U.S. Supreme Court’s Refusal to Hear Appeal Means Cash-in-Lieu Payments Must Be Included in FLSA Regular Rate

On May 11, 2017, the U.S. Supreme Court declined to hear the City of San Gabriel’s appeal of Flores v. City of San Gabriel, and, as a result, the Ninth Circuit’s decision in that case is automatically upheld.  The Ninth Circuit’s Flores decision (an analysis is available here) is significant because many public agencies currently 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.  Prior to Flores, almost no public agency included these “cash in lieu” payments in their calculation of an employee’s regular rate of pay under the FLSA.  In Flores, however, the Ninth Circuit held 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.

How Does it Impact Public Agencies?

The Supreme Court’s decision not to hear an appeal of Flores has significant repercussions for public agencies, including:

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 for unused contributions to a flexible benefit plan also must 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 can be expensive, as the damages will likely apply to numerous employees, and may include double damages and be subject to a three-year statute of limitations plus plaintiffs’ attorney fees.

How Does it Impact Claims and OT?

As a result of the Supreme Court’s decision, public agencies have a greater likelihood of receiving claims for violation of the FLSA in connection with cash in lieu payments.  Public agencies can also expect that employees and labor organizations will reach out to discuss how their employers plan to address Flores, both prospectively and with respect to overtime claims for the past.  Public agencies should be evaluating the legal and cost implications of the Flores decision, and their pay practice options moving forward (subject to applicable MOU and meet and confer obligations) to avoid the increased overtime costs under Flores.  While many agencies were already looking at these issues, the Supreme Court’s decision adds a new sense of urgency to these evaluations.

What is the Bottom Line?

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.  In evaluating an employer’s exposure, and future obligations, the employer should remember that the Flores decision only applies to FLSA overtime, not the more generous overtime paid per an MOU or past practice by many public agencies that does not qualify as FLSA overtime.  In addition, FLSA regulations may allow an employer to take credits for certain MOU overtime paid that wasn’t required under the FLSA against deficiencies in FLSA overtime resulting from the Flores decision.