June 13, 2017

Overtime Calculation includes Benefit Opt-out Payments (article)

A question was addressed by 9th Circuit Court of Appeals relating to whether a cash-out payment in lieu of providing benefits counts in determining an individual’s regular rate of pay for overtime purposes.


In the matter of City of San Gabriel, California v. Flores, the City provides a flexible benefits plan to its employees wherein the City 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. An employee could decline to use the remainder of the funds to purchase medical benefits only upon proof that he/she has alternate medical coverage, such as through a spouse. If an employee elects to forgo medical benefits because of alternate coverage, then the individual could receive the unused portion of the benefit allotment as a cash payment, added to the employee’s regular paycheck.


The City failed to include payments of unused portions of the employees’ benefit allowances when calculating their regular rate of pay, resulting in a lower overtime rate and a consequent underpayment of overtime compensation in violation of the wage payment laws set forth under the Fair Labor Standards Act (FLSA).  The employees sought to recover their unpaid overtime compensation together with liquidated damages. The City deemed that its cash-in-lieu of benefits payments were properly excluded from the employees’ regular rate of pay in accordance with two FSLA statutory exclusions. as well as argued that it qualified for a partial FSLA overtime exemption that permits public agencies employing firefighters or law enforcement officers to designate an alternative work period for purposes of determining overtime.  Upon finding of the facts in this case, the Court concluded that the City’s payment of unused benefits must be included in the regular rate of pay, and thus in the calculation of the overtime rate.


Because other court of appeal rulings conflict with the 9th Circuit Court opinion, the plaintiffs then sought a review by the Supreme Court; their petition for certiorari was denied on May 15, 2017.  Therefore, in states located within the jurisdiction of the 9th Circuit Court (Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington), cash out payments count in an employee’s regular rate of pay.

The information contained in this article is provided as general guidance and may be affected by changes in law or regulation. This article is not intended to replace or substitute for accounting or other professional advice. Please consult a CBIZ professional. This information is provided as-is with no warranties of any kind. CBIZ shall not be liable for any damages whatsoever in connection with its use and assumes no obligation to inform the reader of any changes in laws or other factors that could affect the information contained herein.  

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