Question: We provide employees the option to take a lump sum cash payment ($1,000/yr) in lieu of accepting benefits, payable in increments over each pay period. The U.S. Court of Appeals for the 9th Circuit has indicated those payments should be included in the base wage for purposes of calculating overtime (see Flores v. City of San Gabriel). But we also operate in states outside of this jurisdiction. What is the status of case law outside of the 9th Circuit regarding cash payments made to employees in lieu of health benefits?
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Answer from the experts at HR.BLR.com:
Thank you for your inquiry. The Ninth Circuit Court of Appeals decision in Flores v. City of San Gabriel, 824 F.3d 890 (9th Cir. June 2, 2016) was, according to the Ninth Circuit, a decision of first impression and no other Circuit Courts of Appeals have addressed the issue. Arguably, the decision only affects employers in the Ninth Circuit, which includes Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, Washington, and Guam. However, it is likely that other courts will look to this decision as precedent.
The foundation of this case involved police officers who sued their employer for 3 years’ worth of unpaid overtime. The question was whether cash payments made in lieu of benefits was added to compensation rate calculation resulting in the potential for overtime pay.
The Ninth Circuit made a fairly compelling argument that the cash in lieu of benefits should be included as compensation that must be used to calculate an employee’s regular rate of pay for overtime purposes. According to the court, the cash in lieu of payments was not excluded from the regular rate of pay under the FLSA statute, 29 U.S.C. sec. 207(e)(2) which defines “regular rate” as “all remuneration for employment paid to, or on behalf of, the employee,” except for a few exclusions, including “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 the final phrase — “other similar payments to an employee which are not made as compensation for his hours of employment”— allowed it to exclude payments that do not depend on when or how much work the employee performs.
The court, however, found that the Department of Labor (DOL) regulation addressing additional payments disagrees. In 29 C.F.R. sec. 778.224(a), the DOL says it is “clear that the clause was not intended to permit the exclusion from the regular rate of payments such as bonuses or the furnishing of facilities like board and lodging which, though not directly attributable to any particular hours of work are, nevertheless, clearly understood to be compensation for services.” The regulation provides examples of payments that are properly excluded, including amounts paid to an employee for the rental of the employee’s vehicle; loans or advances made to the employee; and the cost to the employer of conveniences furnished to the employee such as parking space, restrooms, lockers, on-the-job medical care and recreational facilities.
According to the court, the cash in lieu of benefits payments were not similar to payments for non-working time or reimbursement for expenses and so could not be excluded. The court noted that “The City warns us that a ruling in favor of the Plaintiffs in this case will encourage municipalities to discontinue cash-in-lieu of benefits payment programs due to the consequent increase in overtime costs to the detriment of municipal employees. As we have observed before, such arguments are ‘more appropriately . . . made to Congress or to the Department of Labor, rather than to the courts.’”
You will find an analysis of the case from HR.BLR.com by clicking here.
The cash in lieu of benefits should be treated as compensation that is taxable, regardless of whether it is considered part of an employee’s regular rate of pay for overtime purposes. The payments are considered income and not protected as nontaxable health benefits because they are paid out in cash. The employer in Flores recognized this and included the payment as a designated line item on employees’ paychecks that was subject to tax withholdings.
Because of the complicated FLSA and tax issues involved, consultation with a specialist is recommended.