Employers May Need to Restructure “Cash in Lieu of” Payments

By Cynthia Germano and Sarah Mohammadi.

The City of San Gabriel was underpaying its police force by miscalculating their regular rate of pay, the U.S. Ninth Circuit Court of Appeals held in Flores v. City of San Gabriel . The City offered cash-in-lieu of benefits to its police officers, to be used for purchasing 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. The City did not consider the value of that cash payment when calculating the employees’ regular rate of pay and resulting overtime rate. A group of current and former officers sued, claiming they were underpaid for overtime hours worked because the cash provided to employees in-lieu of benefits should have been used in calculating their overtime rate.

In an opinion issued earlier this month, the court agreed with the plaintiffs, finding that the City’s failure to consider the cash-in-lieu of was a mistake, resulting in the employees not being paid sufficient overtime pursuant to the Fair Labor Standards Act. The City argued that the cash-in-lieu of benefits should be exempted from regular rate of pay calculation under FLSA section 207(e)(2), which provides a list of payments that are not considered when calculating the regular rate of pay. The list includes a series of specific exemptions, such as vacation and holiday pay, and at the end includes a catch-all provision for “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 under that catch all provision. The court rejected the City’s argument, noting that the simple fact that the cash-in-lieu of benefits were not tied to hours worked or amount of services provided did not mean that the cash-in-lieu benefits were not considered compensation for employment. Rather, the court focused on whether the character of the payment was considered compensation for work. The court explained that payments properly excluded under the “other similar payments” clause of section 207(e)(2) were those for non-working time, such as vacation or sick time, and that the cash-in-lieu payments at issue were not similar to payments for non-working time or reimbursement for expenses.

The City went on to argue that even if the cash-in-lieu of benefits were not exempt under section 207(e)(2), the payments should be exempt under 207(e)(4), which exempts “contributions irrevocably made by an employer to a trustee or third person pursuant to a bona fide plan for providing… health insurance or similar benefits for employees.” The court disagreed, holding that because the cash-in-lieu payments were made directly to the employees, no such exception could apply.

The court further found that, even if the payments had been made to a third party, the City’s Flexible Benefits Plan did not qualify as a “bona fide plan” under 207(e)(4), so even the City’s payments to trustees or third parties could not be excluded from the regular rate of pay. The court considered the Department of Labor’s definition of the term “bona fide plan” as set forth in 29 C.F.R. Section 778.215, which requires any cash payments under a plan (in lieu of benefits) to be purely incidental. The court found that the City’s plan did not qualify because 40 percent or more of the City’s contributions were paid directly to employees rather than received as benefits, which was not an incidental amount.

While it is expected that the Flores decision will be appealed, at this point employers have no choice but to live with the ruling, which could include looking at options to restructure “cash in lieu of” payments.

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For more information about this decision and how it may relate to your agency or business, contact the attorney authors of this Legal Alert listed at right in the Labor & Employment practice group, or your BB&K attorney.

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