Per diem is Latin for per day or for each day. While per diem has several meanings, in relation to Human Resources, it is the daily allowance paid to employees for expenses incurred while traveling for business. These expenses could be for lodging, meals, tips, taxi, and other ground transportation fees. Incidental per diem traveling expenses also include such things as dry cleaning, laundry, phone use, WiFi, and room attendant tips.
When Per Diem Rates Do Not Apply
What a per diem rate does not cover is the cost of transportation to and from an employee's place of employment. In that case, employers either pay transportation costs separately—usually directly to the airline, train, bus, and so forth—or, the employees use their own personal source of transportation and are reimbursed according to the IRS mileage reimbursement rate.
Examples of Employer Reimbursement for Travel
Employers will pay an employee's transportation costs separately when an employee works at a location for the same company that is different from the location where the employee usually works. For instance, an employee's job and office are located in Michigan but, once a month they travel to Pennsylvania to work out of a different regional office for several days.
Another example is if an employee trains new employees at their company's locations all over the country and an overnight stay is required at each location. Yet another example is an HR staff person who 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 situations would work well with the company paying the employee a per diem because the travel is frequent or lengthy. As such, employees are happy because they don't have to record all expenditures and save receipts as proof. Nor do they need to spend time filling out expense reports.
Setting Per Diem Rates
An employer sets per diem rates based on a number of factors. These 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 and the U.S. General Services Administration (GSA) is the governing body that establishes Federal per diem rates each year on October 1.
The GSA establishes travel policy including per diem rates (but only) for federal employees on official travel away from their local station, or areas of job location, as 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 forms.
Understandably, the per diem rates of employers are normally set at different amounts 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
Employees are spared the time that they would otherwise invest in keeping track of expenses, saving receipts, and filling out expense reports when they return to the office. Employees are allowed to keep the money that they don’t spend while traveling which can encourage thrift and discourage overspending.
The employer benefits because they don't have to invest staff time reviewing expenses, vetting the amount of money spent, and the employee's time spent filling out paperwork. In essence, the employer is saying that they have budgeted the amount of money they are willing to spend on employee travel and the employee was notified before they incurred the expenses.
The per diem process can result in substantial savings for the employer as opposed to businesses that pay actual employee expenses. And of course, it is unwise and anti-employee to expect employees to cover their own expenses when they travel on legitimate business pursuits.
Per Diem Employment
In some occupations and industries, per diem can also refer to short-term, temporary employment. This daily schedule usually consists of several days of employment for a per diem employee asked to fill in for a sick or vacationing employee. Two examples are substitute teachers and health care workers that are paid by the day.