Human Resources News & Insights

Overtime ruling should make employers reconsider this pay option

If you have a compensation and benefits plan that’s set up similarly to the one that just came under fire in this FLSA lawsuit, it’s likely time for some alterations. 

The City of San Gabriel in California had a flexible benefits plan under which it contributed money to each employee for the purchase of medical, vision and dental benefits. All employees were required to use some of these funds to obtain vision and dental benefits.

An employee didn’t have to purchase health insurance with these funds if the person could provide proof of alternate medical coverage (like coverage via a spouse’s plan). If an employee declined to use the funds to purchase medical benefits, the person could receive the unused portion of his or her benefits allotment as a cash payment added to their paycheck.

Example: An employee who declined to use the benefits funds to purchase medical benefits in 2012 received a cash-in-lieu-of-benefits payment of $1,304.95 each month.

This went on for several years … until recently.

‘It’s part of our pay rate’

A group of San Gabriel employees sued the city under the FLSA. They claimed they were illegally shorted overtime compensation because the city didn’t include the cash-in-lieu-of-benefits payments in their hourly pay rate calculations.

They city argued that its cash-in-lieu-of-benefits payments were properly excluded from the regular rate of pay because the FLSA only requires that “compensation for hours worked” be included in an employee’s hourly rate calculation. It said the payments weren’t compensation for hours worked because employees would’ve received the same cash-in-lieu-of-benefits compensation no matter how many hours they worked.

The ruling

After a somewhat extensive legal analysis, the court sided with the employees. It ruled a payment may not be excluded from an employee’s regular rate of pay if it’s “generally understood as compensation for work, even though the payment is not directly tied to specific hours worked by an employee.”

The court said San Gabriel’s cash-in-lieu-of-benefits payments were understood by employees to be compensation for their work, so it ruled they should’ve been included in workers’ regular rate of pay.

But that’s not all. The court slapped the city with a willful violation of the FLSA, which means San Gabriel has to not only pay for unpaid overtime, but also liquidated (i.e., double) damages. It also means that the FLSA’s two-year statute of limitations may be extended to three years.

Why were San Gabriel’s actions considered willful? The court said the city provided no evidence that it attempted to determine whether its treatment of the cash-in-lieu-of-benefits payments complied with the FLSA.

Further court proceedings will determine the exact amount San Gabriel is liable to pay its employees, but you can bet it’ll be considerable.

Stay tuned.

Cite: Flores v. City of San Gabriel

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