Cash-in-Lieu of Benefits Payments Trigger Higher Overtime Pay
April 4, 2017 by Sarah Kanter
In a case that has far reaching implications for unions and workers, the Ninth Circuit ruled in Flores v. City of San Gabriel in June 2016, that when an employer calculates its employees’ “regular rate of pay” for overtime purposes under the Fair Labor Standards Act, it must include “cash in lieu of benefits” payments made to employees. Under the FLSA, an employer must pay its employees overtime compensation of one and one-half times the “regular rate of pay” for any hours worked in excess of forty in a seven-day work week. The “regular rate of pay” is defined as “all remuneration for employment paid to or on behalf of the employee” subject to a number of exclusions. The plaintiffs brought suit against the city in this case, arguing that the city violated the FLSA by not including the cash-in-lieu of benefits they received in their regular rate of pay.
San Gabriel provides a fund to each employee for the purchase of medical, dental and vision benefits. The city allows an employee to forego purchasing medical benefits if the employee has alternate coverage (such as through a spouse’s employment). In that situation, the employee will receive the unused portion of his/her fund in a cash payment that is added to the employee’s regular paycheck (known as a “cash-in-lieu of benefit”). San Gabriel excluded these cash-in-lieu of benefits payments from its calculations of its employees’ “regular rate of pay” for FLSA overtime purposes.
The city argued that its cash-in-lieu of benefits payments should be excluded from the employees’ regular rate of pay because while the payments were “compensation,” they were not tied to the number of “hours worked” by the employee. The Court rejected the city’s argument relying on Department of Labor regulations holding payments not directly attributable to any particular hours worked, but clearly understood to be compensation for services, are not excluded. Since the cash-in-lieu of payments were compensation for services, the Court ruled that the payments were improperly excluded from the “regular rate of pay.”
The Ninth Circuit’s decision has been appealed to the U.S. Supreme Court, but in the meantime, California employers are at risk if they do not follow the Ninth Circuit’s ruling. Not surprisingly, the decision has resulted in employers immediately seeking to end and/or modify their cash-in-lieu of benefits offered to employees. Please contact our office with any questions regarding this case, or for help negotiating with an employer over this issue.
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