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Federal Court of Appeals Holds Cash-in-Lieu Payments Must be Included in Regular Rate of Pay When Calculating Overtime

Cities Should Review Payroll Practices

June 9, 2016
The Ninth Circuit Court of Appeals issued a decision on Thursday, June 2, 2016, in Flores v. City of San Gabriel — a case in which former and current police officers challenged the city’s practice of excluding cash payments made in lieu of health benefits from the officers’ regular rate of pay when calculating overtime under the Fair Labor Standards Act (FLSA).
The FLSA requires covered employers to compensate employees at one and one-half times their “regular rate” of pay for all overtime hours. The regular rate is defined by FLSA regulations as the hourly rate of renumeration paid to employees for the normal, nonovertime workweek, except for certain categories of pay that are specifically excluded. 
The city argued that its cash-in-lieu payments fell within excluded categories but the Ninth Circuit Court disagreed. The court found the cash-in-lieu payments to be different from other payments which are not made as compensation for hours of employment — such as vacation or holiday payments, or payments for travel or other expense reimbursements — and held that it is not necessary for the payments to be tied to the actual hours worked or the amount of service provided to be considered compensation for purposes of calculating the regular rate of pay. The court further concluded the payments do not fit within the exclusion for “contributions irrevocably made by an employer to a trustee or third person pursuant to a bona fide plan for providing … health insurance or similar benefits for employee.” 
After finding the cash-in-lieu payments were improperly excluded from the regular rate of pay, the court went on to find that the exclusion was “willful,”  therefore entitling the officers to three years of back overtime pay, instead of two, plus liquidated damages. The court based its willfulness finding on the fact that the city did not take any affirmative action to determine whether its exclusion of cash-in-lieu benefits complied with the FLSA.
Although this ruling may be appealed, cities that provide cash payments to their employees in lieu of health benefits should consider asking their city attorney to review their payroll practices in light of the court’s ruling in this case.

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