On June 2, 2016, the Ninth Circuit Court of Appeals, in Flores v. City of San Gabriel, held that the City of San Gabriel willfully violated the Fair Labor Standards Act (FLSA) by failing to include cash payments to police officers for unused medical benefits allowances when calculating their regular rate of pay, which ultimately resulted in a lower overtime rate and an underpayment of overtime.
In Flores, the City provided a flexible benefits plan to its employees under which the City furnished a designated monetary amount to each employee to be used for purchasing medical, vision, and dental benefits. While employees were required to use a portion of these funds to purchase vision and dental insurance, employees with access to alternative medical coverage (for example, through a spouse) could decline to use the remaining benefits and opt for a cash payment instead. The cash payment would then be added to the employee’s regular paycheck. The City did not consider the value of that cash payment when calculating the employees’ regular rate of pay and resulting overtime rate. A group of current and former officers sued, claiming they were underpaid for overtime hours worked because the cash provided to employees in lieu of benefits should have been used in calculating their overtime rate.
The primary issue was whether the City’s cash-in-lieu payments were properly excluded from the employees’ regular rate of pay. 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 under 29 U.S.C. § 207(e)(2) from the regular rate of pay as are payments for leave, travel expenses, and other reimbursable 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 rejected the City’s argument that its cash in lieu of benefit payments were properly excluded pursuant to § 207(e)(4) because the payments were paid directly to employees. Section 207(e)(4) excludes from the regular rate of pay “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.”
Note: This decision only affects those employers located in the Ninth Circuit. The Ninth Circuit includes Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, Washington, and Guam.