A group of 28 police officers for the City of Sanger, California sued the City under the Fair Labor Standards Act (FLSA). The officers alleged that the City had failed to include in the FLSA overtime rate two forms of compensation: (1) cash-back payments for officers who opted out of the City’s health care plan, and (2) merit pay increases.
Under the FLSA, an employer must pay overtime at time and one-half the employee’s “regular rate.” That term, in turn, is defined as including “all remuneration,” which includes compensation that is “not directly attributable to any particular hours of work.”
A federal trial court found that the City should have included both forms of compensation in the FLSA overtime rate. The City argued that the cashback payments should not be included because they were analogous to “payments to an employee which are not made as compensation for his hours of employment” which can be excluded from the overtime rate. The Court disagreed, finding that “under the health benefits reimbursement program, the City contributes a fixed sum of money per year toward employees’ medical benefits in which employees have the option to receive an unused portion of their monthly benefit allowance as income in their paycheck. Thus, the benefit is tied to their compensation for hours of employment because the employee must be working to qualify for the health benefits and any reimbursement. Furthermore, the payments are subject to federal and state withholding taxes, Medicare taxes, and garnishment, which indicates the cash payments are remuneration for work performed and must be included in the regular rate of pay used in calculating overtime.”
The City also urged the Court to consider an advisory opinion letter from the U.S. Department of Labor issued in 2003. The letter provides that cashback payments through a cafeteria health plan need not be included in the overtime rate if (1) no more than 20% of the employer’s contribution is paid out in cash; and (2) the cash is paid under circumstances that are consistent with the plan’s overall primary purpose of providing benefits. The Court was unconvinced, finding that “this letter was written in response to a case where specific information about the plan itself was provided, and gave guidance where the requirements of the plan regarding employer contribution rates and reimbursement policies were outlined. Although it is undisputed here that less than 20% of the sworn officers who received this benefit are taking cash in lieu of the medical benefits, none of the other necessary facts regarding the program have been presented. A narrow construction of FLSA exemptions precludes the Court from finding that the City has met its burden in establishing that the exemption applies.”
The Court also found that the merit pay received by the officers should be included in the overtime rate. The City’s argument was that merit pay was the equivalent of a discretionary bonus, and thus need not be included in overtime calculations.
The Court began by looking at the DOL’s regulations on discretionary bonuses, noting that the regulations required three things before bonuses could be excluded from overtime: (1) the raises are discretionary, (2) the determination of whether the payment is made and the amount paid occurs at the end of the period, and (3) the bonus is not given pursuant to a prior contract or agreement.
The Court found that there was inadequate proof that the merit pay met these criteria: “The City has not provided much information regarding how the merit raises are specifically awarded other than what is outlined in Article 13 of the MOU. This section provides that merit increases can be applied at any step within the range, at any time as determined by the Chief of Police, and are renewed annually upon the recommendation of the Police Chief for satisfactorily meeting the eligibility requirements for such increases. The MOU also indicates that a committee is established by the Chief of Police, with the approval of the City Manager, to develop criteria which will be utilized for determining eligibility for merit increases.
“Other than this information, no evidence has been presented regarding the eligibility criteria of this program. Without additional facts, the Court is unable to determine whether the merit incentive is truly discretionary or merely perfunctory. For example, it is unclear what ‘satisfactorily meeting the eligibility requirements’ means. The timing of when the evaluation occurs is also ambiguous since the MOU states that the increases can be applied ‘at any time.’ Even assuming this information was provided, the City’s argument still proves difficult because the regulation provides that the exclusion would not apply to raises awarded pursuant to a prior contract or agreement. Here, the bonuses stem from the contractual provisions of the MOU. Given these circumstances, the City has not established that the merit pay is excludable from the regular rate of pay.”
Callahan v. City of Sanger, 2015 WL 2455419 (E.D. Cal. 2015).