Unused benefits pay must be included in regular rate

A city’s payment of unused benefits must be included in the regular rate of pay and thus in the calculation of the overtime rate for its police officers, ruled the Ninth Circuit. Additionally, because the city took no affirmative steps to ensure that its initial designation of the benefits payments complied with the FLSA and failed to establish that it acted in good faith in excluding those payments from the regular rate of pay, the employees were also entitled to a three-year statute of limitations and liquidated damages. However, the city demonstrated that it qualified for the partial overtime exemption under Section 207(k) of the FLSA, limiting its damages for the overtime violations.

Police officers alleged that their municipal employer failed to include payments of unused portions of their benefits allowances when calculating their regular rate of pay, resulting in a lower overtime rate and a consequent underpayment of overtime compensation. The employees also asserted that the city’s violation of the FLSA was “willful” entitling them to a three-year statute of limitations, and liquidated damages. For its part, the city claimed that its cash-in-lieu of benefits payments were properly excluded from the employee’s regular rate of pay. Moreover, it argued that it qualified for a partial overtime exemption under Section 207(k), which allows public agencies employing firefighters or law enforcement officers to designate an alternative work period for purposes of determining overtime.

Flexible benefits

The city provides a Flexible Benefits Plan to its employees under which it furnishes a designated monetary amount to each employee for the purchase of medical, vision, and dental benefits. All employees are required to use a portion of these funds to purchase vision and dental benefits. However, an employee may decline to purchase medical benefits upon proof of alternate medical coverage. If an employee forgoes medical benefits, he or she may receive the unused portion of the benefits allotment as a cash payment added to the regular paycheck.

The city designated its cash-in-lieu of benefits payments as “benefits” that were excluded from its calculation of a recipient’s regular rate of pay. Police officers were paid overtime when they worked more than 80 hours in a 14-day work period. This work period was memorialized in successive collective bargaining agreements and the city’s Salary, Compensation and Benefit Policy Manual.

Regular rate calculation

Following discovery in this action, the district court agreed with the employees that the city’s cash-in-lieu of benefits payments were not properly excluded from its calculation of the regular rate of pay for the calculation of overtime. However, it found that the city’s violation was not willful, so the employees’ claims were restricted to the two-year statute of limitations. The district court also found that the city qualified for the Section 207(k) partial overtime exemption, thus limiting the city’s liability for overtime to hours worked in excess of 86 in a 14-day work period.

Compensation for work

Under 29 C.F.R. §778.224(a), a payment may not be excluded from the regular rate of pay pursuant to Section 207(e)(2) if it is generally understood as compensation for work, even though the payment is not directly tied to specific hours worked by an employee. The Ninth Circuit has interpreted the “other similar payments” clause of Section 207(e)(2) to focus on whether the character of the payment was compensation for work. Accordingly, consistent with its precedent and the Department of Labor’s interpretation, the appeals court focused its inquiry on whether a given payment is properly characterized as compensation, regardless of whether the payment is specifically tied to the hours an employee works, when determining whether that payment falls under Section 207(e)(2)’s “other similar payments” clause.

Here, the appeals court concluded that the city failed to carry its burden to demonstrate that its cash-in-lieu of benefits payments “plainly and unmistakably” constituted excludable payments under Section 207(e)(2). Accordingly, it affirmed the district court’s ruling that the city’s cash-in-lieu of benefits payments are not properly excluded under Section 207(e)(2). Further, the court rejected the city’s assertion that its cash-in-lieu of benefits payments fell within the ambit of Section 207(e)(4) because the payments were not made to a trustee or third party, but were paid directly to the employees.

Partial overtime exemption

However, the city fared better on its contention that it was entitled to a partial overtime exemption under Section 207(k). Because the employees did not contest the city’s eligibility for the exemption; the only question was whether it had actually established a Section 207(k) work period. Here, it was undisputed that the city adopted an 80-hour/14-day work period for its police officers at least as early as 2003 and that it has paid overtime in accordance with this work period since at least 1994. The fact that the employer did not reference Section 207(k) in any documents adopting this work period did not prohibit its use of the partial overtime exemption. An employer need not expressly identify Section 207(k) when establishing a Section 207(k) work period in order to qualify for the exemption. Consistent with the Third, First, Sixth, and Eleventh Circuits, the Ninth Circuit concluded that all that is required is that the employer show that it established a Section 207(k) work period and that the Section 207(k) work period was regularly recurring. Accordingly, the district court’s grant of summary judgment in favor of the city was affirmed on this issue. (Flores v. City of San Gabriel, 9thCir., 166 LC ¶36,448.)

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