Ninth Circuit Holds that “Cash-in-lieu” of Health Benefits Must Be Included in Calculating Employees’ Regular Rates of Pay for Overtime

June 17, 2016 | Bulletin No. 1274001.1

On June 2, 2016, a three judge panel for the Ninth Circuit issued a decision in Flores v. City of San Gabriel in which the Court held that the Fair Labor Standards Act ("FLSA") required the City to include cash payments provided to employees in lieu of health benefits in the calculation for an employee's regular rate of pay for purposes of calculating overtime.

Background

Under the FLSA, overtime must be compensated at a rate that is at least one-and one-half times the employee's regular rate of pay. (29 U.S.C. section 207(a)(1).) The regular rate of pay includes all forms of compensation paid to an employee unless specifically excluded by law. (29 U.S.C. sec. 207(e).) 

In the Flores, et al v. City of San Gabriel suit, the City of San Gabriel provided flexible benefits plans to its employees and allowed them to choose medical, dental and vision benefits from those plans. If an employee did not purchase benefits through the flexible benefits plan and could provide proof of alternative insurance coverage, the employee was provided the unused portion of the monetary amount otherwise provided by the City to purchase coverage. The monetary amount provided to the employees who did not elect coverage was referred to as "cash in lieu." Between 2009 and 2012, of the total amount set aside for employee benefits, between 42% and 47% of the money was paid directly to employees as cash in lieu. The monthly amount paid to employees who did not elect health coverage through the City ranged between $1,000 and $1,300 per month, approximately.

The cash in lieu was classified by the City as "benefits" and not "compensation." Therefore, the City excluded the additional money from the calculation of the employee's regular rate of pay for overtime. A group of the City's police officers challenged the City's decision to exclude the cash in lieu from the regular rate of pay. Additionally, the officers claimed the City did not establish a partial overtime exemption under the FLSA's 207(k) exemption for law enforcement and fire personnel. The officers alleged that the City's conduct was willful and therefore, the three year statute of limitations applied. Further, the officers sought liquidated damages, double the amount owed, available under the FLSA for the City's failure to include the cash in lieu when it calculated the employees' regular rates of pay. The City argued that the cash in lieu should not be considered compensation because the amount was not tied in any way to how much the employee actually worked. Rather, the cash in lieu was more akin to payments for leave and expenses which are specifically excluded from the regular rate of pay by law.

Holding

The Court disagreed with the City and determined the cash in lieu should be considered as compensation. The Court also determined that while an employer lawfully can exclude money irrevocably deposited into a third party bona fide benefit plan for health insurance, retirement or similar benefits, pursuant to section 207(e)(4), because this money was provided to the employees directly through payroll, the benefits exclusion did not apply. The Court noted that the Department of Labor's ("DOL") interpretations provide that incidental pay outs as part of a benefits plan would not be need to be included as compensation for purposes of determining an employee's regular rate of pay. (See C.F.R. sec. 778.215) The DOL had issued an opinion letter in 2003 that defined cash in lieu benefits as incidental so long as the cash in lieu did not exceed 20% of the employer's total contribution towards the benefits plan. The Court rejected the DOL's arbitrary 20% rule but nevertheless held that the City of San Gabriel's payments were not incidental considering they were equivalent to 42% to 47% of the City's total benefits contribution. The Court also found that the City's failure to include the cash in lieu as compensation for purposes of calculating the regular rate of pay was a "willful" violation and, as such, the three year statute of limitations applied.

The Court held in favor for the City that it could establish a 207(k) work period for its public safety employees without specifically referencing "207(k)," so long as the work period was established and regularly occurred.

Going Forward

If your agency provides cash in lieu payments to its employees who do not elect health coverage through their employer, you should evaluate your potential liability under the Court's decision above. It is noteworthy, however, that if your agency provides for overtime accrual pursuant to a MOU and those terms are in excess of what is provided for under the FLSA, those hours are not subject to this analysis. This application is limited to overtime accrued pursuant to the FLSA minimums only.

It is expected the City will petition for a rehearing of this decision and if the City's petition is granted, the effect of the three judge panel's decision will be stayed while an en banc panel of the Ninth Circuit re-hears the case.

For specific guidance on your agency's payroll practices as it relates to cash in lieu payments and this decision, please contact Kristianne T. Seargeant (kseargeant@kmtg.com or 916.321.4244).