Flores v. City of San Gabriel: The Way Forward

Category: Published Articles
Date: Aug 19, 2016 12:32 PM

The Ninth Circuit's recent decision in Flores v. City of San Gabriel provides a new interpretation of how employers should calculate overtime under the Fair Labor Standards Act (FLSA) if the employer provides cash payments in lieu of health benefits to its employees.  There are generally two types of cash-in-lieu plans implicated by Flores.  One type of plan allows employees to opt out of an employer provided medical benefit plan and receive a cash payment instead.  In the other type of plan, employers provide employees with a fixed allowance to pay for medical benefits and any unused portion of the allowance is paid to employees as cash. 

Under the FLSA, hours worked in excess of the applicable FLSA overtime threshold (usually 40 hours in a seven-day work week) must be compensated at 1.5 times the "regular rate of pay."  Generally, all forms of compensation earned or received in a work week must be included in the regular rate of pay, with certain exceptions for gifts, reasonable expenses, discretionary bonuses, and payments made to a trustee to provide the employees with benefits.  Prior to Flores, many agencies did not consider cash-in-lieu as a type of compensation that must be included in their calculation of the regular rate. 

The facts of the Flores case were as follows:  the City of San Gabriel offered its employees a "Flexible Benefits Plan."  Under the plan, the City provided a designated monetary amount to each employee to purchase medical, vision, and dental benefits.  While the City required employees to purchase vision and dental benefits, employees did not have to purchase medical benefits if they provided proof of alternate medical coverage.  Employees who did not purchase medical benefits received the unused portion of their designated monetary amount as a cash payment.  Of the total amount the City contributed to the Flexible Benefits Plan, the City paid between 42% and 47% of that amount directly to employees as cash in lieu of benefits each year. 

The City treated the cash-in-lieu payments as benefits, not compensation, and excluded the payments in its calculation of the regular rate.  The City's police officers sued, alleging the cash-in-lieu payments were not benefits, but compensation and must be included in the regular rate calculation.  The police officers also alleged the City's failure to include the cash-in-lieu payments was willful, entitling them to three years of back pay rather than two years.  The officers also sought liquidated damages (i.e., "double damages," the statutorily imposed remedy for an FLSA violation).

The Ninth Circuit agreed with the officers and found that cash-in-lieu payments were "compensation for work" and, as such, must be included in the City's "regular rate" calculation used to compensate non-exempt employees for FLSA overtime. 

The Court went further and determined that the City's benefits plan was not a bona fide plan.  In addition to other factors, a plan is bona fide if an "incidental" percentage of the total contributions is paid out in cash.  The Court did not set a threshold to determine when an amount is "incidental" versus when it is not.  However, in the City's case, approximately 42-47% of the total contributions were paid out in cash to its employees; an amount the Court thought was not incidental.  The consequence of having a plan that is not bona fide means that the employer must calculate the regular rate using the entire amount it contributes to the employee's benefits plan, not just the cash amount provided to the employee in lieu of benefits.

In addition to finding that the City violated the FLSA by failing to include cash-in-lieu benefits in the regular rate, the Court also found that the City's violation was willful because it failed to take sufficient affirmative steps to determine whether cash-in-lieu should be included in the regular rate.  As a result, the Court awarded the officers three years of back pay instead of two. 

The Court also assessed liquidated damages against the City.  Typically, such an award can be averted if the employer can demonstrate it acted in good faith.  Here, the City argued its payroll department had consulted human resources regarding whether to categorize its cash-in-lieu payments as a "benefit" instead of compensation.  The court found this was insufficient to establish a good faith defense.

Looking Back

It is important to note that if your agency provides cash-in-lieu payments, but has not included the cash-in-lieu in your regular rate calculation, this does not automatically mean your agency violated the FLSA.  Rather, it is not unusual for  agencies to compensate employees in amounts and at rates greater than what the FLSA requires – for example, by paying "daily" overtime or by counting certain leaves as time worked for overtime purposes.  Nonetheless, it is important for agencies to evaluate carefully the potential liability created by Flores under the FLSA. 

Moving Forward

Many agencies are looking for ways to minimize liability going forward and otherwise bring themselves into compliance with the FLSA.  There are a number of ways to do this and certain options may implicate or trigger obligations under other laws such as the Affordable Care Act, IRS Section 125, and Public Employees' Medical and Hospital Care Act.  Before implementing any option, we strongly recommend consulting with legal counsel to analyze potential impacts and consequences for your agency.

Employers should consider moving to a payroll system that regularly calculates FLSA overtime liability separately from whatever overtime is owed under the MOU.  Under such a "dual calculation" method, employers can compare the amount an employee is paid under the MOU with the amount the employee is required to be paid under the FLSA and pay whichever amount is greater.  Use of such a "dual calculation method" may be the best way for an employer to insulate itself from FLSA liability going forward.  Of course, effective use of a "dual calculation method" requires an accurate and FLSA-compliant regular rate calculation. 

The most obvious way to cut off potential liability under Flores is for agencies to start including cash-in-lieu benefits in their regular rate calculations.  Currently, all agencies should have a method for determining the regular rate in order to calculate FLSA overtime for non-exempt employees.  To comply with the Flores decision, an agency would need to develop a method to regularly incorporate cash-in-lieu benefits into its regular rate calculation for FLSA overtime. 

Another way to minimize liability may be to eliminate or reduce cash-in-lieu benefits payments to employees.  If an agency does not provide cash-in-lieu, Flores does not apply.  However, before an agency can implement this option, it must meet and confer with affected employee organizations. 

Finance and payroll departments play a critical role in ensuring that an agency is in compliance with the FLSA.  If you have not audited your payroll practices for some time, we recommend using Flores as an opportunity to make sure that your regular rate of pay formulas and calculations are up to date and in compliance with the law.  

For specific advice on how Flores and the decision to offer cash-in-lieu of health benefits may impact your agency, please contact one of the attorneys at any of our offices statewide.


Laura Kalty, Partner in the Los Angeles office of Liebert Cassidy Whitmore, began as a litigator and has grown into an unparalleled labor relations expert for clients, providing cutting edge labor and employment counsel for public agencies. She can be reached at lkalty@lcwlegal.com.

Lisa S. Charbonneau, Attorney in the San Francisco office of Liebert Cassidy Whitmore, represents clients in litigation throughout the state and advises clients on a variety of labor and employment law matters. She can be reached at lcharbonneau@lcwlegal.com.

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