Cash in Lieu of Benefits Must Be Included in Overtime Calculations, 9th Cir. Rules
Author: Michael Cardman, XpertHR Legal Editor
July 12, 2016
Employers that provide cash payments to employees who have health care coverage through a spouse or other means may find themselves thinking of the old adage that "no good deed goes unpunished" in the wake of a new appeals court ruling.
In Flores v. City of San Gabriel, the 9th Circuit Court of Appeals held that such payments can result in higher overtime payments.
Under the Fair Labor Standards Act (FLSA), nonexempt employees must be paid one and one-half times their regular rate of pay for all overtime hours (usually those beyond 40 in a workweek).
The regular rate of pay must include not just wages but also other forms of compensation, such as commissions, most bonuses, company cars and corporate housing.
There are, however, some narrow exceptions to this rule, including vacation pay, sick pay, travel expense reimbursements and other similar payments to employees that are not made as compensation for their hours of employment.
The employer in the Flores case offered a "flexible benefits plan," through which it provided employees a certain amount of money with which to buy medical, dental and vision benefits. The employees were required to purchase dental and vision benefits, but could decline to purchase medical benefits if they could prove they had medical coverage through a spouse or some other alternative means. Employees who declined medical benefits through the city's plan received the unused portion of their benefits allotment as a cash payment -- which ranged in size from $1,037 in 2009 to $1,305 in 2012 -- added to their paychecks.
Some of the employees sued their employer, claiming these payments should have been included in the regular rate of pay when calculating their overtime.
The employer claimed these payments could be excluded from the regular rate of pay because they were not tied to the hours the employees worked or the amount of services they performed, and thus qualified as other similar payments.
The 9th Circuit rejected that argument. It noted that a US Department of Labor (DOL) regulation offered the following as examples of other similar payments:
- Sums paid to an employee for the rental of his truck or car;
- Loans or advances made by the employer to the employee; and
- The cost to the employer of conveniences furnished to the employee such as parking space, restrooms, lockers, on-the-job medical care and recreational facilities.
Under this regulation, the 9th Circuit held, a payment may not be excluded from the regular rate of pay if it is "generally understood as compensation for work, even though the payment is not directly tied to specific hours worked by an employee."
The 9th Circuit also rejected the employer's argument that the cash-in-lieu-of-benefits payments were covered by a clause in the FLSA statute that excludes from the regular rate any "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" because the payments were made directly to employees and not to a trustee or third party.
The ruling will discourage employers from having similar flexible benefits programs, the employer had warned. But the 9th Circuit said its hands were tied, and that such arguments are better made to Congress or the DOL.
The Flores ruling applies to employers operating in Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon and Washington.