Decision: In Flores v. City of San Gabriel, the plaintiff filed a putative collective action under the Fair Labor Standards Act (FLSA) alleging that the city’s police officers were underpaid for overtime hours worked because the city excluded cash payments made to employees in lieu of benefits from their regular rate of pay used to calculate overtime. Specifically, the city offered police officers a flexible benefits plan under which the city furnished employees a designated monetary amount for the purchase of medical, vision and dental benefits. Employees were required to use a portion of these funds to purchase vision and dental insurance but could decline to use the remaining funds for health insurance upon proof that the employee had alternate medical coverage. Instead, the employee could opt to receive the unused portion of his or her benefits allotment as a cash payment added to the employee’s regular paycheck. The city did not consider the value of the cash payment when calculating the employee’s regular rate of pay for overtime.
On a matter of first impression, the Ninth Circuit found that cash-in-lieu of benefits payments should be considered compensation and included in the regular rate of pay calculation. The court further noted that the simple fact that the cash-in-lieu of benefits payments were not tied to hours worked or the amount of services provided did not mean they were not considered compensation for employment. The panel further found that the city’s violation of the FLSA was willful because the city has taken no affirmative steps to ensure that its initial designation of its cash-in-lieu payments as benefits complied with the act.
Impact: In the wake of the Ninth Circuit’s opinion, employers who provide flexible benefits plans should review their policies to ensure that they are correctly including “cash-in-lieu of benefits” payments when they calculate the regular rate of pay for non-exempt employees. From an economic perspective, the Ninth Circuit’s decision is significant because increases in an employee’s regular rate of pay will increase the employee’s compensation for overtime hours worked. Some employers may decide to eliminate the “cash-in-lieu of benefits” option as a financial and risk control measure.