It’s an unusual, slightly arcane sounding phrase, that’s used regularly in the world of employee expenses. But what exactly do we mean when we’re talking about a ‘per diem’ expense or allowance? Here’s an overview:
What does ‘per diem’ mean?
‘Per diem’ is a Latin phrase which means ‘per day’ or ‘for each day’. It can be traced back to Roman times when Latin established itself as the common legal language used by countries across Western Europe.
Today, it’s mainly used in a business context and it refers to a specific amount of money that’s provided to a person as a daily allowance. This could be a daily rate to cover a full day’s work, with many part-time positions being reimbursed on a per diem basis.
The most common use relates to employee expenses. It’s a set allowance that’s provided to cover a specific business-related expense. The two most common types of per diem expenses are 1. to cover overnight accommodation and, 2. daily meals for a business traveller.
How does a per diem allowance work?
Instead of reimbursing the actual costs of business expenses, the employee is allocated a per diem payment. If a business trip requires them to stay in accommodation for three nights, they receive an allowance for each day.
As the actual cost is not a factor with per diem expenses, there is no need for business travellers to retain receipts for record-keeping. The actual costs may be lower or higher than the allowance but unless there are exceptional circumstances, this is a matter for the employee to manage.
Who sets per diem allowances?
For a private business, it’s a task for the finance team to decide but they will typically use the rates that have been set by governmental bodies. A typical example is the way that the General Services Administration (GSA) sets per diem rates for each US city.
These rates are primarily created for federal employees, to cover their costs when travelling away from home but they’re also used by the IRS (Internal Revenue Service) for private employers who want to provide employees with a daily travel budget.
Employee reimbursements which are in excess of the GSA per diem rates are taxable. US employers also need to have an accountable plan for employee expenses in order to comply with the IRS rules regarding per diem allowances.
In the United States, the GSA rates are updated annually - usually around October 1st. You can find the latest rates here.
What are the benefits of per diem expenses?
The main benefit of a per diem approach to expenses is simplicity. It removes the need for individual expenses to be recorded, processed, checked and reimbursed. Some of the other advantages include:
A per diem allowance gives a business traveller considerable flexibility over how they use it. They may want to eat frugally to save money or, conversely, they might want to stay in a luxury hotel that their allowance doesn’t cover. Either way, it’s their choice.
A daily allowance provides a comfortably predictable business cost for finance managers. If you know the number of business trips that an employee is going to make during a year, you can predict the amount of per diem allowances they will require. It removes the volatility and uncertainty of actual expenses.
A per diem expense reduces the risks of employees fraudulently exaggerating or falsifying costs. If an employee racks up exorbitant costs during a business trip, it’s their own bank balance which will suffer, rather than that of the employer.
What are some of the problems?
The main downside to a per diem expense approach is a basic lack of financial control. By not keeping track of exact business costs, the potential problems include:
A per diem approach means that an employer is routinely paying more than the actual expense costs accrued. Even if the differences between a per diem allowance and the actual costs are relatively small, multiplied across a workforce, this can lead to significant losses over time.
A per diem allowance works on the basis that it’s a fair and equitable amount. But establishing this is difficult when a per diem allowance has to cover a multitude of different circumstances and situations. The perceived unfairness of these allowances often becomes a source of frustration and conflict within the workplace.
A per diem approach can quickly become an administrative headache, particularly when business travel demands are constantly evolving. Different destinations and business roles will often require a different set of per diem rates and all of these allowances are having to be constantly reviewed and updated.
How is tech changing attitudes towards per diem?
In the past, the major benefit of a per diem approach has been the reduced administrative burden on finance teams.
It meant that employees were not required to track each individual expense - saving paper receipts and submitting expense reports. For finance managers, it meant there was no need to collect expense reports - to check each cost and reimburse approved claims.
The move to digital forms of expense management and automated processes has made this much less of a factor when choosing an approach. Today’s digital expense management systems allow for a completely paperless process in which claims can be created in less than a minute - using a smartphone app.
Automated processes check claims for policy compliance and provide a finance team with instant access to the kind of information which used to take weeks or even months to collate. It provides the simplicity and speed of a per diem approach while retaining complete financial control over employee expenses.