FLSA Overtime Rate Must Include In-Lieu-Of-Insurance Payments

Many health care plans have a feature that allows employees to opt out of insurance coverage in favor of receiving a cash payment. For some time, questions have arisen as to whether these in-lieu-of-insurance payments must be included in the regular rate of pay for purposes of calculating the FLSA overtime rate.

In a recent decision, the federal Ninth Circuit Court of Appeals ruled that the payments must be included in the overtime rate. The case involved the City of San Gabriel, California, which provides a Flexible Benefits Plan to its employees. Under the Plan, the City furnishes a designated monetary amount to each employee for the purchase of medical, vision, and dental benefits.

All employees are required to use a portion of these funds to purchase vision and dental benefits. An employee may decline to use the remainder of these funds to purchase medical benefits only upon proof that the employee has alternate medical coverage, such as through a spouse. If an employee elects to forgo medical benefits because she has alternate coverage, she may receive the unused portion of her benefits allotment as a cash payment added to her regular paycheck.

In 2009, an employee who declined medical coverage received a payment of $1,036.75 in lieu of benefits each month. This amount has increased each year, so that employees who declined medical coverage received $1,112.28 in 2010, $1,186.28 in 2011, and $1,304.95 in 2012. This payment appears as a designated line item on an employee’s paycheck and is subject to federal and state withholding taxes, Medicare taxes, and garnishment.

The way the FLSA is structured, all “remuneration for employment” must be included in the “regular rate of pay,” which is then multiplied by 1.5 to produce the overtime rate. Section 7(e) of the FLSA contains eight types of payments that are excluded from “remuneration for employment” and thus need not be included in overtime calculations.

The exclusion found in Section 7(e)(2) allows an employer to exclude from the overtime calculation “payments made for occasional periods when no work is performed due to vacation, holiday, illness, failure of the employer to provide sufficient work, or other similar cause; reasonable payments for traveling expenses, or other expenses, incurred by an employee in the furtherance of his employer’s interests and properly reimbursable by the employer; and other similar payments to an employee which are not made as compensation for his hours of employment.”

The City argued that because its payments for unused benefits were not tied to hours worked or amount of services provided by employees, the payments were properly excluded under Section 207(e)(2). The Court found that while the matter was “a close question,” the City was incorrect.

The Court pointed to a Department of Labor regulation that provided that a payment may not be excluded from the regular rate of pay if 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 also cited its own prior opinions that “it makes no difference whether the supplemental payments are tied to a regular weekly wage or regular hourly wage. In other words, the question of whether a particular payment falls within the ‘other similar payments’ clause does not turn on whether the payment is tied to an hourly wage, but instead turns on whether the payment is a form of compensation for performing work.

“The payments at issue here are properly considered compensation for work. The other payments we have found to be excluded under Section 207(e)(2)’s ‘other similar payments’ clause are payments for non-working time, similar to vacation or sick time, which are expressly excluded. The payments at issue here are not similar to payments for non-working time or reimbursement for expenses.

“Moreover, the FLSA’s inclusion of a separate exemption specifically addressing benefits, Section 7(e)(4), suggests that payments related to benefits would otherwise be considered compensation. Inclusion of a separate exemption also indicates that Congress did not understand Section 7(e)(2)’s ‘other similar payments’ clause to already exempt payments related to benefits. For these reasons, and in light of the command that we interpret the FLSA’s exemptions narrowly in favor of the employee, we conclude that the City has failed to carry its burden to demonstrate that its cash-in-lieu of benefits payments plainly and unmistakably constitute excludable payments.”

The Court also found the City’s failure to include the payments to be willful, awarding the employees both liquidated damages and the benefits of a three-year statute of limitations.

Flores v. City of San Gabriel, 2016 WL 3090782 (9th Cir. 2016).