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June 2, 2016
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Offering a flexible benefits plan is an oft-cited tool for organizations to improve employee satisfaction, recruitment, and retention. However, employers should be very careful when designing benefits plans that permit cash-in-lieu of payments, as the City of San Gabriel discovered in a recent case.
In Flores v. City of San Gabriel, the City provided a flexible benefits plan consisting of a predetermined amount of money allocated to employees each month, which the employees would then use to purchase and maintain benefits. The employees were required to use a portion of the funds for dental and vision, but also had the option to receive the remaining portion of the funds as a cash payment added to their paycheck if they declined medical coverage and furnished proof that they had alternate medical coverage. These monthly funds were designated as benefits and were not included in the regular rate of pay calculations.
A group of City employees filed suit, alleging that because these cash-in-lieu of benefits payments were not included in calculating the regular rate of pay, the employees wrongfully received a lower overtime rate. On appeal, the Ninth Circuit stated that the cash-in-lieu of benefits payments were considered compensation for work under the Fair Labor Standards Act (“FLSA”) and should have been added to the rate calculations, unlike other payments for non-working time or expense reimbursement, which can be excluded. The Ninth Circuit also stated that an exception in the FLSA for “bona fide plans” did not apply, as the cash-in-lieu benefits were paid directly to employees rather than a trustee or third party, and the cash payments were too significant to be deemed incidental.
Finally, the Ninth Circuit stated that the City willfully violated the law by failing to do enough to confirm whether the exclusion of the benefit payments complied with the FLSA. Overall, the outcome of Flores was a punishing blow for the City, who had offered a generous and flexible benefit plan to employees. Organizations who offer cash-in-lieu of benefits payments should carefully review their own policies to ensure compliance with the FLSA.
- If offering cash-in-lieu of benefits payments, review your benefits plan and amount of payments carefully for compliance with the FLSA.
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Disclaimer: This document is designed to provide general information and guidance concerning employment-related issues. It is presented with the understanding that ManagEase is not engaged in rendering any legal opinions. If a legal opinion is needed, please contact the services of your own legal adviser.
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