LCW Partners Brian Walter And Paul Knothe And Associate Nick Grether Convince Ninth Circuit That Opt-Out Fee Is Excluded From FLSA Regular Rate

CATEGORY: Client Update for Public Agencies, Fire Watch, Law Enforcement Briefing Room
CLIENT TYPE: Public Employers, Public Safety
DATE: Jan 08, 2024

Ventura County firefighters and law enforcement officers sued the County for failing to include a portion of their flex benefits in the Fair Labor Standards Act (FLSA) “regular rate” of pay.  The regular rate of pay is used to calculate FLSA overtime compensation.  Every pay period, employees received a “Flex Credit” under the County’s Flexible Benefit Program which they could use to purchase health benefits on a pre-tax basis.  The amount of their Flex Credit was set through annual negotiation.  If an employee’s health premium was less than their flex benefit amount, the employee could take the remainder of the benefit in cash.  That cash was included in the employee’s regular rate of pay.

Employees who chose to participate in the Flexible Benefits Plan, but had insurance through a non-County or non-union source, such as a spouse’s health plan, would receive the same Flex Credit, but had to pay an opt-out fee, which varied from year-to-year.  This opt-out fee was largely put back into the health plans to lower the cost of health insurance for the employees who did participate based in the County or union health plans.  The remainder was then credited to the employees as cash earnings.  The Flex Credit appeared on an employee’s paystub under “Earnings” and the opt-out fee was listed as a “before tax deduction.”  When calculating overtime, the County included the residual cash earnings as part of employees’ regular rate of pay, but excluded the value of the opt-out fee.

The employees alleged that excluding the opt-out fee from the “regular rate” resulted in them being underpaid for FLSA overtime.  The U.S. District Court granted the County’s summary judgment motion, and the employees appealed.  The Ninth Circuit affirmed the District Court in favor of the County in a published decision.

The Ninth Circuit stated that while it had previously held that FLSA exemptions should be interpreted narrowly, the U.S. Supreme Court in Encino Motorcars, LLC v. Navarro, 138 S. Ct. 1134 (2018), later clarified that “FLSA exemptions are construed under ‘a fair (rather than a “narrow”) interpretation.’”

First, the employees claimed that the 2016 Ninth Circuit opinion in Flores v. City of San Gabriel, required that cash cafeteria benefits, like the opt-out fee, be included in the regular rate.  The Ninth Circuit held that Flores was not applicable because the opt-out fee was not provided to the employees in cash at all.  Instead, the opt-out fee was used to fund the County and union-provided health plans.

Second, the employees claimed that the opt-out fee could not be excluded from the regular rate under 29 U.S.C. Section 207(e)(4), which excludes “contributions irrevocably made by an employer to a trustee or third person pursuant to a bona fide plan for providing … health insurance ….for employees.”  The employees did agree that the opt-out fee was irrevocably provided to third parties.  They argued the exception still did not apply because:  1) the opt-out fee was not contributed for their own benefit, but rather was applied towards health insurance for other employees; and 2) the Flexible Benefits Program was not “bona fide.”

The Court dismissed each of these arguments.  As to the argument that the exception did not apply because it was meant to exempt contributions for an employees’ own health care, and not for the health care of others, the Court found that the reference in the exception to “employees” did not mean the individual employee themselves.  Instead, the opt-out fees were still irrevocably contributed towards health plans “for employees” overall, rather than for specific employees.

The Court also rejected the employees’ argument that the Flexible Benefits Program was not “bona fide.”  While the FLSA does not define “bona fide,” the Department of Labor (DOL) regulations indicate that the 207(e)(4) exception applies if the primary purpose of the plan is for the payment of benefits to employees, and that a plan is still bona fide even if, as an incidental part, the plan pays an employee in “cash of all or a part of the amount standing to his credit…”  The DOL’s rule for determining whether a cash payment was incidental was based on a 20% cash ceiling of the plan’s employee contributions on a plan-wide basis.  The Ninth Circuit declined to adopt this 20% ceiling for a couple of reasons.

First, the Court noted that the DOL’s 20% ceiling, which was first explored in a 2003 opinion letter, was expressly rejected by the courts in Flores, and the DOL provided no additional support for the 20% bright-line rule when promulgating its new Rule in 2019.  Thus, the Flores holding was still correct.  Second, the opt-out fees were not cash payments at all, thus rendering the 20% ceiling inapplicable.

The Court held that the County properly excluded the Flex Credit opt-out fees from the employees’ regular rate of pay  under 29 U.S.C. Section 207(e)(4).

Sanders v. County of Ventura, et al, 87 F.4th 434(9th Cir. 2023).

Note: This is the first published Ninth Circuit opinion to address the DOL’s 20% rule for bona fide plans since the 2016 Flores case.  Once again, the Court has decided this DOL rule was undeserving of deference.

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