Cash Payments Made To Employees In Lieu Of Health Benefits Must Be Factored Into Overtime Pay Under The FLSA

In Flores v. City of San Gabriel, the Ninth Circuit held that cash payments made by the City to its employees in lieu of healthcare benefits must be factored into the base pay that is used to calculate overtime pay (1.5 times base pay).

The City provided a “Flexible Benefits Plan” to its employees, under which it gave employees a designated monetary amount to aid in the purchase of healthcare (vision, dental, and medical) benefits. Employees had the choice to obtain medical benefits through the City or receive cash instead. The cash was added to the employees’ paychecks as a separate line item, and was referred to as “cash in lieu.” Roughly 42-47% of the employees elected to receive cash in lieu of obtaining healthcare benefits through the City, which amounted to $1,000-1,300 per employee per month. The City viewed the cash in lieu payments as a benefit, not compensation.

In 2012, a group of police officers sued the City under the Fair Labor Standards Act (“FLSA”), arguing that the amount they received as cash in lieu must be included in the regular rate for overtime pay calculations. They alleged that the underpayment was willful and therefore sought three years of back pay, as well as liquidated damages.

The Ninth Circuit held that “cash in lieu” payments, though not tied to the number of hours worked by employees or their work performance, constitute compensation, because the payments were paid directly to the employees rather than to a third party healthcare provider. In its decision, the Ninth Circuit rejected the Department of Labor’s interpretation that cash in lieu payments are “incidental” if they make up no more than 20% of the employee’s total contribution to the benefit plan.  In the case of the City employees, the cash in lieu payments were far from incidental, as they made up approximately 42-47% of the employees’ total benefits contribution. (The Court did not provide a threshold for “incidental” payments for future reference.)  Ultimately, the Court found the City employees to be entitled to the three-year statute of limitations in addition to liquidated damages, because the City failed to take “affirmative action” to confirm it was in compliance with the FLSA. Notably, the Court held a determination by a human resource individual that the payment should not be included in over time calculate rates was insufficient.

Subsequently, the City of San Gabriel submitted a petition for review to the U.S. Supreme Court, but it was denied on May 15, 2017, leaving the underlying ruling as controlling law.

In light of Flores, employers offering employees cash payments for those who opt-out of the employer’s healthcare benefits should review their payroll practices to ensure they are not in violation of the FLSA. This can include a legal review of a company’s policy and procedures and an FLSA compliance audit.  Under the FLSA, an employee may recover their unpaid wages, reasonable attorney’s fees and costs, and liquidated damages in an amount equal to the backpay awarded.  Notably, liquidated damages are presumed under the FLSA. As a result, employers must be vigilant about meeting the requirements of the FLSA or risk significant penalties.

To date, no other appellate circuit has addressed this issue.


This entry was posted in California, Employee Benefits, Wage and Overtime Pay and tagged , , . Bookmark the permalink.

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