Employer's Cash-in-Lieu of Benefits Payments Must Be Included in Regular Rate of Pay Under FLSA: Ninth Circuit | Practical Law

Employer's Cash-in-Lieu of Benefits Payments Must Be Included in Regular Rate of Pay Under FLSA: Ninth Circuit | Practical Law

In Flores v. City of San Gabriel, the US Court of Appeals for the Ninth Circuit held that payments of unused portions of employees' benefits allowances must be included when calculating their regular rate of pay under the Fair Labor Standards Act (FLSA).

Employer's Cash-in-Lieu of Benefits Payments Must Be Included in Regular Rate of Pay Under FLSA: Ninth Circuit

by Practical Law Labor & Employment
Published on 14 Jun 2016 • USA (National/Federal)
In Flores v. City of San Gabriel, the US Court of Appeals for the Ninth Circuit held that payments of unused portions of employees' benefits allowances must be included when calculating their regular rate of pay under the Fair Labor Standards Act (FLSA).
On June 2, 2016, in Flores v. City of San Gabriel, the US Court of Appeals for the Ninth Circuit held in a matter of first impression that cash payments to employees for unused portions of the employees' benefits allowance must be included when calculating their regular rate of pay under the FLSA. The Ninth Circuit found that the city's police officers were due overtime pay as a result of the miscalculation and that the city's failure to include the benefit payments was willful. ( (Jun. 2, 2016).)

Background

The City of San Gabriel (City) had a benefits plan under which it provided money to its employees to purchase health, dental and vision insurance coverage (benefits allowance). Under the plan the City's employees:
  • Were required to use a portion of the benefits allowance to purchase dental and vision coverage.
  • Could elect to forego using the remainder of the benefits allowance to purchase health insurance, if they could establish they had alternate health insurance coverage. If foregoing health coverage, employees were entitled to receive the unused portion of their benefits allowance as a cash payment in their paychecks (cash-in-lieu of benefits payments).
The City considered these cash-in-lieu of benefits payments to be benefits that were excluded from employees' regular pay. As a result, the City did not factor the cash-in-lieu of benefits payments when calculating employees' regular pay rate and resulting overtime rate.
In 2012, current and former City police officers filed a lawsuit in US district court alleging that:
  • The City violated the FLSA by failing to include payments of unused portions of the officers' benefits allowances when calculating their regular rate of pay, resulting in them being denied overtime pay when they worked more than 80 hours in a 14-day period. (The 80-hour, 14-day work period was based on both City policy and an agreement between the police officers and the City.)
  • The City's violation was willful, and therefore a three-year statute of limitations should apply.
Both the City and the police officers moved for partial summary judgment. The district court granted partial summary judgment to the police officers, ruling that:
  • The cash-in-lieu of benefits payments were improperly excluded from the police officers' regular rate of pay, except where the City made payments to trustees or third-parties.
  • The City's FLSA violation was not willful and therefore a two-year statute of limitations applied.
  • The City qualified for a partial FLSA overtime exemption and its liability was limited to the police officers' overtime hours based on the 80-hour, 14-day work period.
The City appealed the portion of the district court's decision regarding the cash-in-lieu of benefits payments, arguing that the payments in-lieu of benefits should not be included in employees' regular rate of pay because the payments were not tied to the police officers' hours worked or the amount of services the police officers provided. The police officers cross-appealed on the willfulness and partial overtime exemption issues.

Outcome

The Ninth Circuit:
  • Affirmed the district court's decision in part and reversed the decision in part.
  • Held that:
    • the cash-in-lieu of benefits payments were required to be included in the City's calculation of the employees' regular rate of pay under Section 207(e)(2) of the FLSA because the payments were understood as compensation for the police officers' work;
    • the police officers were entitled to unpaid overtime as a result of the City's miscalculation of their regular rate and resulting overtime rate;
    • the City's failure to include the cash-in-lieu of benefits payments in the police officers' regular rate of pay was willful because the City took no affirmative steps to ensure that it was complying with the FLSA (and therefore the police officers' overtime claims were subject to a three-year statute of limitations); and
    • the City qualified for a partial overtime exemption under Section 207(k) of the FLSA, and therefore the police officers' were entitled to overtime pay based on the City's 80-hour, 14-day work period.

