On June 2, 2016, the 9th Circuit Court of Appeals found that the City of San Gabriel violated the Fair Labor Standards Act (FLSA) when it failed to include payments of unused portions of police officers’ medical, vision, and dental benefit allowances in calculating the employees’ regular rate of pay. Flores v. City of San Gabriel, No. 14-56421, 2016 WL 3090782, at *2-3 (9th Cir. June 2, 2016). This miscalculation resulted in a lower overtime rate and thus an underpayment of overtime compensation. The Court found that the officers were entitled to liquidated damages for the City's FLSA violations.
The City’s Flexible Benefits Plan provided a designated monetary amount to each employee for the purchase of medical, vision, and dental benefits. All employees were required to use a portion of those funds to purchase vision and dental benefits; however the employee could refrain from purchasing medical benefits if that person provided proof of alternate medical coverage. Employees with alternative coverage would then receive the unused portion of the benefits allotment as a cash payment that would appear in the employee’s regular paycheck.
The City argued that its cash-in-lieu of benefits payments should have been excluded from its calculation of an employee’s regular rate of pay pursuant to § 207(e)(2). Section 207(e)(2) excludes the following 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.
The City stated that the cash-in-lieu of benefits should qualify as “benefits” since the payments are not compensation for hours worked by the employees. The Court disagreed, finding that the FLSA's inclusion of a separate exemption specifically addressing benefits, § 207(e)(4), would suggest that payments related to benefits would otherwise be considered compensation. Further, the Court found that the City took no affirmative steps to ensure that its initial designation of its benefits payments complied with the FLSA, resulting in a finding by the court that the City failed to establish that it acted in good faith in excluding those payments from its regular rate of pay, thus qualifying as willful violation of the act.
The lesson for employers is clear. Whenever a cash in lieu of benefits is paid to non-exempt employees, always determine if that payment alters the base wage for overtime purposes.