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Cash Payments to Employees in Lieu of Benefits

On Behalf of | Feb 9, 2017 | Business And Corporate Law

In June 2016, the federal appellate court for our region ruled in Flores v. City of San Gabriel, that any employer who pays their employees cash payments in lieu of health benefits or pays cash for unused benefits must include those payments in the calculation for the regular rate of pay for overtime compensation.  Failure to do so violates the federal Fair Labor Standards Act (FLSA) and will expose your company to liability for back wages and other penalties.

The court further held that even payments the employer made directly to trustees and third parties for health benefits must be included in the employees’ regular rate of pay. Although such payments are normally excluded from the regular rate when made pursuant to a “bona fide plan” of benefits, in this case, the court determined that the payments did not qualify for the “bona fide plan” exemption because employees received plan contributions in cash that were not incidental in value.

The court then went even further to hold that the employer was liable for back wages and penalties, because the employer did not prove that it acted in good faith and, despite the lack of case law in this area, the employer “knew or showed reckless disregard” that its conduct violated the Fair Labor Standards Act.

Employers should review any cash in lieu of benefit policies in light of this case and consider alternatives to such policies where they contradict the Ninth Circuit’s decision. In the alternative, employers should ensure that cash paid in lieu of benefits is included in the regular rate of pay for purposes of calculating overtime.