Tag Archives: Flores v. City of San Gabriel

Cash-in-Lieu of Benefits May be Subject to Overtime

Contributed by Kelly Haab-Tallitsch, August 25, 2016

Compensation to employees who opt out of health insurance or other benefits, known as a “cash-in-lieu” program, can be an attractive option for both employers looking to manage skyrocketing health care costs and employees looking for a little extra cash. But a recent ruling by the Ninth Circuit Court of Appeals highlights a significant risk to employers of such programs.

In Flores v. City of San Gabriel, 2016 WL 3090782 (June 2, 2016), the first case of its kind, the court held that under the Fair Labor Standards Act (FLSA) cash payments made to an employee in lieu of benefits must be included in the employee’s regular rate of pay for the purpose of calculating overtime.

Health Insurance and MoneyThe employer in Flores, the City of San Gabriel, sponsored a flexible benefit plan that provided employees with a certain monetary allowance to purchase health insurance and other benefits. Employees who opted out of some or all of the benefits received a cash payment for the amount of their remaining allowance. The employer did not include these cash-in-lieu of benefits payments in the employees’ regular rates of pay when it calculated overtime. A group of employees sued, alleging that the exclusion of the cash-in-lieu payments from overtime calculations was a violation of the Fair Labor Standards Act and they had been underpaid for the overtime hours they worked.

The court in Flores agreed, ruling that the employer’s cash-in-lieu-of benefits payments were “compensation for services” (similar to other types of bonuses) that must be included in the regular rate of pay for overtime purposes. The court also held that the employer’s actions were a willful violation because it did not do enough to determine if it was complying with the law. As a result the employer was liable for double the amount of unpaid overtime compensation for the three year period before the complaint was filed.

Cash-in-lieu of benefits programs were already dealt a blow in late 2015 when Treasury Department guidance indicated that most cash-in-lieu payments will be included in the determination of a health plan’s “affordability” for purposes of the Affordable Care Act’s (ACA) employer mandate.

What Does This Mean for Employers?

The City of San Gabriel has asked the Ninth Circuit to reconsider its decision, but until and unless the decision is actually overturned, employers operating in the Ninth Circuit should review their cash-in-lieu of benefit programs and payroll practices to ensure compliance with the FLSA.

The court’s ruling in Flores is a groundbreaking decision and it’s too early to tell whether courts outside of the Ninth Circuit will rule similarly. Employers outside of the Ninth Circuit who offer (or are considering) cash payments to employees who opt out of health benefits should consult with counsel to assess the impact of legal developments in this area.

The List of Gotchas Continues to Grow for Employers Offering Cash-In-Lieu of Benefits

Contributed by Rebecca Dobbs Bush, June 10, 2016

Years ago, providing cash to employees that declined benefits was fairly common. Over the past few years, increasing regulations have made that practice mostly obsolete. Then, on June 2, 2016, the Ninth Circuit added FLSA overtime implications to the list of gotchas.

We routinely receive questions from employers contemplating offering cash to employees that decline benefits. Non-exhaustive examples of the concerns are:

  • The option needs to be provided through a cafeteria plan
  • The cash amount may impact “affordability” under the ACA
  • The option cannot enable/require an employee to purchase an individual policy
  • The option needs to be offered to all eligible employees and not just a select few or those with high claims
  • Depending on the timing/structure of the payments, an employer can risk losing overpayments to employees that leave mid-year
  • With events such as marriage or birth of a child, employees can still exercise HIPAA special enrollment rights
  • Unintended consequences – individuals with high claims will not likely be the ones declining coverage

If this isn’t enough reason to change course, the Ninth Circuit, in Flores v. City of San Gabriel, confirmed that employers need to also account for overtime obligations under the Fair Labor Standards Act (“FLSA”).

CashThe City offered a set amount to employees for purchasing benefits. An employee could decline coverage and receive the unused portion as an extra cash payment on her regular paycheck. In a case of “first impression” (i.e., where no court has decided the issue before), the court determined cash payments to employees should have been included in regular rate of pay and overtime calculations.

The City argued that payments should not be part of the “regular rate” because they were not for “hours worked” and similar to payments such as vacation or sick time. The court did not agree.  Instead, the court held that a payment may not be excluded from the employees’ regular rate of pay where it is generally understood as “compensation for work, even though the payment is not directly tied to specific hours worked by an employee.” The court likened the payments to board and lodging which is not pay for “hours worked” but is still included in the “regular rate.”

The City also argued that the  payments were not part of the “regular rate” because they were made “incidental” to a “bona fide” benefit plan. The City lost this argument for 2 reasons: 1) the payments were not to a third party; and 2) the payments were not “incidental” to the plan, as they represented more than 40% of contributions to the plan.

All of this begs the question – Can an employer still possibly structure a cash-in-lieu offering to its employees that is compliant with all state and federal laws?  What is clear is that any employer offering or contemplating a cash-in-lieu option should immediately contact experienced counsel in order to verify compliance and/or for assistance in promptly remedying non-compliance.