Cash-in-Lieu of Benefits Payments

The Ninth Circuit noted that:
  • The FLSA excludes certain types of payments from an employee's regular rate of pay, including payments:
    • when the employee does not perform work because of, among other things, vacation, holiday, or illness;
    • for reasonable traveling expenses or other expenses an employee incurs in furtherance of the employer's interests; and
    • referred to as "other similar payments" an employer makes to an employee which are not made as compensation for the employee's hours of employment.
    (29 U.S.C. § 207(e)(2).)
  • The DOL's FLSA regulations interpreting the "other similar payments" language of Section 207(e)(2) provide that:
    • employers make various types of "miscellaneous payments" to employees which make it not worthwhile to list them;
    • the language was clearly not intended to exclude from the regular rate payments like bonuses and lodging that are not directly connected to work hours but are understood to be compensation for an employee's services; and
    • examples of properly-excluded "other similar payments" include moneys paid to an employee for car rental, loans advanced to an employee, and employee conveniences such as the cost for a parking space, restroom, locker, on-the-job medical care and recreational facilities.
    (29 C.F.R. § 778.224(a); 29 C.F.R.§ 778.224(b).)
  • It views Section 778.224(a) as interpreting Section 207(e)(2) to mean that a payment may not be excluded from the employee's regular rate if it is "generally understood as compensation for work."
  • The City's position that the payments in-lieu of benefits should not be included in employees' regular rate of pay because it was not tied to hours worked or the amount of services the police officers provided was contrary to the DOL's interpretation of Section 207(e)(2).
  • The Ninth Circuit previously interpreted the "other similar payments" language of Section 207(e)(2) to focus on whether the payment at issue was compensation for work (Local 246 Utility Workers Union of Am. v. S. Cal. Edison Co., 83 F.3d 292, 295 (9th Cir. 1996)).
  • The Third Circuit has viewed Section 207(e)(2) more in line with the position urged by the City, holding that payments made to employees in lieu of a wage increase to induce ratification of a collective bargaining agreement (CBA) were properly excluded under § 207(e)(2). However, the Third Circuit acknowledged that "other similar payments" can include payments that are not tied directly to work hours. (Minizza v. Stone Container Corp. Corrugated Container Division East Plant, 842 F.2d 1456, 1461 (3d Cir. 1988).)
  • The payments in Minizza would have been excludable anyway under Section 207(e)(2) because they were intended in part to get employees to ratify the CBA and not as compensation for work performed.
  • A separate FLSA exemption specifically addressing benefits suggests that:
    • payments related to benefits would be considered compensation under Section 207(e)(2); and
    • Congress did not intend the "other similar payments" language to exempt payments related to benefits.
    (29 U.S.C. § 207(e)(4); Reich v. Interstate Brands Corp., 57 F.3d 574, 578 (7th Cir. 1995).)
  • The Section 207(e)(4) exemption excluding from employees' regular pay rate an employer's contributions to a trustee or third party for a bona fide retirement or similar plan did not apply because the City pays the unused benefits directly to employees and not to a trustee or third party.

Willfulness of FLSA Violation

The Ninth Circuit found that the City's FLSA violation of not including the cash-in-lieu of benefits payments in the police officers' regular rate of pay was willful and required a three-year statute of limitations for police officers' claims because evidence showed that the City:
Judge Owens issued a brief concurrence (joined by Judge Trott) agreeing entirely with the majority opinion written by Judge Davis, but noting that the circuit's case law addressing willfulness under the FLSA is "off-track."

FLSA Section 207(k) Exemption

The Ninth Circuit found that the Section 207(k) partial overtime exemption that allows employees engaged in fire protection or law enforcement to be paid overtime on a "work period" basis instead of a regular 40-hour workweek basis applied because:

Practical Implications

The Ninth Circuit's decision in Flores holds, in a matter of first impression, that cash-in-lieu of benefits payments are required to be included in the calculation of employees' regular pay rate. Employers within the Ninth Circuit that are not factoring in similar types of payments when calculating their employees' pay rate should change their practices, particularly with employees who are working overtime. The decision also illustrates the need for employers to take affirmative steps to investigate and analyze whether certain types of special payments to employees should be included in their regular pay rate. Failure to do so could result in magnifying employers' overtime liability under the FLSA.