On June 2, 2016, the Ninth Circuit held in Flores v. City of San Gabriel (9th Cir., June 2, 2016, No. 14-56421), that the Fair Labor Standards Act (“FLSA”) requires employers to include cash payments received by employees who waive medical benefits into its regular rate of calculation for overtime purposes.

In Flores v. City of San Gabriel, a group of police officers sued the City of San Gabriel (“City”) for three (3) years of unpaid overtime. The City provided a “Flexible Benefits Plan,” which allowed City employees to purchase medical, vision, and dental benefits. City employees were required to use a portion of these monies to purchase vision and dental benefits through the City, but could use the remainder of the funds as a cash payment as long as the employee provided proof of an alternate medical coverage, such as through a spouse. Employees who elected not to participate in the City’s medical benefits, received a cash payment added as a separate line item in his or her regular paycheck, referred to as “cash-in-lieu.”

The City treated the cash-in-lieu payments as benefits, not compensation, and therefore, excluded this amount when calculating an employee’s regular rate of pay for overtime purposes. A small group of City police officers brought suit against the City alleging that the “cash-in-lieu” payments should have been considered in their regular rate of pay for overtime purposes because it was considered compensation for hours worked. As such, these officers alleged that the City owed them three (3) years of back pay because of the miscalculation.

The City argued that the “cash-in-lieu” payments were not considered compensation because this amount was not tied to the amount of work performed for the City. Therefore, the City excluded the “cash-in-lieu” payments from the regular rate of pay.

Although the United States District Court for the Central District of California agreed with the City, the Ninth Circuit Court of Appeals sided with the employees. It held that cash payments made to employees in lieu of health benefits must be included in the hourly “regular rate” used to calculate overtime pay, even if the payments were not specifically tied to time worked for the City.

Ultimately, the Ninth Circuit found that the “cash-in-lieu” payments should be included in an employee’s regular rate of pay for determining that employee’s overtime rate since those payments are paid directly to the employee and not to a trustee or to a third party.

In its decision, the Ninth Circuit acknowledged the possibility that this decision could discourage employers from offering flexible benefit plans to its employees. However, the court determined that to be an issue for the legislature to address and not the courts.

We anticipate that the City will attempt to appeal the Ninth Circuit’s decision to the Supreme Court of the United States. Agencies should begin considering their options when negotiating benefits with employees. This ruling does not apply to contractual overtime hours, only overtime pursuant to the FLSA.

Meanwhile, Churchwell White LLP will continue to follow and keep you updated on any relevant developments pertaining to this issue as they become available.

As always, if you have any questions on this issue, please contact Douglas L. White at (916) 468-0947 doug@whitebrennerllp.com, or Helane S. Seikaly at (916) 458-4963 helane@whitebrennerllp.com.