On Thursday, June 2, 2016, the Ninth Circuit issued a long-awaited decision in a case called Flores v. City of San Gabriel, which involved a group of police officers who sued their City employer for three years of unpaid overtime and liquidated damages under the Fair Labor Standards Act. The primary issue on appeal was whether the FLSA required the City to include cash payments made in lieu of health benefits into its regular rate calculation for overtime pay purposes. Four years after the lawsuit was filed, the Ninth Circuit has now held that such payments must be included in the regular rate for overtime purposes under the FLSA.
Although highly-technical and an issue of first impression for the Ninth Circuit, the Flores decision may have far-ranging and significant impacts on the way your agency compensates employees and provides benefits.
Under the FLSA, overtime hours must be compensated at a rate that is at least one-and-a-half times the employee’s hourly “regular rate.” (29 U.S.C. sec. 207(a)(1).) The FLSA “regular rate” is the hourly rate equivalent to what the employee was actually paid per hour for the normal, non-overtime workweek for which s/he is employed. (29 C.F.R. sec. 778.108, citing Walling v. Youngerman-Reynolds Hardwood (1945) 325 U.S. 419.) Generally speaking, all forms of remuneration or compensation for employment paid to an employee are included in the regular rate except for certain specifically excluded payments. (29 U.S.C. sec. 207(e).)
The Flores Facts
The City of San Gabriel provided a “Flexible Benefits Plan” to employees under which a designated monetary amount was furnished to each employee for the purchase of medical, vision, and dental benefits. Although employees were required to use the Plan’s funds to purchase vision and dental benefits, they could decline the purchase of medical benefits upon proof of alternate medical coverage. An employee that elected to forgo medical benefits received the unused portion of the designated monetary amount as a cash payment added as a separate line item in the employee’s regular paycheck. This cash payment is referred to as “cash in lieu.” Of the total amount the City paid on behalf of its employees pursuant to its Flexible Benefits Plan, between 42% and 47% of that amount was paid directly to employees as cash in lieu benefits each year. Between 2009 and 2012, the monthly payment paid to employees who declined medical coverage was between approximately $1,000 and $1,300 per month.
The Issue Raised by the Officers
Since enacting the Flexible Benefits Plan many years ago, the City treated the cash in lieu payments as benefits, not compensation, and thus excluded the payments from employees’ regular rate of pay for overtime purposes. This meant the cash in lieu payments were not incorporated into the City’s calculation of employees’ FLSA overtime rate. In 2012, a small group of the City’s police officers brought suit, alleging the cash in lieu payments were compensation for hours worked that must be included in the City’s regular rate calculation for overtime payments. The officers also alleged the City failed to legally establish a partial overtime exemption for law enforcement (known as the 207(k) work period), and that the City’s failure to include the cash in lieu payments was willful, entitling them to three years of back pay. The officers also sought liquidated damages (i.e., double damages, the statutorily imposed remedy for an FLSA violation).
The Ninth Circuit’s Holding On Inclusion of Cash In Lieu Benefits in the Regular Rate
The primary issue on appeal was whether the City’s cash in lieu payments were properly excluded from the City’s regular rate. In its June 2, 2016 opinion, the Ninth Circuit held that cash payments made to employees in lieu of health benefits must be included in the hourly “regular rate” used to compensate employees for overtime hours worked. The City argued that the cash in lieu payments were not payments made as compensation for hours of employment and were not tied to the amount of work performed for the employer, and therefore were excludable from the regular rate of pay as are payments for leave used and expenses. The Ninth Circuit disagreed, finding the payments were “compensation for work” even if the payments were not specifically tied to time worked for the employer.
The Ninth Circuit also held that the cash in lieu payments could not be excluded from the regular rate as payments made irrevocably to a third party pursuant to a bona fide benefit plan for health insurance, retirement, or similar benefits pursuant to section 207(e)(4) of the FLSA since those payments were paid out directly to employees. Thus, those payments must be added into the employee’s regular rate of pay for the time period that they cover for purposes of determining the employee’s FLSA overtime rate.
Finally, the DOL interpretations state that a benefits plan can only pay out an incidental part of its benefits as cash to be considered a bona fide benefits plan. (29 C.F.R. sec. 778.215.) In 2003, the DOL issued an opinion letter that defined cash in lieu benefits as “incidental” if they amount to no more than 20% of the employer’s total contribution to the benefit plan. The Ninth Circuit rejected the DOL’s 20% rule as unpersuasive, but nevertheless held that the City’s cash in lieu payments to employees were not incidental as they amounted to too great of a percentage of the City’s total benefits contribution (42-47%). Since the cash in lieu payments were not “incidental,” the plan does not qualify as a bona fide plan under section 778.215. Thus, the City must also include all amounts that it paid into the flexible benefits plan for employees in their regular rate of pay, not just the cash in lieu payments. The Ninth Circuit acknowledged that this decision could force employers to discontinue cash in lieu plans, but stated that is a policy decision for Congress or the DOL – not the courts – to address.
Other Holdings of the Decision
- The Ninth Circuit affirmed that a City may establish a 207(k) work period for its public safety employees without specifically referencing the term “207(k),” as long as the work period is otherwise established and regularly recurs.
- The fact that the City’s payroll department consulted the human resources department to categorize the cash in lieu payments as a “benefit” instead of compensation was insufficient to establish the City’s good faith defense to liquidated damages.
- The officers proved the City’s exclusion of the cash in lieu payments was “willful” under the FLSA, entitling the officers to three years of back overtime pay (rather than the standard two-year period) because the City did not take affirmative steps to determine whether the payments should be included in the regular rate of pay. In an unusual concurring opinion, a majority of the panel noted that the willfulness standard adopted by the Ninth Circuit in Alvarez v. IBP, Inc. in 2003 is “off track” with the standard for willfulness previously established by the Supreme Court. However, the judges felt compelled to find willfulness based solely on the Alvarez decision.
If your agency provides cash payments to employees who opt-out of a health insurance plan, your agency should carefully evaluate the impact of Flores on payroll practices and FLSA liability. This decision could require either the cash in lieu amount or all plan benefits to be included in employees’ regular rate of pay for FLSA overtime purposes. Many agencies provide contractual overtime in excess of FLSA minimum overtime requirements, such as overtime for working beyond scheduled hours in a workday (as opposed to overtime for working more than 40 hours in a week). It is important to remember that the requirement to include cash in lieu or benefit plan amounts in the regular rate of pay only applies to FLSA overtime hours, not contractual overtime hours. Finally, the holdings on good faith and willfulness reiterate the importance of conducting and documenting regular reviews of all aspects of FLSA compliance for your agency.
Employers who offer cash-in-lieu may also face potential penalties under the Patient Protection and Affordable Care Act. For more information on this topic, see our article here .