Hourly Per-Diem Allowance Is a Question of Fact

M, leased workers from W; many of the workers re-mained at Ms job site seven days a week. For reimbursement of their lodging, meals and incidental expenses (M&IE) at the site (travel expenses), W paid an hourly amount to those employees who lived more than 100 miles away from the site, in addition to their hourly wage. When nonlocal employees received two fifty-cent increases in the hourly per diem after each of their first two months on the job, local employees to whom no per diem was paid received fifty-cent raises in their salaries. The per diem paid to nonlocal employees was computed on both regular and overtime hours. As a result, employees who were away from home for the same amount of time received different per-diem payments, because some worked more hours than others. No employment, unemployment or income tax was paid on these reimbursements.

The question is whether the hourly per diem paid to the nonlocal employees as reimbursed travel expenses are wages subject to employment taxes. Such payments are not subject to employment taxes if made under an accountable plan as defined by Regs. Sec. 1.62-2(c). A plan is accountable when (1) it covers only expenses with a business connection; (2) all expenses are substantiated to the employer; and (3) the employee is required to return to the employer any amount paid in excess of substantiated expenses. If a plan does not meet these criteria, it will be considered nonaccountable and the payments will be subject to withholding and employment taxes.

A per-diem allowance for travel expenses that is computed on a basis similar to that used in computing the employees wages or other compensation (e.g. the number of hours worked) can meet the business connection requirement, as long as a per diem allowance computed on that basis was commonly used in the industry in which the employee is employed on Dec. 12, 1989. (Emphasis in original.)

The district court granted the IRSs motion for summary judgment because it concluded that the hourly per-diem amounts were not made with a reasonable expectation that the employees would actually incur travel expenses in the amounts paid; the Service argues, under Ws arrangement, employees who should have been expected to incur similar travel expenses received dramatically different reimbursements because they worked more hours in the same number of days. Employees (particularly those who worked overtime) would inevitably receive reimbursements in excess of their reasonably anticipated expenses under Ws scheme.

W relies on the Eleventh Circuits decision in Trucks, Inc., 234 F3d 1340 (11th Cir. 2000). In Trucks, a trucking company reimbursed truckers for expenses on a per-diem rate based on the load revenue, which was calculated primarily by the number of miles driven, but is modified to account for weather, unloading and reloading, and road conditions in the particular area. Because the truck drivers were not required to turn in receipts and received the per diem even when they slept in their trucks, reimbursements could greatly exceed expenses.

In Trucks, as here, the appeal turned on the question of whether Trucks, Inc. reasonably anticipated and calculated the drivers expenses before reimbursing them. Reversing the district court, the Eleventh Circuit concluded that the focus of the business connection test is on the employers reasonable expectations, not the drivers actual expenditures. These questions of reliability and state of mind fall within the purview of the jury. Applying that analysis to the trucking company at issue in that case, the Trucks court held that [t]he reasonableness of both Truckss calculations and anticipations is a jury question and not appropriate for summary judgment because Trucks has produced some evidence that its plan met the IRS requirements at the time.

The court found this reasoning persuasive and concluded that whether the employer reasonably anticipated and calculated its employees travel expenses in the course of developing its reimbursement arrangement is essentially one of state of mind and that, as long as the employer produces summary judgment evidence that amounts to more than conclusory allegations, improbable inferences, and unsupported speculation, the issues of reasonableness and state of mind are proper questions for a jury.

Applying the reasoning of Trucks, W produced considerable summary judgment evidence of research it undertook to determine its per-diem rates. In particular, it provided testimony by its president in his deposition, which describes the investigation W undertook before setting its rates. We leave to the jury the question of whether Ws reimbursements were reasonably calculated not to exceed the expenses incurred by its employees.

Judgment as a matter of law is not appropriate. A jury could find that W reasonably anticipated each employee would generally receive either $48, $52 or $56 per day in travel reimbursements for working an eight-hour day. This is only slightly more than the $47 per day that Ws research showed that one of its employees would be required to spend if he or she stayed at the least expensive hotel in a double-occupancy room; it is slightly less than the $58.50 per day in travel expenses that Ws research showed its employee would incur if he or she stayed at the most expensive hotel in a single-occupancy room, and is considerably less than the $66 per day the Federal government reimbursed its employees working away from home in the same locality.

 Thus, based on the summary judgment evidence relied on by the government, a jury could find that Ws reimbursement payments are reasonably calculated not to exceed the amount of its employees anticipated expenses. Moreover, the extent to which Ws expectation was not reasonable because it knew (or should have known) that some (or even many) of its nonlocal employees would work overtime is quintessentially a fact issue as to reasonableness and state of mind for a jury to decide, based on its assessment of the witness testimony and evidence presented.

Worldwide Labor Support of Mississippi, Inc., 5th Cir.,11/15/02

Reflections: Under Section 4.02(5) of Rev. Proc. 94-77, per-diem arrangements computed on a basis similar to that used in computing the employees wages or other compensation are limited to a meals only per diem allowance. Thus, to the extent based on this exception, the portion of the hourly per-diem allowance exempt from employment tax and withholding is limited to the Federal M&IE rate; however, the employee is still entitled to a deduction for his or her travel expenses over that amount.