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June 2 — A California city violated the Fair Labor Standards Act by excluding cash payments made to employees in lieu of benefits from their “regular rate of pay” used to calculate overtime compensation, the U.S. Court of Appeals for the Ninth Circuit ruled ( Flores v. City of San Gabriel , 2016 BL 175160, 9th Cir., No. 14-56421, 6/2/16 ).
Deciding a matter of first impression, the court said cash in lieu of benefits payments aren't covered by an FLSA exclusion codified at 29 U.S.C. § 207(e)(2). While defending an FLSA overtime pay action filed by 13 police officers, the city of San Gabriel argued such payments fall under the FLSA exclusion because they “are not made as compensation for [a worker's] hours of employment.”
But agreeing with the Labor Department's interpretation of Section 207(e)(2), the court said a payment may not be excluded from the regular rate of pay if it's “generally understood as compensation for work,” even if it's “not directly tied to specific hours worked by an employee.”
The decision is significant because it addresses a “relatively common arrangement” under flexible benefit plans offered both by public sector and private sector employers, said Joseph Bolander of Castillo Harper APC in Ontario, Calif., which represents the police officers.
If employees don't use all or part of a benefits allowance, perhaps because they are covered under a spouse's plan, the employer then pays cash in lieu of benefits to the employee, Bolander said. The statutory issue is whether such payments must be included in the FLSA's “regular rate of pay,” which is used in overtime pay calculations.
The Ninth Circuit's decision that such payments are included will have “a significant effect” because a “few bucks an hour” increase in an employee's pay rate in turn increases overtime pay if the employee works extra hours, Bolander told Bloomberg BNA June 2.
That effect might be tempered in this case because the court also ruled San Gabriel qualifies for an FLSA “partial exemption,” codified at Section 207(k), that allows public employers to use alternative work schedules for police officers and firefighters.
A federal district court had awarded a total of about $2,500 in damages to seven of the 15 original plaintiffs, Bolander said. On remand, more plaintiffs might be found eligible for damages and the Ninth Circuit also ruled that liquidated or double damages are available because San Gabriel willfully violated the FLSA, he said.
Meanwhile, San Gabriel disagrees both with the ruling that the FLSA exclusion doesn't apply and that it committed a willful violation, said Brian Walter of Liebert Cassidy & Whitmore in Los Angeles, which represents the city.
San Gabriel is considering all its options, which include a petition for rehearing by the Ninth Circuit, Walter told Bloomberg BNA June 2.
The court's ruling “definitely could be a deterrent” to employers' willingness to offer flexible plans that include cash payments in lieu of benefits, which would be a loss for workers as well as employers, Walter said.
The FLSA defines the “regular rate” of pay as “all remuneration for employment paid to, or on behalf of, the employee,” subject to a number of statutory exclusions.
San Gabriel argued its payments of cash in lieu of benefits are properly excluded under Section 207(e)(2) because they aren't compensation for hours worked by the employees. Section 207(e)(2) excludes from the regular rate of pay such items as vacation pay, reimbursable travel expenses and “other similar payments to an employee which are not made as compensation for his hours of employment.”
The city contended that final phrase permits exclusion of “any payments that do not depend on when or how much work the employee performs.”
The city argued that because its payments of the plaintiffs' unused benefits aren't tied to their hours worked or amount of services provided, they are properly excluded from the regular rate of pay.
But the Ninth Circuit said the Labor Department's interpretation of Section 207(e)(2) is “directly contrary” to the city's argument. Under the relevant DOL regulations, a payment may not be excluded from the regular rate of pay if it's “generally understood as compensation for work, even though the payment is not directly tied to specific hours” that the employee worked, Judge Andre M. Davis wrote.
The DOL's non-exhaustive list of payments that are not intended to be excluded includes bonuses and room and board, which are “commonly considered to be compensation” even though such payments don't fluctuate based on particular hours worked by an employee, the court said.
In previous decisions involving other kinds of payments, the Ninth Circuit also has focused on whether “the character of the payment was compensation for work,” Davis wrote.
The payments in this case are “properly considered compensation for work” and there's no necessity they must be tied to hours worked to fall outside the Section 207(e)(2) exclusion, the court decided.
San Gabriel argued the payments also fall under Section 207(e)(4), which excludes from the regular rate of pay an employer's “contributions” to a third party under a “bona fide plan” for providing health insurance or similar benefits.
But the cash in lieu of benefits payments aren't made to a third party, the Ninth Circuit said. The city's flexible benefits plan also isn't a “bona fide plan” because the payments made to employees who don't spend their allowances on benefits aren't just an “incidental” part of the plan, the court said.
The city committed a willful violation of the FLSA because it “took no affirmative steps” to ensure that its designation of its benefits payments complied with the act, the court said.
San Gabriel failed to establish that it “acted in good faith” in excluding those payments from the officers' regular rate of pay, so the plaintiffs are entitled to a three-year statute of limitations and liquidated damages under the act, the court decided.
But the city did prove it qualifies for the partial exemption found in Section 207(k), which limits its damages for the alleged overtime pay violations, the court said.
Judges Stephen S. Trott and John B. Owens joined in the decision.
In a concurring opinion, however, Owens and Trott said Ninth Circuit case law is “off track” regarding “willfulness” for purposes of the FLSA limitations period.
Absent that binding precedent, the judges said they would find San Gabriel didn't commit a willful violation and the limitations period for FLSA liability is two years rather than three.
To contact the reporter on this story: Kevin McGowan in Washington at firstname.lastname@example.org
To contact the editor responsible for this story: Susan J. McGolrick at email@example.com
Text of the opinion is available at http://www.bloomberglaw.com/public/document/Flores_v_City_of_San_Gabriel_No_1456421_2016_BL_175160_9th_Cir_Ju.
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