What Is Per Diem and How Does It Work for Business Travel?

Business travel should help people get work done, not create unnecessary admin. Yet hotel bills, meal receipts, and out-of-pocket costs can quickly turn a simple trip into a complex expense process.

That is where per diem payments, also known as travel allowances, can make a real difference. Instead of managing every small travel expense individually, organizations can use predefined daily amounts or reimbursement limits to simplify the experience for employees while keeping spending predictable and compliant.

What is per diem?

A per diem is a daily allowance provided to employees who travel for business. The amount usually depends on the destination, trip duration, and the type of expense being covered. A trip to a high-cost city, for example, may require a higher allowance than travel to a lower-cost location.

In practice, travel allowances usually focus on three everyday expense categories:

1. Lodging: Lodging covers overnight accommodation such as hotels or other temporary stays.
2. Meals: Meals include daily food expenses such as breakfast, lunch, and dinner. Meal allowances are usually standardized per day. They may be adjusted depending on the duration of travel or whether certain meals are already provided during events like conferences.
3. Incidentals: Incidentals are small, necessary travel related expenses. These may include, for example, tips for hotel or service staff, or minor service related fees.

Many organizations base their travel reimbursement policies on the Government of Canada's National Joint Council (NJC) Travel Directive and the Canada Revenue Agency (CRA) guidelines. These resources help organizations establish fair meal and incidental allowances for business travel within Canada. For international travel, the Government of Canada's Travel Directive Appendix C provides meal and incidental allowance benchmarks to help ensure employees are fairly reimbursed when travelling abroad.

Tip: A clear expense policy is the foundation of a successful per diem program. It should explain what is covered, how rates are calculated, and what employees need to do before, during, and after a trip.

How does per diem work?

Companies typically choose between fixed allowances and reimbursable allowances. Both models are widely used, and each offers different advantages.

• Fixed Allowances: A fixed allowance gives employees a set amount per day or per trip, regardless of what they actually spend. This model is easy to understand and gives employees flexibility. If they spend less than the allowance, they usually keep the difference. If they spend more, they are typically responsible for the additional cost.
• Reimbursable Allowances (Daily Allowances as a Limit): A reimbursable allowance works more like a daily cap. Employees can claim actual expenses up to a defined limit, while spending above the limit may require additional review or may not be reimbursed. This approach gives organizations stronger cost control, especially for higher-value expenses such as lodging.
• Using a Mixed Model: Many organizations use a mixed model because it balances employee flexibility with financial control. A common setup includes:
  • Daily allowance as a limit for lodging, where costs are higher and vary significantly by location
  • Fixed allowances for meals and incidentals, where simplicity and predictability are more important

This setup keeps high-cost categories such as accommodation under tighter control, while making everyday spending on meals and incidentals easier to manage. The result is less administrative effort and a more consistent employee experience.

Modern travel and expense solutions like SAP Concur can automate much of this process. They can calculate per diem rates from travel itineraries, apply location-specific rules, support approval workflows, and use intelligent checks to help ensure compliance with company policies. Employees and approvers can also manage travel allowances on mobile devices, making the process easier to handle on the go.

Why do pre-approvals and advances matter

Per diem can already simplify business travel on its own, and it can become even more effective when supported by a clear pre-trip process. Before employees travel, they may need to submit a request that outlines the purpose, duration, destination, and expected costs of the trip. Once approved, the allowance can be paid in advance, helping employees avoid unnecessary out-of-pocket spending.

For finance and travel teams, this creates better visibility before costs are incurred. Automated workflows and policy checks can also help ensure that travel requests are reviewed consistently and aligned with company rules from the start.

How does per diem work for international travel?

For global organizations, per diem is rarely one-size-fits-all. Travel allowance rules can vary significantly from country to country because of local tax requirements, statutory rates, and reimbursement regulations.

SAP Concur supports this complexity with both country-specific configurations and a generic configuration model.

Country-specific versions help organizations address local statutory requirements, such as government-defined rates, tax handling, and reimbursement rules for meals, lodging, and incidentals.

This is especially useful for companies with subsidiaries in multiple countries, where each location may need to follow its own legal and tax requirements when reimbursing employees.

At the same time, a generic configuration gives organizations the flexibility to define their own travel allowance rules where no predefined statutory template is available or where company-specific policies are preferred.

With this approach, organizations can:

• Use country-specific configurations where compliance with local regulations is required
• Use the generic model to define custom travel allowance rules for all other regions

Together, these options help organizations stay compliant where local rules apply while still maintaining a consistent and manageable global travel program.

For more information, organizations can refer to SAP Help for the Travel Allowance Service and country-specific configuration guidance.

What are the benefits of per diem?

When designed well, per diem can benefit both employees and the organization. It creates a simpler, more predictable way to manage travel costs without losing control over policy and compliance.

• Simplicity: It removes the need to track every individual expense, which makes reporting easier for employees.
• Predictability: Employees know in advance how much they will receive, which helps them plan their spending.
• Efficiency: Finance teams benefit from reduced administrative work and faster approval processes.
• Control: Organizations can maintain consistent spending levels and reduce the risk of unexpected costs. Clear daily amounts or limits also support more transparent and compliant spending.

What are the risks and limitations of per diem?

Per diem also comes with trade-offs. Fixed daily rates may not always reflect actual costs, especially when prices fluctuate or when employees travel to unusually expensive locations. If rates are too low, employees may feel underfunded. If they are too high, organizations may lose cost efficiency.

There is also less visibility into actual spending when receipt requirements are reduced. That can make it harder to analyze detailed travel costs or identify policy gaps. For this reason, organizations should review rates regularly, communicate rules clearly, and pay close attention to local compliance and tax requirements.

What should a per diem policy include?

A strong per diem policy starts with clarity. Employees should know which expenses are covered, how rates are structured across locations, what happens on partial travel days, and how provided meals or special circumstances are handled.

Leading organizations also build in regular reviews. Annual rate checks, defined exceptions for high-cost cities, consistent rules across business units, and controlled flexibility where needed can all strengthen the policy. Regular audits help confirm that the rules are applied correctly and highlight opportunities for improvement.

When these practices are supported by automation and policy controls, per diem becomes easier to manage, easier to explain, and easier to scale across the organization.

How can organizations simplify per diem management?

Used well, per diem is a practical way to make business travel simpler, more predictable, and easier to govern.

By combining clear policies, appropriate rate structures, country-specific compliance, and automation, organizations can reduce administrative effort while giving employees a smoother travel experience.

For finance teams, travel managers, and employees alike, that balance of simplicity and control is what makes per diem a valuable part of modern travel and expense management.