Supreme Court Lets Flores Ruling Stand, Requiring Some Employers to Include Cash In Lieu of Benefits in Calculating Overtime Pay

05.19.2017

On May 15, 2017, the U.S. Supreme Court denied the City of San Gabriel’s ("City") petition for review of the Ninth Circuit Court of Appeals’ decision in Flores v. City of San Gabriel, 824 F.3d 890 (9th Cir. 2016). In Flores, the Ninth Circuit held that an employer must include cash payments made in lieu of benefits when calculating an employee’s overtime pay under the FLSA. While Flores is now controlling law within the Ninth Circuit, the case leaves open as many questions as it answers.

What We Know After Flores
Cash-in-lieu of benefits payments must be included when calculating regular rate of pay and overtime rates.

The City offered a benefits plan, providing employees with a set monetary amount to purchase dental, vision and medical benefits. Employees were required to use a portion of this money to purchase vision and dental benefits, but could choose to use the remainder of the funds either to purchase medical benefits or to receive cash payments. The City did not include these cash-in-lieu of benefits payments in its determination of employees’ regular rate of pay, and thus did not incorporate these payments in its calculation of the employees’ overtime rates or overtime wages. The Ninth Circuit held that these cash-in-lieu of benefits payments must be included when calculating regular rates of pay and overtime rates.

Any payments made to an employee for performing work must be included when calculating regular rates of pay or overtime rates, regardless of whether the payment is tied to particular hours of work.

The City argued that the payments in-lieu-of benefits were not tied to hours worked and, as such, should be excluded from the calculation of the regular rate and overtime rate under section 207(e)(2) of the FLSA. The court rejected that argument and held that the question of whether the payments must be included in the calculation of the regular and overtime rate "does not turn on whether the payment is tied to an hourly wage, but instead turns on whether the payment is a form of compensation for performing work."

A benefits plan which allows for more than "incidental" cash payments to employees is not a bona fide benefits plan under the FLSA.

The court held that in order to exclude payments made to a benefits plan from the calculation of the regular rate, the benefits plan had to be a bona fide plan under the FLSA. In order to be a bona fide plan, the plan could not allow more than "incidental" cash payments to employees. In Flores, the court found that the City’s cash-in-lieu of benefits payments constituted 40 percent of its overall payments under its plan, such that these payments were not incidental. Thus, the benefits plan was not a bona fide benefits plan.

Any employer payments made to a plan that is not a bona fide benefits plan must be included in the calculation of the regular and overtime rates of pay.

As the court held that the benefits plan in Flores was not a bona fide plan, the court held that all payments made by the employer to the plan had to be included in the calculation of the regular and overtime rates.

In order to avoid a finding of a willful violation of the FLSA, which can result in an additional year of liability, the employer must take affirmative action to assure it is in compliance with the FLSA.

Under FLSA section 255(a), the statute’s two-year statute of limitations may be extended to three years if an employer’s violation is "willful." In Flores, the court held that an employer commits a willful violation if the employer remains "on notice of its FLSA requirements, yet [takes] no affirmative action to assure compliance with them." Based on this standard, the court ruled the City’s conduct was willful because, despite knowing the FLSA applied, there was no evidence the City took any affirmative action to ensure that its classification of the cash-in-lieu of benefits payments complied with the FLSA. The court held that a simple initial determination by human resources that the payment should not be included in the calculation of overtime rates was not sufficient.

In order to establish the defense of good faith and avoid liquidated damages in any FLSA action, the employer must show that it took steps necessary to ensure compliance with the FLSA.

Under FLSA section 216(b), an employer who violates the FLSA is liable for liquidated damages in an amount equal to the amount of any unpaid wages or overtime compensation, unless the employer shows it acted in good faith and had reasonable grounds to believe its actions did not violate the FLSA. The City’s evidence that its human resources department designated the cash-in-lieu of payment as excludable was not sufficient, because there was no evidence of any inquiry as to whether the exclusion was appropriate.

What We Do Not Know After Flores
What percentage of cash-in-lieu of benefits payments is considered "incidental" so that a plan will constitute a bona fide benefits plan under section 207(e)(4)?

The Ninth Circuit rejected a Department of Labor Opinion Letter which held that where more than 20% of the total contributions go directly to the employee as wages, the payments are not an "incidental" part of the plan. The Ninth Circuit also held that the City’s plan which resulted in cash payments of more than 40% was not incidental. However, the court did not set forth the threshold at which these payments become more than "incidental" so that the plan is no longer a bona fide plan for which payments can be excluded from the regular and overtime rates.

Can cash-in-lieu of benefits payments be made in some other way, such as through a contribution to a deferred compensation plan?

The Flores case dealt with a plan that provided for a significant amount of cash payments to employees, and did not address whether other methods of reimbursement for opting out of insurance would have to be included in the calculation of regular and overtime rates.

What is the impact of a contract or MOU which provides for the calculation of overtime?

Flores applies only to the calculation of an overtime rate under the FLSA, not to the calculation of any overtime rate required by contract or a MOU. However, if the contract or MOU is based on the regular rate under the FLSA, the holding in Flores would apply. On the other hand, if the contract or MOU requires inclusion of items in the calculation of the overtime rate which are not required under the FLSA, resulting in an equal or higher overtime rate, there would be no additional overtime due.

What does an employer have to do to avoid a finding of a willful violation of the FLSA and to show good faith?

While the court in Flores found that the actions engaged in by the City were not sufficient to ensure compliance with the FLSA, the court did not set forth what level of inquiry is necessary to avoid a finding of willfulness and/or to prove good faith so as to avoid liquidated damages. However, actions such as a review of policies and procedures, an audit of FLSA compliance and obtaining advice as to FLSA compliance, would provide evidence as to steps taken to ensure compliance with the FLSA.

Steps to Take in Light of Flores

• For employees receiving cash-in-lieu of benefits, the amount paid for this benefit should be included in the calculation of the regular and overtime rate for purposes of the calculation of overtime.
• Analyze your benefits plan to determine if it is a bona fide plan so that non-cash payments do not have to be included in the calculation of the regular rate of all employees in the plan.
  
  • Determine the percentage of the total payments made that are cash payments to determine whether the cash payments are "incidental." As discussed above, there is no bright line for this determination, but the court has held that 40% is too high.
• If the plan is not a bona fide plan, than all payments made to the plan must be included in the calculation of the regular and overtime rates for purposes of the calculation of overtime. If the plan is a bona fide plan, only those "incidental" cash payments must be included.
• Analyze the impact of Flores and take action to minimize liability, including making decisions regarding continuation of cash-in-lieu of benefits plan.
  
  • When analyzing the potential liability, make sure to apply offsets for any items included in the overtime rate that are not required by the FLSA. Also, exclude any employees who may be exempt.
  • Put in place a mechanism to calculate both a MOU overtime rate and a FLSA overtime rate and ensure that the minimum rate used is the FLSA rate.
  • Consider methods of controlling the amount of overtime to avoid the increase in overtime costs brought about by Flores.
  • Determine costs and benefits of the cash-in-lieu of benefits payments.
  • Consider eliminating the plan allowing for the cash-in-lieu of benefits payment.
• Take action to ensure that your policies and procedures are in compliance with the FLSA so that if you are faced with litigation, you can assert that any violation of the FLSA was not willful and avoid an additional year of liability. This could include a review of your policies and procedures, an FLSA audit and advice from counsel.
• Take action to ensure that your policies and procedures are in compliance with the FLSA so that if you are faced with litigation, you can avoid the imposition of liquidated damages by demonstrating that you acted in good faith. This could include a review of your policies and procedures, an FLSA audit and advice from counsel.