Why it matters

The U.S. Supreme Court denied certiorari in a case defining what constitutes “wages” to calculate overtime pay under the Fair Labor Standards Act, leaving in place the expansive interpretation adopted by the U.S. Court of Appeals for the Ninth Circuit. The city of San Gabriel, California, had a policy of permitting workers to receive “cash-in-lieu” payments when they purchased less medical insurance coverage (because of coverage under a spouse’s plan, for example). But the city did not include these payments when determining a worker’s regular rate of pay for purposes of calculating overtime under the FLSA, triggering a collective action. After a split decision from a district court, the Ninth Circuit sided with the employees. Even though the “in-lieu” amount was not a payment based on the number of hours worked, it was still compensation that must be included in the overtime calculation, the panel wrote, relying in part on the U.S. Department of Labor’s interpretation of the statute. The city filed a writ of certiorari, but the justices denied it without comment, leaving the Ninth Circuit’s opinion in place despite contrary authority from the Third, Sixth and Tenth Circuits, where the courts have adopted more narrow readings of what constitutes “wages.”

Detailed discussion

Pursuant to the FLSA, employers must pay premium overtime compensation of one and one-half times the regular rate of payment for any hours worked in excess of 40 in a seven-day workweek. The “regular rate” is defined as “all remuneration for employment paid to, or on behalf of, the employee,” subject to a number of exclusions in the statute.

The city of San Gabriel, CA, offered a Flexible Benefits Plan for its employees, furnishing a designated monetary amount to each employee for the purchase of medical, vision and dental benefits. If an employee elected to forgo benefits because of alternative coverage, the employee received the unused portion of that benefits allotment as a cash payment added to his or her regular paycheck.

A group of current and former police officers employed by the city brought suit under the FLSA, alleging that the city failed to include payments of unused portions of their benefits allowances when calculating their regular rate of pay, resulting in a lower overtime rate and underpayment of overtime compensation. The plaintiffs also asserted that the city’s violation of the FLSA was willful, entitling them to a three-year statute of limitations and liquidated damages.

The employer responded that its cash-in-lieu of benefits payments were properly excluded from the regular rate of pay based on two statutory exclusions, denying that the alleged violations were willful.

A federal district court issued a split decision on the parties’ cross motions for summary judgment, but the U.S. Court of Appeals for the Ninth Circuit sided with the employees. Emphasizing that the FLSA is construed liberally in favor of employees—with exceptions construed narrowly against employers—the panel held that the payments should be included in the plaintiffs’ regular rate of pay.

An exclusion found at Section 207(e)(2) of the FLSA provides that payments made for vacation, holiday, illness “and other similar payments to an employee which are not made as compensation for his hours of employment” did not apply to the city’s payments, the court said, relying in part on the U.S. Department of Labor’s interpretation of the phrase.

Under the DOL’s regulations, “a payment may not be excluded from the regular rate of pay pursuant to Section 207(e)(2) if it is generally understood as compensation for work, even though the payment is not directly tied to specific hours worked by an employee,” the court stated. Ninth Circuit precedent backed this reading of the exclusion, as “the question of whether a particular payment falls within the ‘other similar payments’ clause does not turn on whether the payment is tied to an hourly wage, but instead turns on whether the payment is a form of compensation for performing work.”

The city’s payments are properly considered compensation for work, the panel found, and distinguishable from payments for nonworking time or reimbursement of expenses.

A second exclusion—found at Section 207(e)(4) for “contributions irrevocably made by an employer to a trustee or third person pursuant to a bona fide plan for providing old-age, retirement, life, accident or health insurance or similar benefits for employees”—was also inapplicable, the Ninth Circuit said. Not only did the city pay the unused benefits directly to its employees and not to a trustee or third person, but the Flexible Benefits Plan did not meet the definition of a “bona fide plan” under the statute.

The court did find that the employer was entitled to a partial overtime exemption for law enforcement officers pursuant to Section 207(k), but affirmed the district court’s ruling that the alleged violations were willful, permitting the plaintiffs to recover for an additional year and entitling them to liquidated damages.

Although the city argued that it properly evaluated the FLSA to exclude the benefits from the regular rate of pay, that classification took place in 2003 and was not reviewed, the panel said. An employer that fails to take the steps necessary to ensure its practices comply with the FLSA, and that offers no evidence that it “actively endeavored” to ensure such compliance, fails to dodge a finding of willfulness under the statute, according to the court.

Even the lack of case authority on the proper treatment of cash-in-lieu of benefits payments under the statute in the circuit did not help the employer, the court stated, particularly as the defendant “put forth no evidence that it ever looked to see whether such authority existed.”

In its writ of certiorari to the U.S. Supreme Court, the city argued that the Ninth Circuit’s interpretation of the exclusions created a circuit split with contrary authority from the Third, Sixth and Tenth Circuits. The employer also noted that an affirmation of the Ninth Circuit decision would lead employers to eliminate this type of cash-out plan, to the detriment of employees.

The justices were not persuaded, denying cert without comment and letting the Ninth Circuit opinion stand.

To read the Supreme Court’s order list denying cert, click here.

To read the Ninth Circuit opinion in Flores v. City of San Gabriel, click here.