Employers Must Include Cash-in-Lieu of Benefits in Calculating Regular Rate for Overtime Pay

06.17.2016

Ruling on an issue that had never been decided by any court in the country, the Ninth Circuit Court of Appeals held that an employer must include monetary payments made in lieu of benefits when calculating an employee’s regular rate of pay for purposes of determining overtime payments under the Fair Labor Standards Act (“FLSA”).  The court further held that under FLSA’s liquidated damages provision, the employer was liable for double the amount of unpaid overtime compensation covering the three years before the complaint was filed.  Flores v. City of San Gabriel (June 2, 2016, 14-56421) _ F.3d _ [2016 WL 3090782].  This ruling will significantly affect most employers operating in the Ninth Circuit, increasing the amount of overtime payments due their employees and opening the door to lawsuits seeking to recover ordinary and liquidated damages over a three-year period.

Facts
The City of San Gabriel (“City”) offers a Flexible Benefit Plan that provides employees with a set monetary amount to purchase various benefits.  Employees may decline to use these funds for medical benefits, receiving them instead as cash payments added to their paychecks.  The City did not include these cash-in-lieu of benefits payments in its determination of recipients’ regular rates of pay, and consequently did not incorporate them into its calculation of non-exempt employees’ overtime rates.

Fifteen current and former police officers sued the City, arguing the payments should have been included in calculating the officers’ regular rates of pay and overtime rates.  After the trial court ruled on the issues, the case went to the Ninth Circuit Court of Appeals.  

The Court of Appeals’ Analysis
First, the court acknowledged the case raised a question of first impression: whether the City properly excluded cash-in-lieu of benefits payments from regular rates of pay under FLSA section 207(e)(2), given that the payments are not tied to hours worked.  Section 207(e)(2) excludes from the regular rate of pay “payments made for occasional periods when no work is performed due to vacation, holiday, illness, failure of the employer to provide sufficient work, or other similar cause; reasonable payments for traveling expenses, or other expenses, incurred by an employee in the furtherance of his employer’s interests and properly reimbursable by the employer; and other similar payments to an employee which are not made as compensation for his hours of employment.” 

Relying on Department of Labor interpretive bulletins which found that Section 207(e)(2) did not exclude bonuses and room-and-board payments, the court determined the City’s payment scheme was commonly considered compensation, even without a direct relationship to the number of hours worked.  The court emphasized the question “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.”  It referred to its earlier ruling concerning payments made to supplement wages of disabled workers who performed lower-wage work than they had performed before their disability.  In that case, Local 246 Utility Workers Union of America v. Southern California Edison Co. (9th Cir. 1996) 83 F.3d 292, the court determined that the payments qualified as compensation for work and stated that “it makes no difference whether the supplemental payments are tied to a regular weekly wage or regular hourly wage.” Id at 295. 

The court also noted that the inclusion of a separate exemption specifically addressing benefits, Section 207(e)(4), indicated that Congress did not consider Section 207(e)(2) to already exempt payments related to benefits. 

Second, the Court of Appeals held that because the City’s cash-in-lieu of benefits payments were made directly to employees, they did not qualify under Section 207(e)(4), which excludes from the regular rate of pay “contributions irrevocably made by an employer to a trustee or third party pursuant to a bona fide plan for providing old-age, retirement, life, accident, or health insurance or similar benefits for employees.”  The Court further ruled that even if the City had made these payments directly to a trustee or third party, its flexible benefits plan did not qualify as a “bona fide plan.”  The court looked to the Department of Labor’s interpretation of this term in 29 C.F.R. section 778.215, which states that incidental payments to employees do not affect whether there is a bona fide plan under 207(e)(4).  Given that cash-in-lieu of benefits payments constituted 40 percent of the City’s payments under its plan, the court concluded they were not incidental and thus could not be excluded.

Third, the court found the City liable for liquidated damages. Section 216(b) of the FLSA requires employers that violate the statute to pay employees their unpaid overtime compensation plus “an additional equal amount as liquidated damages.”  Liquidated damages may be reduced or eliminated if the employer shows that it acted in good faith and had reasonable grounds to believe that its actions did not violate the Act.  The court held that neither exception applied.

Finally, the Court of Appeals held the City willfully violated the FLSA.  Under FLSA section 255(a), the statute’s two-year statute of limitations may be extended to three years if an employer’s violation is “willful.”  The court noted that a violation is willful if the employer is on notice of the FLSA’s requirements, yet takes no action to assure compliance.  The court found the City was aware of the FLSA’s mandates, as it distinguished between “premium” payments and “benefit” payments.  

Two of the Ninth Circuit judges signed a concurring opinion on the basis that “our willfulness case law in the context of the FLSA statute of limitations is off track.”  Using a phrase that might amuse Game of Thrones fans, the concurring opinion stated that by finding a willful violation whenever the employer knew the FLSA “was in the picture,” the majority opinion “comes very close to a qyburnian resurrection” of a standard that a Supreme Court decision had made defunct.

Conclusion
The potential impact of this decision promises to be dramatic.  Employers may need to immediately add cash-in-lieu of benefits in their calculations of overtime payments for non-exempt employees, so as to avoid claims for double damages for a three-year period.  We anticipate the City may file a petition for rehearing with the Ninth Circuit Court of Appeals and/or a petition for certiorari with the United States Supreme Court, so this may not be the last word on this issue.