to the employee at an hourly rate with no direct correspondence to his actual expenses, they played the role of money wages, and thus should be included in a benefits calculation.

Background

Otis Pearley worked as a shipfitter for B&D Contracting (“B&D”) beginning July 1999, earning $16.50 per hour. B&D divided Pearley’s paychecks into an hourly taxable rate of $8.50 and an untaxed hourly “per diem” rate of $8.00. Pearley subsequently received a raise to $9.50 and $9, respectively.

In June 2002, Pearley injured his back in the course of employment. In calculating Pearley’s temporary disability payments, B&D used only the taxable portion of his paychecks, omitting the non-taxable per diem payments from the calculation.

Pearly challenged this calculation before a Department of Labor ALJ, which determined that the per diem payments should be included as “wages” for the purpose of calculating Pearley’s benefits rate. The Benefits Review Board (“BRB”) agreed with the ALJ’s ruling.

In its opinion dated Nov. 6, 2008, the U.S. Court of Appeals for the 5th Circuit found no error with the ALJ and BRB’s decision and denied B&D’s petition for review. B&D Contracting v. Pearley, 548 F.3d 338 (5th Cir. 2008).

Per Diem payments are “wages”

The Longshore and Harbor Workers’ Compensation Act (“LHWCA”) exists to ensure compensation for employees who have lost wage-earning capacity due to work-related injuries. The amount of disability benefits paid is calculated based on the injured employee’s “wages,” as that term is specifically defined in the LHWCA, 33 U.S.C. section 902(13). The courts have determined that “for a [payment] to constitute a wage, it must be considered either monetary compensation or a taxable advantage.” James J. Flanagan Stevedores, Inc. v. Gallagher, 219 F.3d 426, 431 (5th Cir. 2000).

Per diem payments are often made to compensate employees for expenses they incur – for things such as meals, lodging, and travel—in order to perform their work, it is often legitimately excluded from “wages,” as indicated in 26 U.S.C. section 119(a). In its opinion, the 5th Circuit acknowledged that per diem payments made for this purpose may be excluded from the definition of “wages” and, therefore, the benefits calculation. 548 F.3d at 341.

However, the court distinguished those excludable per diem payments from purported per diem payments that look and smell more like ordinary wages. The court cited Custom Ship Interiors v. Roberts, 300 F.3d 510 (4th Cir. 2002) and other precedent for the notion that when “per diem” payments are really just another way of paying compensation, they are “nothing more than a disguised wage.” Id. at 515.

B&D argued that only taxable compensation should be considered “wages,” but the court held that under the LHWCA, the taxability of the payment is not determinative of whether it is a wage. 548 F.3d at 342. Moreover, the 5th Circuit found that Pearley’s per diem payments were merely a “disguised wage,” as they were not directly related to his travel, lodging, or commuting expenses. Finding that the per diem payments were wages, the court stated: “The per diem payments were designed to maximize employees’ take home pay, provide tax benefits to the employer, and keep up with B&D’s competitors that paid employees in a similar manner.” Id. at 342 - 343.

Conclusion

Employers should be aware that per diem payments made to employees based on their hours worked, rather than tied to any actual expenses incurred by the employee, will be considered “wages” for benefits calculations under the LHWCA. In order to avoid this result, efforts should be made to structure the per diem payment in such a way as to show a direct link between the payment and employee’s legitimate expenses. Note that this same analysis does not appear to claims made under the Fair Labor Standards Act, 29 U.S.C. section 201-219, which defines “wages” differently than the LHWCA. (See discussion in B&D Contracting, 548 F.3d at 343).