BB&K In The News

BB&K Partner Cynthia Germano Discusses How a Federal Appeals Court Ruling Could Lead to Big Expenses and Changes in Practice

By Cynthia Germano

Employers who allow their employees to opt for taxable cash payments in lieu of health benefits must consider the value of the payments when calculating overtime rates, a federal appellate court has ruled.

If not overturned, the decision may have a major effect on how employers provide benefits going forward, and expose employers to significant liability for the manner in which they compensated certain employees over the last several years.

The case was filed by a group of current and former police officers who worked for the city of San Gabriel. Through a Flexible Benefits Plan, the city provided a designated amount of money per month to each employee to be used to purchase medical, vision and dental benefits. While employees were required to use a portion of these funds to purchase vision and dental insurance, employees with access to alternative medical coverage (for example, through a spouse) could decline to use the remaining benefits and opt for a cash payment instead. The cash payment would then be added to the employee’s regular paycheck as taxable wages. Because the city designated the cash payments as benefits, it did not consider the value of the payments when calculating the employees’ regular rate-of-pay and resulting overtime rate.

The police officers sued, claiming that the city violated the Fair Labor Standards Act because the cash provided to the employees in lieu of benefits was not considered in calculating their overtime rate, and thus that they were underpaid for the overtime hours they had worked.

In a decision issued June 2, the U.S. Ninth Circuit Court of Appeals agreed with the officers. The FLSA provides that an employee must be paid overtime at one and one-half times the “regular rate of pay,” and that the “regular rate of pay” includes the hourly rate of pay, as well as “all remuneration for employment” paid to or on behalf of an employee – but excludes vacation and holiday pay and “other similar payments to an employee which are not made as compensation for his hours of employment.”

The city argued that the cash-in-lieu-of benefits qualified as “other similar payments.” But the court disagreed, finding that the cash-in-lieu benefits were considered compensation for employment, and thus had to be calculated in the regular rate for determination of overtime. The city’s failure to do so meant that the city had not been paying the correct overtime rate.

The court further decided that, because the city was unable to produce evidence establishing that it made appropriate efforts to determine whether it was paying overtime in accord with the FLSA, it had “willfully” violated the law. As a result, the employees were entitled to be compensated for the overtime pay they should have received for three years, and were also entitled to an additional award of liquidated damages in the amount of the unlawfully withheld overtime.

The amount of “back” overtime that employers might have to pay if this decision is not overturned may not be overwhelming, but employers will be also be required to pay various penalties and interest for not timely paying employees in the first place, as well as potential liquidated damages.

The decision may also discourage employers from offering flexible benefit plans to employees, a point which was noted by the court but left for the Legislature to address.

While the city has asked the Ninth Circuit to reconsider its decision, until and unless the decision is actually overturned, employers who offer cash payments to employees who opt out of health benefits should diligently examine their payroll practices and determine whether they are complying with the FLSA in terms of calculating overtime.

* This article first appeared in The Press-Enterprise on July 10, 2016 Republished with permission.