My employer has recently started taxing my per diem. Can they do that?

Depends on the labour laws in your area, but as a rule I don't believe so. When I got perdiem it wasn't taxed. The way that it was looked at was that when you were away there are costs incurred that you can't have control over, food, laundry, having someone come in a feed your cat, or the neighborhood kid coming in to shovel your walk in the winter. It isn't a wage but an allowance because they're putting you out.

Talk to your local government and see if it is legal, and then fire back at your company.

Let's step back and take a breath.

Per diem CAN become taxable if it is for a job that exceeds a year in length, because then, in the eyes of the IRS, the job is no longer temporary in nature and the per diem, which is supposed to reimburse the employee for expenses incurred on a temporary job, is just considered to be added taxable compensation.