In Calculating Employees’ Overtime Rates, Public Employers Must also Count Cash Payments in lieu of Medical Insurance

The United States Supreme Court recently declined to review the case of Flores v. City of San Gabriel.  As a result, the Ninth Circuit Court of Appeals’ decision will remain good law, which is favorable to workers earning overtime under the Fair Labor Standards Act (“FLSA”).

Our summary of the Ninth Circuit’s decision is below:

Ninth Circuit Rules Public Employers Must Count Cash Payments in lieu of Medical Insurance for Calculating Employees’ Overtime Rates

The Ninth Circuit found that a public employer must include cash payments in lieu of medical benefits in its calculation of an employee’s overtime rate of pay under the Fair Labor Standards Act (“FLSA”).
In Flores v. City of San Gabriel, the City of San Gabriel offered employees a “Flexible Benefit Plan” that allowed its employees to receive a monthly cash payment in lieu of benefits if the employee declined medical coverage under the plan.  The City excluded this payment from the employees “regular rate of pay,” which affected the calculation of overtime.

A group of City police officers filed a lawsuit against the City under the FLSA for failing to include the cash-in-lieu payment in their regular rate of pay, leading to incorrect payments of overtime.  The City argued that it properly excluded the cash-in-lieu payments according to Section 207(e)(2) of the FLSA which excludes from the regular rate of pay “payments to an employee which are not made as compensation for his hours of employment.”  The City argued that the cash-in-lieu payment did not correspond to the number of hours an employee works.

The Ninth Circuit flatly rejected the City’s argument.  The appropriate question is whether cash-in-lieu payment was “a form of compensation for an employee’s service,” regardless of whether the compensation is tied to the employee’s hourly work.  The Court found that the cash-in-lieu payment was in fact a form of compensation for an employee’s service and should have been included in the regular rate of pay for purposes of calculating overtime.

The City also argued that Section 207(e)(4) of the FLSA excluded the cash-in-lieu payments because “contributions irrevocably made by an employer to a trustee or third person pursuant to a bona fide plan for . . . health insurance” are not included in the calculation for an employee’s regular rate of pay.  The Court again rejected the City argument because the City was not making the cash-in-lieu payment to a trustee or a third person.  Rather, the City was making payments directly to the employee.

This decision from the Ninth Circuit only affects the calculation of overtime hours under the FLSA; it does not directly affect the calculation of overtime under a collectively bargained Memorandum of Understanding.

The Flores case has a significant impact on how public employers must calculate the regular rate of pay for their employees for purposes of overtime compensation under the FLSA.  Unions representing public employees should be vigilant about these calculations to ensure that public employers are including cash-in-lieu payments in their calculations of employees’ regular rates of pay.

Please contact your labor law counsel for more information.