JOSEPH N. BOLANDER
Associate Attorney
Castillo Harper, APC

On June 2, 2016, the Ninth Circuit Court of Appeal issued an important published decision that should positively impact the overtime rates of many hourly employees. The case is also mandatory reading for any association whose members can currently choose to receive some or all of the value of their health benefits in the form of monetary compensation. Specifically, the Ninth Circuit held that wage payments made in lieu of health benefits must be included in the regular rate for overtime purposes under the Fair Labor Standards Act (FLSA). The court also provided some guidance on when an employer’s benefit plan can lose its status as a “bona fide” plan under the FLSA, at which point the value of all benefit contributions, regardless of whether paid out in cash or given in the form of benefits, must be included in the regular rate of pay. Members of the City of San Gabriel Police Officers’ Association were represented by Castillo Harper, APC attorney Joseph N. Bolander through almost the entirety of the district court proceedings and before the Ninth Circuit on appeal.

The Regular Rate and Benefit Contributions
Under the FLSA, 29 U.S.C. § 201, et seq., an employee must be paid overtime at 1 1/2 times the regular rate of pay. The “regular rate” is usually higher than just the base hourly wage. This is because the default rule is that all forms of compensation must be included in the regular rate, subject to certain narrow exceptions. (See § 207[e].) For law enforcement, typical additional sums included in the regular rate are attributable to things like special assignment pay and certain shift differentials.

Generally speaking, health benefit contributions paid by an employer on behalf of an employee to an insurance carrier or plan administrator are excludable from the regular rate under the exemption for contributions made pursuant to bona fide benefit plans. (See 29 U.S.C. § 207[e][4].) The San Gabriel benefits plan and others like it give employees the option to decline some or all of their health benefits and receive the value of those benefits instead in the form of monetary income on their paychecks. FLSA regulations provide that such a plan can still be bona fide, meaning benefit contributions made on behalf of employees can still be exempt from the regular rate under
§ 207(e)(4) so long as the cash payments to employees that come out of the plan do not become more than an “incidental part” of the plan. (See 29 C.F.R. § 778.215[a][5].)

This case was the first time the Ninth Circuit addressed both the regular rate treatment of monetary payments in lieu of benefits, and the issue of when a benefit plan loses its status as a bona fide plan because cash payments are more than an “incidental part thereof.” And because many employers in the public sector offer similar health plans and, like San Gabriel, do not include the value of the cash-in-lieu payments or the value of the total health plan contribution in the regular rate of pay, this case is likely to have an immediate and far-reaching impact.
The District Court Proceedings
A group of City of San Gabriel police officers sued the City, arguing that the City was violating the FLSA. The plaintiffs did not argue that there was anything improper about offering cash in lieu of benefits. The issue, instead, was that the “cash” part, even if paid in lieu of benefits, is still compensation that should be included in the regular rate calculation, which would mean an increased overtime rate. The employees additionally argued that wage payments pursuant to the plan were more than an incidental part thereof, causing the plan to lose its bona fide status under the FLSA.

The district court agreed with the employees that the direct cash-in-lieu payments must be included in the officers’ regular rates of pay, finding that the payments were part of the officers’ compensation for services, so they could not be excluded under § 207(e)(2); and the payments were made directly to the employees, not to a trustee or third person, so they did not qualify for exclusion as benefit contributions under § 207(e)(4).

The district court ruled against the employees on the bona fide plan issue, finding that even though 42% to 47% of all plan contributions were paid directly to employees as taxable wages, those payments were still not more than an incidental part of the plan under the relevant regulations. The District Court also found that the City’s violation was not willful and was only a good-faith error, even though the City made zero attempt to ascertain whether the payments were properly excludable from the regular rate after their initial wrongful classification as an excludable benefit.

The Ninth Circuit’s Decision on Appeal
The City appealed the district court’s ruling, prompting 13 of the employees to cross-appeal aspects of the district court’s ruling. The Ninth Circuit Court of Appeal agreed with the officers and Castillo Harper attorney Joseph Bolander, upholding the district court’s ruling that cash-in-lieu-of-benefit payments must be included in regular rate. But it did not stop there. The Ninth Circuit also ruled that the City’s benefit plan was not a bona fide plan under the FLSA due to the high percentage of wage payments made from it, so the actual value of those benefits, even for employees who did not take the cash option, had to be included in the regular rate. The Ninth Circuit also reversed the district court in favor of the employees on several other significant issues, ordering that the employees were entitled to liquidated damages and an additional year on the statute of limitations because the City’s violation was willful and was not shown by the City to have been a good-faith mistake. The Ninth Circuit did, however, uphold the district court’s ruling on the City’s establishment of the 29 U.S.C. § 207(k) partial overtime exemption for law enforcement.

What It Means
The City has petitioned for rehearing. This means that the same three-judge panel, or an en banc panel composed of additional Ninth Circuit judges, could choose to rehear and revisit some or all of the ruling. It is difficult to say whether this will happen, but we are confident that the court got it right and look forward to defending the main tenants of the decision in future proceedings, if necessary. So unless the decision is altered by the Ninth Circuit or appealed to and reversed by the United States Supreme Court, the following is clear: Employers who offer similar benefit plans must include wage payments made to employees who opt out of health coverage in the regular rate of pay.

But it is not so clear exactly when a benefit plan ceases to be bona fide under the FLSA. The Department of Labor (DOL) had taken the position that if more than 20% of total contributions go directly to employees as wages, and not to benefits, then those payments were not merely an incidental part of the plan. The Ninth Circuit rejected the DOL’s application of the 20% rule on this issue. But the Ninth Circuit agreed with the San Gabriel officers and Castillo Harper, APC that the City of San Gabriel’s plan was not bona fide under the act because between 42% and 47% of total plan contributions were paid directly to employees as wages. So where, and if, the “incidental” line will be drawn between 20% and 42% will likely be decided on a case-by-case basis in the future.

The implications of the Flores ruling also go beyond simply the FLSA, because many MOUs define overtime and other payments under the contract as being calculated using the “regular rate of pay.”

In sum, there are a number of different factors affecting entitlement to and the potential amount of FLSA damages in a case like this, including the amount of the cash-in-lieu payments, the total percentage of plan contributions paid as wages, the amount of overtime you work, and the amount of offsets and credits your employer may be able to claim. But if your employer offers employees the ability to opt out of health coverage and receive the value of their benefits in the form of wages, your association should talk with an FLSA attorney quickly.

About the Author
Joseph N. Bolander is a civil division attorney with Castillo Harper, APC. He also represents law enforcement in LDF matters.