Human Resources News & Insights

Supreme Court just killed this pay option for some: Is your firm impacted?

When the Supreme Court opted not to hear a recent FLSA case, it effectively killed a pay option for many employers and left one California city on the hook for a serious amount of back pay.

The case, which centered around a cash in lieu of benefits pay option, was Flores v. City of San Gabriel.

By not taking up the case, the ruling becomes law in the Ninth Circuit, a circuit covering AK, AZ, CA, HI, ID, MT, NV, OR and WA. Plus, other circuits could use the ruling in their decisions.

Premiums given as cash

City of San Gabriel workers had the option of declining health insurance coverage from the city and receiving a portion of the premium payments as cash if they had alternate coverage.

The City cited an FLSA reg, a reg that said employers could exclude payment from overtime calculations if they’re unrelated to hours of employment, to justify excluding the cash payments from employees regular rate of pay.

Because of this arrangement, a group of employees sued the City of San Gabriel, claiming they were shorted overtime comp as a result of the benefits payment not being included in their hourly rate.

A Ninth Circuit court ruled that the City interpreted the FLSA reg it cited all wrong. Payments for non-working time – such as PTO – aren’t the same as cash in lieu of benefits.

Must include direct payments

In its decision, the court also cited an FLSA reg that specifically mentioned health insurance and other benefits directly.

According to Sec. 207(e)(4) of the FLSA, only contributions made to a trustee or third person for benefits can be excluded from the regular rate of pay for OT purposes.

The City made its payments directly to employees, not a trustee or third person. That means the City owes up to three years of unpaid OT.

If your company offers cash in lieu of benefits, remember: This payment must be included the calculation of the regular and OT rate for purposes of the calculation of overtime.

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