California Labor &
Employment Law Blog

Jun. 7 2016

No Good Deed Goes Unpunished – Employer Liable for Not Including Cash-in-Lieu of Benefits Payments in Regular Rate

Topics: Court Decisions, Employee Benefits, Wage & Hour Issues

In a case of first impression, the Ninth Circuit held last week in Flores v. City of San Gabriel that an employer was liable to a class of employees for underpaid overtime compensation stemming from the employer’s failure to include cash-in-lieu of benefits payments in its calculation of the regular rate for overtime purposes.  The City provided a Flexible Benefits Plan to its employees, whereby the City provided a designated monetary amount to employees each month for the employee to use to purchase and maintain medical, dental, and vision benefits.  Employees were required to use a portion of the funds for dental and vision benefits, but could decline to use the remainder of the funds for medical insurance upon proof that the employee had alternate medical coverage (e.g. through a spouse).  If an employee declined to use the funds to purchase medical benefits, the employee would receive the unused portion of the benefits allotment as a cash payment (of between $1,036 to $1,304 per month) added to his or her regular paycheck.  For the four years relevant to the lawsuit, between 42%-46% of the City’s total plan contributions were paid to employees as cash for unused benefits.  The City designated all of its plan payments as “benefits” that were excluded from its regular rate of pay calculations. 

A group of City employees filed a collective action under the FLSA, alleging that the City underpaid overtime compensation by failing to include the cash-in-lieu of benefits payments in caclulating the regular rate (thus resulting in a lower regular rate than if the payments had been included).  The trial judge ruled in favor of the plaintiffs that the City improperly excluded the cash-in-lieu of benefits payments from the regular rate of pay, except to the extent that such payments were made by the employer to trustees or third parties.  However, the judge ruled that the City’s violation was not willful, thereby limiting the period of recovery on the claim to two years (instead of three – for willful violations), and that plaintiffs were not entitled to liquidated damages.  Both sides appealed to the Ninth Circuit.

On the issue of whether the cash-in-lieu of benefits payments have to be included in the regular rate, the Ninth Circuit answered that question in the affirmative, albeit acknowledging that it was  a “close call” on an issue of first impression.  The Court rejected the City’s argument that the payments are properly excluded from the regular rate because the payments are not compensation for hours worked by the employees.  The City relied on Section 207(e)(2) of the FLSA, which 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.”  The City argued that its cash-in-lieu of benefits payments fell under this last category of payments that the FLSA allows to be excluded from the regular rate.   Rejecting this argument, the Ninth Circuit relied on a Department of Labor (“DOL”) interpretation of this provision suggesting that the “similar payments” must be similar in kind to the other categories of payments specified in the statute as being properly excluded from the regular rate (such as payments for non-working time like vacation or sick time, or other types of expense reimbursement).  According to the Ninth Circuit, the key issue is determining whether the payments are “compensation for work” generally and, if so, they must be included in the regular rate.  The Ninth Circuit held that the City’s cash-in-lieu of benefits payments were compensation for work (thereby requiring inclusion in the regular rate) and were not like other types of payments for non-working time or expense reimbursement that properly may be excluded from the regular rate. 

The Ninth Circuit also held that the payments could not be excluded from the regular rate under an alternate provision of the FLSA (section 207(e)(4)), which excludes from the regular rate payments made by an employer to a third party or trustee pursuant to a “bona fide plan” for employee benefits.  The Court held that because the City’s cash-in-lieu of benefits payments were made directly to its employees and not to a trustee or third party, the section 207(e)(4) exclusion plainly did not apply.  The Ninth Circuit noted that the DOL has interpreted section 207(e)(4) to allow for “incidental” cash payments made to an employee pursuant to a bona fide plan for providing employee benefits (see 29 CFR 778.215) but nonetheless held that the City’s plan does not qualify as a “bona fide plan” for providing benefits.  The Court cited a DOL opinion letter suggesting that the cash payments cannot be deemed “incidental” if they exceed 20% of the total plan contributions (here the cash payments were in excess of 40% of the total plan contributions), but refused to follow the DOL opinion letter, finding it “unpersuasive.”  Even without reliance on the DOL opinion letter, however, the Court still found that the City’s plan was not a bona fide benefit plan because more than 40% of the plan was paid as cash to employees who declined medical benefits.  Because only a “bare majority” of the plan was actually used for the purpose of providing benefits to employees, the Court held (without any supporting authority) that it did not qualify as a bona fide benefit plan within the meaning of section 207(e)(4) of the FLSA.   As such, the Court held that regardless of whether the City made payments to a trustee or third party or directly to the employee, the payments could not properly be excluded from the regular rate.

If the foregoing was not enough of a blow to the City for having had the gall to offer a generous and flexible benefit plan to its employees, the Ninth Circuit further ruled that the City acted “willfully” in violating the law and that the plaintiffs were entitled to back overtime for a 3-year period and to liquidated damages.  Why you ask?  According to the Ninth Circuit, the City acted willfully by failing to do enough to affirmatively ascertain whether its classification of the payments (as excludable from the regular rate) complied with the FLSA.  [Of course, given that the Ninth Circuit admits that this issue if one of “first impression” before any Circuit Court of Appeal, this begs the question of how the City possibly could have answered this question for itself in the first place.  Indeed, the Ninth Circuit admitted it was a “close call.”]

In case anyone is wondering whether the Ninth Circuit realizes that its decision will have negative public policy consequences by discouraging employers to offer flexible benefit plans to employees, the Ninth Circuit actually acknowledged this possibility but dismissed it, reasoning that this is an issue for the legislature, and not the courts, to address.

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Robin Largent represents employers, including major food and retail companies, in all types of employment litigation: wrongful termination, retaliation, breach of contract, wage and hour (California Labor Code) and unfair competition. She also regularly counsels and advises California employers on issues of compliance with California and federal employment laws.
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