What Is Per Diem?

Want to Know About How Employers Can Pay Employees for Travel?

A per diem covers meals and housing when employees travel on business.
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Per diem is the Latin word that means per day or for each day. Per diem has several meanings related to Human Resources—one of which is used more prevalently. 

Per diem is a daily allowance that is paid to employees for lodging and for meals, tips, taxi and other ground transportation fees, and for other incidental expenses such as dry cleaning, laundry, phone use, WiFi charges, and room attendant tips when an employee travels for business.

It is the amount of money that each employee can spend per day on a business trip, attending work-related educational events and conferences, and when traveling away from their main office for business.

The per diem rate does not cover the cost of transportation to the site at which the employee is working. Employers either pay transportation costs separately, most frequently directly to the airline, train, bus and so forth. Or, the employees use their personal auto for transport and are reimbursed according to the IRS mileage reimbursement rate.

This can include working at a location for the same company that is different from the location where the employee usually works. For example, an employee's job and office are located in Michigan but, once a month he travels to Pennsylvania to work out of a different regional office for several days.

In a second example, an employee trains new employees at her company's locations all over the country and an overnight stay is required at each location.

In a third example, an HR staff person usually works at the company's main headquarters. But each time the company opens a new location she works for a period of time at the new location while she hires and brings staff onboard.

All three of these described situations would work well with the company paying the employee a per diem.

Because the travel is frequent or lengthy, employees are happier not to have to record all expenditures and save receipts as proof. Nor do they like to fill out expense reports.

Setting Per Diem Rates

The employer sets per diem rates based on a number of factors. These can include the cost of travel related expenses at various locations, the length of time the employee travels away from the office, and the current Federal per diem rate.

Most employers use the Federal per diem rate. Otherwise, employers may find that the Federal per diem rates provide a point of comparison with the rate you plan to establish for employees. The US General Services Administration establishes Federal per diem rates that are effective on October 1 each year.

The General Services Administration (GSA) establishes travel policy including per diem rates only for federal employees on official travel away from their local station or areas of job location defined by their agency.

Companies tend to use the Federal per diem rate because per diem payments above the Federal rate are taxable income for employees on their W-2 form. For more about the intricacies of per diems and taxation, see per diem rates at US Business Law and Taxes.

The per diem rates of employers are normally set at different amounts of money for different locations and vary by the level of travel expenses the employee will experience. Employees traveling to Las Vegas, NV, for example, receive approximately one-third the per diem reimbursement that an employee traveling to New York City would receive based on local expenses (in Federal rates).

Benefits of the Per Diem Rate

Companies that use a per diem rate save employees the time that they would otherwise invest in keeping track of expenses, saving receipts, and filling out expense reports upon return from business travel. Employees are allowed to keep the money that they don’t spend while traveling which can encourage thrift and no overspending.

Alternatively, employers may require employees to invest the time in accounting for expenses for an expense reimbursement.

The employer benefits because it doesn't have to invest staff time in reviewing expenses, vetting the amounts of money spent, and the employee time that is invested at work in doing all of the reporting. The employer has essentially budgeted the amount of money it is willing to spend on employee travel and the employees were notified before they made purchases.

The per diem process can result in substantial savings over the employer paying actual employee expenses. It works well when the employer has done its homework so the employee's expenses are sufficiently covered. It is unwise and anti-employee to require employees to cover their own expenses when they travel on legitimate business pursuits.

Per Diem Employment

Per diem, in some occupations and industries, can also refer to short-term, temporary employment. This daily schedule usually consists of several days of employment, for a per diem employee, to fill in for a sick or vacationing employee. Two examples are substitute teachers and healthcare workers that fill in for an absent employee and are paid by the day.

You may also be interested in learning about ten ways to reduce the cost of employee business travel and whether employees should ever have to share rooms while traveling on business related trips.

Related to Employee Satisfaction