September 20, 2016 -- Client Alert
On August 23, 2016, the Ninth Circuit denied rehearing in Flores v. City of San Gabriel, in which it held San Gabriel’s cash payments of unused benefits to employees must be included in the regular rate of pay when calculating overtime. This client alert provides an update on the Flores decision.
Overtime Under the Fair Labor Standards Act
Under the Fair Labor Standards Act (FLSA), an employer must pay its employees premium overtime compensation of one and one-half times the “regular rate” of pay for any hours worked in excess of forty in a work week.
Employers who violate the FLSA’s overtime provisions remain liable to employees for the amount of unpaid overtime compensation and potentially liquidated (double) damages. While claims filed under the FLSA are generally time barred after two years, “willful” violations by an employer extend the statute of limitations to three years.
The FLSA defines “regular rate” to include all remuneration for employment paid to, or on behalf of, the employee. Excluded from the regular rate are (1) payments made for periods when no work is performed (such as vacation and holidays); (2) reimbursable expenses incurred by an employee; and (3) other similar payments to an employee which are not made as compensation for hours of employment. (29 U.S.C. § 207(e)(2).). The Court in Flores v. City of San Gabriel considered this third exception – specifically, whether payment of unused benefits not tied to the amount of hours worked or services provided should be excluded from the regular rate of pay.
Flores v. City of San Gabriel
Prior to 2003, the City of San Gabriel had designated its cash-in-lieu of benefits program as a “benefit,” therefore excluding payments made under the program from regular rate of pay calculation. Under the City’s “Flexible Benefits Plan,” San Gabriel provided its employees with funds to purchase medical, vision, and dental benefits. While all employees were required to purchase vision and dental benefits through the plan, employees were not required to purchase medical benefits if they had obtained alternate medical coverage (such as through a spouse). Employees with alternate coverage were entitled to receive the unused portion of their benefits as a cash payment added to their regular paycheck.
Payments Understood as Compensation for Work Must be Included in the Regular Rate
The Court in Flores found that payment generally understood to be compensation for work must be included when calculating the regular rate of pay. The fact that a payment is not directly tied to a specific number of hours worked does not disqualify the payment from being included within the regular rate of pay. According to the Court, the question of whether a particular payment should be included in the regular rate turns on whether the payment is a form of compensation for performing work.
(a) What Should be Included:
Any compensation for work performed or services rendered – regardless of whether the payment is tied to a regular hourly wage. Examples include payments made for working an inconvenient schedule or assuming risky work; employee bonuses; and room and board.
(b) What Should be Excluded:
Lump sum payments made as inducement to ratify employment contracts or collective bargaining agreements; payments made to an employee for the rental of his or her vehicle; loans or advances made by the employer to the employee; the cost of conveniences furnished to employees, such as parking spaces, restrooms, lockers, on-the-job medical care and recreational facilities.
The Court Found City’s Cash Payments Were Not Part of a Bona Fide Employee Benefit Plan
While contributions to bona fide employee benefit plans may be excluded from the regular rate of pay under 29 U.S.C. 207(e)(4), the Court in Flores held that the exclusion applies only where benefits are paid (1) directly to “to a trustee or third person,” and (2) pursuant to a “bona fide” plan. Cash-in-lieu of benefits plans are generally not “bona fide” within the meaning of the exclusion, but cash payments which are an “incidental part” of a benefit plan may be properly excluded from the regular rate of pay.
It remains unclear precisely when cash payments to employees are “incidental” to a benefit plan. The Court in Flores cast doubt on the continuing validity of the Department of Labor’s definition of “incidental” (defined as cash payments no greater than 20% of an employer’s overall contribution to the plan). The Flores Court, however, failed to provide an alternative definition. However, the Flores Court found that the City’s cash payments to employees – which accounted for over 40% of its overall contribution to the plan – were not “incidental” within the meaning of the exclusion. Due to this high percentage, the court held even City payments to the plan for employees-that were not paid out as cash-had to be included in the regular rate.
Liquidated Damages Appropriate Where Employer Fails to Take Steps to Ensure Compliance
Employers may avoid liquidated (double) damages for FLSA wage and hour violations by “actively endeavoring” to ensure compliance with the law. In Flores, the Court found that mere consultation between the payroll and human resources department to determine proper categorization within the City’s payroll system did not establish an honest intention to ascertain and follow the FLSA’s requirements; nor did this fact establish reasonable grounds for believing that City’s conduct complied with the law. However, the Court found the City qualified for the 207(k) partial overtime exemption which limited the damages somewhat.
Extension of Statute of Limitations Appropriate Where There Is Willful Employer Conduct
While claims for overtime violations are generally time barred after two years, an employer’s “willful” violation extends the statute of limitations to three years. An employer's violation of the FLSA is “willful” when the employer (1) is on notice of its obligations under the FLSA and (2) takes no affirmative action to assure compliance.
In Flores, the City of San Gabriel argued that because the Court had never considered whether cash-in-lieu payments should be included within the regular rate, it was impossible for the City to take steps to assure compliance. However, the Court found that the absence of controlling case authority does not relieve employers from their duty to investigate the requirements under the law. The absence of controlling case authority will not shield an employer from a finding of willfulness when an employer puts forth no evidence that it ever took steps to see what the law required. Thus, the Court found the City’s violation willful, extending statute of limitations for claims to three years.
The City may petition for certiorari to the U.S. Supreme Court. The Flores decision is binding on district courts within the Ninth Circuit during the pendency of such a petition.
For further information, please contact Colin J. Tanner, Pam K. Lee, Laura A. Walker or Christine M. Carson of Aleshire & Wynder, LLP’s Labor Practice Group at (949) 223-1170.
Disclaimer: Aleshire & Wynder, LLP legal alerts are not intended as legal advice. Additional facts or future developments may affect subjects contained herein. Please seek legal advice before acting or relying upon any information in this communication.