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Cashed Out Benefits Must Be Included in Regular Rate When Calculating Overtime Premium

    Client Alerts
  • July 12, 2016

Overtime paid to non-exempt employees under the Fair Labor Standards Act must be at time and one-half of the employee’s “regular rate.” The regular rate includes most compensation paid to the employee, such as bonuses and other forms of incentive compensation. However, the regular rate typically does not include employee benefits allowances such as health care coverage. Last month, the Ninth Circuit Court of Appeals concluded that these benefits must be included in the regular rate used to calculate overtime if the employee is allowed to take cash in lieu of using the benefit.

In Flores v. City of San Gabriel, city employees received a flexible benefits plan that could be used for purchase of medical, vision and dental coverage. An employee with alternative coverage (usually through a spouse) could decline to purchase the coverage and instead receive the unused portion of the benefits allotment as a cash payment added to the regular paycheck. The employer made payroll withholdings from this additional cash amount paid to employees. A group of city police officers filed a FLSA collective action suit against the city, claiming that the cash paid in lieu of benefits should have been added to their wages when calculating the overtime rate for this period of time.

The defendant claimed that the cash payments should be excluded from the regular rate because they did not represent compensation for hours worked by the plaintiffs. The benefits allotment was not tied to the number of hours worked by the police officers. The Ninth Circuit noted that this was a novel legal issue, but ultimately concluded that the cash payments must be included in the regular rate.

The court stated that under Department of Labor regulations, the additional amounts paid to the plaintiffs as compensation must be included in the regular rate for overtime calculation purposes even if they were not tied to hours worked. Basically any compensation for work falls within the regular rate calculation unless it meets a specific FLSA exception. The city could not claim the general benefits exclusion because that provision requires that the contributions be paid to a trustee or third person, and not directly to the employees.

In practice, very few forms of cash compensation are excludable from the regular rate calculation. These exclusions include truly discretionary bonuses and reimbursement for certain expenses incurred by the employees. All other compensation and wages should be included when determining the regular rate for purposes of overtime calculation and payment.