Rate For Overtime Must Include Cash-In-Lieu Payments

Rate For Overtime Must Include Cash-In-Lieu Payments

On June 2, 2016, the Ninth Circuit Court of Appeal issued an important labor law ruling in Flores v. City of San Gabriel. [1] In a thirty-page Opinion, the Ninth Circuit panel sided with current and former police officers employed by the City of San Gabriel, California (“City”), concluding that, “the City’s payment of unused benefits must be included in the regular rate of pay and thus in the calculation of the overtime rate for its police officers as well.” The panel conducted a deep dive into Fair Labor Standards Act (“FLSA”) sections 207(e) and (k), which discuss items that may be excluded from regular rate of pay calculations and the partial overtime exemption, respectively. The panel also found that Plaintiffs were entitled to liquidated damages in light of the City’s “paltry evidence” of good faith action in light of the heavy statutory burden, and that the three-year statute of limitations applied due to the City’s “willful” violation of the FLSA. Overall, this case of first impression warrants close attention from employers providing Flexible Benefit Plans to their employees. 

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Background Facts:

In a benefit scenario familiar to many employers, the City provided a Flexible Benefits Plan (“Flex Plan”) to its employees. Under the Flex Plan, an employee could purchase medical, vision, and dental benefits, or, in the event the employee had alternative medical coverage and wished to forego the medical benefits, the employee could receive a cash payment. For the time period of 2009-2011, roughly 40 percent of the total Flex Plan paid to or on behalf of City employees was paid out as “cash-in-lieu of benefits.”

For over a decade, the City paid overtime to its police officers when they worked more than eighty hours in a fourteen-day “work week.” Critically, the City excluded cash-in-lieu of benefits payments from an employee’s regular rate and thus, did not include those cash payments into the City’s calculation of overtime.

Procedural Background:

In 2012, Plaintiffs filed their FLSA lawsuit seeking, among other things, unpaid overtime and liquidated damages equivalent to the amount of unpaid overtime under FLSA section 216(b). On summary judgment, the district court ruled that the City’s cash-in-lieu of benefits payments were improperly excluded from the calculation of the regular rate of pay. The district court also ruled that because the City’s violation was not willful, the two-year, not three-year, statute of limitations applied to Plaintiffs’ claims. The district court also found that the FLSA section 207(k) partial overtime exemption applied to the City and denied to award Plaintiffs liquidated damages. The City and Plaintiffs both appealed.

Holdings and Findings:

On de novo review, the panel examined the question of first impression presented by the case: did cash-in-lieu payments not tied to hours worked or amount of service provided by Plaintiffs make them excludable under section 207(e)(2)? The panel analyzed FLSA section 207(e)(2)’s “other similar payments” language in detail, looking both at cases from other districts as well as Department of Labor’s interpretation of the statute. The panel emphasized looking, “at whether the payment at issue is generally understood as compensation to the employee, not whether the payment is tied to specific hours worked by the employee.” The panel focused its inquiry on, “whether a given payment is properly characterized as compensation, regardless of whether the payment is specifically tied to the hours an employee works, when determining whether that payment falls under section 207(e)(2)’s “other similar payments” clause.” Ultimately, the panel concluded that the city failed to carry its heavy burden to demonstrate that cash-in-lieu of benefits payments “plainly and unmistakably” constituted excludable payments under the statute.

Final Thoughts:

Many employers offer Flex Plans similar to those reviewed by the panel in Flores. Even where employers offer such “gold-plated” Flexible Benefit Plans with cash-in-lieu options, compliance with the FLSA presents major challenges. The key take away is not just that cash-in-lieu benefits must be accounted for in calculating overtime payments under the FLSA, but that in the ever-changing Labor Law arena, employers would be wise to closely consult with legal counsel in crafting compliant plans. In what could be fairly characterized as a technical violation of the statute, employers are exposed to millions in not just damages to account for unpaid overtime, but millions more in liquidated damages for a “willful” violation. As the Ninth Circuit pointed out, simply consulting with an internal Human Resources department will not be enough to demonstrate an employer acted in good faith.

Contributor:  Darrell P. White, Attorney at Law  |  Weintraub Tobin

[1] This article is intended to summarize the Opinion for ease of reading. It is not intended to and cannot capture the full 30-page Opinion in detail. The Opinion may be read, in its entirety, here: https://cdn.ca9.uscourts.gov/datastore/opinions/2016/06/02/14-56421.pdf