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Ninth Circuit Holds Cash-in-Lieu Payments Under a Flexible Benefits Plan Must Be Included in the FLSA Regular Rate

By: Eddie Kreisberg

The Ninth Circuit recently held in Flores v. City of San Gabriel that the amount of cash an employee receives in lieu of an employer’s contribution to health premiums under a flexible benefits plan must be included in the FLSA regular rate.

The FLSA regular rate of pay is the hourly rate multiplied by 1.5 for all FLSA overtime worked.  In addition to including an employee’s base wages in the hourly rate, various other forms of compensation are added to the base hourly rate to arrive at the FLSA regular rate.  These include such forms of compensation as specialty pay, out of class pay, and certification and education pay.

The Flores decision is significant because many public agencies allow employees either to take cash in lieu of participating in an agency’s health insurance program and/or to receive as cash the unused portion of an agency’s contribution toward a flexible benefits plan.  Under Flores, these amounts will now need to be added to the other forms of compensation included in the FLSA regular rate to determine how much is due for each FLSA overtime hour worked.  By way of example, assume an employee with a base hourly rate of $25.00 per hour with no specialty pays also receives $1,000 cash in lieu each month.  The FLSA overtime rate before Flores would have been 1.5 x $25.00/hour = $37.50 per FLSA overtime hour.  After Flores, and after the $1,000 per month cash in lieu is converted to an additional $5.77 per hour and added to the FLSA regular rate, the same employee would be entitled to the FLSA overtime rate of 1.5 x $30.77 = $46.16 per hour.

In Flores, the City of San Gabriel (City) offered a flexible benefits plan under which the City provided a certain amount of money each month for the purchase of medical, vision and dental benefits.  Employees were required to use a portion of these funds to purchase vision and dental benefits.  However, employees could decline the remainder of these funds if the employees could prove alternative coverage and instead receive the balance as cash.  Similarly, if the cost of employees’ health premiums was less than the balance after dental and vision premiums were paid, employees could receive the balance as cash.  (For example, an employee without dependents whose employee-only premium was less than the balance in the flexible benefits plan could receive the balance as cash.)  Many City employees elected to receive the cash which was $1,304.95 per month in 2012 for those who did not participate in a health plan through the City.  The City characterized its payments as payments to “benefits” and excluded these payments from the regular rate of pay for overtime hours.  A group of police officers sued, alleging that these monthly cash payments were compensation that should have been included in the FLSA regular rate.

The District Court agreed with the police officers, and the Ninth Circuit affirmed.  The Ninth Circuit rejected the City’s argument that the payments were not tied directly to hours worked, finding that the payments were compensation for employees’ work and thus included in the FLSA regular rate.  The Ninth Circuit also held that the cash-in-lieu payments were not “plainly and unmistakenly” excludable payments for “benefits” under a statutory exemption under the FLSA.  Further, the Court held that the City could not take advantage of the FLSA exemption for contributions made irrevocably to a trustee or third person for benefits because the City made the payments directly to the employees rather than to any third party.

Significantly, the Ninth Circuit disagreed with the District Court on one key issue, placing employers further at risk.  Specifically, the Ninth Circuit concluded that the amounts the City paid to a third party for medical benefits for employees that did use flexible health plan dollars to pay for health premiums “may not be excluded” from the FLSA regular rate either under the facts of the Flores case.

The Court reviewed a Department of Labor regulation stating that the FLSA exemption for benefit contributions to a third party only applied to a “bona fide plan,” and a plan was only “bona fide” if only “an incidental part” of the overall employer contributions were cash payments directly to employees.  The Ninth Circuit expressed some concerns with the Department of Labor’s 20% standard for what qualifies as “incidental.”   Rather than define what percentage of an employer’s overall contributions as direct cash payments would be permitted, the Ninth Circuit simply held that the City’s plan was not bona fide because over 46% of the City’s contributions went to cash rather than to health premiums, a percentage that could not be characterized as “incidental.”  As such, all City of San Gabriel payments to the flexible benefit plan, whether used to pay premiums or taken by employees as cash, needed to be included in the FLSA overtime rate.

The Court then ordered the City to pay all deficiencies in FLSA overtime for a 3 year period back from the date the lawsuit was filed, plus an equal amount in liquidated damages.

Key Take-Aways:

  1. Cash payments to employees who opt out of payments to health premiums under a flexible benefits plan must be included in the FLSA regular rate.
  2. Cash payments to employees who receive cash payments for the amount of a flexible benefit plan that they do not use must also be included in the FLSA regular rate.
  3. If the amount of an agency’s overall payments to a flexible benefit plan going to cash payments is more than an “incidental” portion of the agency’s overall payments, the flexible benefits plan may not be bona fide and all payments under the flexible benefits plan may need to be included in the FLSA regular rate.
  4. Damages in FLSA cases like Flores would be expensive, as the damages would likely apply to numerous employees, and include double damages, subject to a three-year statute of limitations, plus plaintiffs’ attorney fees.
  5. Employers that allow employees to take cash in lieu of contributions to health premiums should consult with legal counsel and evaluate potential FLSA exposure and modifications to their current benefit programs.