On Monday, May 15, 2017, the U.S. Supreme Court denied the City of San Gabriel’s petition for review of Flores v. City of San Gabriel, a 2016 decision by the U.S. Court of Appeals for the Ninth Circuit that offered new interpretations of the Fair Labor Standards Act (FLSA). Therefore, Flores remains the governing law in the eight states within the Ninth Circuit Court of Appeals, including California. The primary holding of Flores is that amounts paid to employees in lieu of health benefits must be included in employees’ regular rate for purposes of calculating FLSA overtime. The holdings of the case will remain the law of this Circuit unless and until (1) Congress acts to amend the FLSA to provide relief to employers, or (2) another Circuit Court rules differently than the Ninth Circuit on the same issue or issues and the Supreme Court grants review of that case and rejects Flores.
How Did We Get Here?
In 2012, Danny Flores and other police officers working for the City of San Gabriel filed a lawsuit seeking to recover back overtime pay under the FLSA. After a decision by the trial court, both parties appealed the decision to the U.S. Court of Appeals for the Ninth Circuit. The Ninth Circuit issued its decision on June 2, 2016. The holdings of the decision are discussed below. On June 16, 2016, the City sought a rehearing by the Ninth Circuit (“en banc review”). The request was denied by the Ninth Circuit on August 23, 2016. In January 2017, the City filed a petition for writ of certiorari with the U.S. Supreme Court, asking the Supreme Court to review and overturn the Flores case. Two amicus curiae briefs were filed in support of the City’s petition, including a brief from seven different public sector organizations that demonstrated the wide impact of the Ninth Circuit’s decision. On May 15, 2017, the Supreme Court denied the City’s petition, thus terminating the possibility of further judicial review of the Flores decision. The Flores decision remains the law of the Ninth Circuit and is binding upon California employers.
A Review of the Three Main Holdings of the Flores Case
Cash in Lieu
The clearest mandate arising from the Flores case is that cash payments to employees for waiving health insurance or not using their entire health allowance (“cash-in-lieu”) must be included in the employees’ FLSA “regular rate of pay,” which is the hourly rate used to compensate non-exempt employees for FLSA overtime hours. The FLSA regular rate requirements apply to FLSA overtime hours, but not other types of contractual overtime. Many labor agreements provide overtime more generously than required by the FLSA – such as treating paid leave time as hours worked, or paying overtime for working on holidays. The FLSA regular rate requirements do not apply to those “non-FLSA” contractual overtime hours.
For employers who pay employees significantly in excess of minimum FLSA overtime requirements, an inclusion of cash-in-lieu in the FLSA regular rate of pay may not result in additional FLSA overtime liability because of the various offsets against FLSA overtime liability that are available to those employers. This is particularly true for public safety employees for whom the employer has adopted a section 207(k) work period. For employers with high cash-in-lieu amounts or contractual overtime practices that more strictly follow the FLSA, implementing this aspect of the decision will likely result in higher overtime costs. Before making changes to a regular rate calculation because of Flores or other similar issues, employers should carefully evaluate whether inclusion of cash-in-lieu in the FLSA regular rate of pay will require them to pay more than their current contractual overtime obligations.
Bona Fide Plans
Per Flores, if the aggregated amount of cash-in-lieu an agency pays to employees is more than 40% of total plan payments (total plan payments means cash-in-lieu and other plan contributions), the employer’s plan is not bona fide under the FLSA. This means the value of all plan payments must be included in the FLSA regular rate of pay. There is no bright line rule as to a percentage that will ensure an employer’s plan is bona fide. Indeed, the Ninth Circuit in Flores threw out the formerly-applicable 20% test but offered no guidance as to what the test should be. Accordingly, employers that offer cash-in-lieu should work with legal counsel to evaluate whether their plans are bona fide under the Ninth Circuit standard. If an employer’s benefits plan is not bona fide, overtime costs will undoubtedly rise since the FLSA regular rate for non-exempt employees will increase.
Now that Flores is final, the current Ninth Circuit standard on willfulness is the following: in the words of the Court, an employer’s violation of the FLSA is willful when the employer is “on notice of its FLSA requirements, yet [takes] no affirmative action to assure compliance with them.” A willful violation subjects an employer to liability for three years of back pay (instead of two). This “willfulness” standard places a burden on employers who have any awareness of their FLSA obligations to be proactive in their FLSA compliance efforts. We recommend employers work with legal counsel to ensure sufficient active steps to achieve FLSA compliance are taken and – importantly – documented on a regular basis.
The Flores decision illustrates the challenge of FLSA compliance for employers. The FLSA was enacted 79 years ago and the statute and the Department of Labor regulations and interpretations have not kept pace with the realities of the twenty-first-century workplace, such as payments to employees for opting out of health insurance. This is especially true in the public sector, where employers have a myriad of different types of employees and pay requirements. In light of those challenges, the decision reiterates the importance of conducting and documenting a careful review of FLSA overtime payment practices, to not only ensure compliance, but also to prevent a willful violation and be able to prove a good faith defense.
LCW Webinar: The Flores Decision is Here to Stay – What Do California Public Employers Need to Know?
Join us for a webinar, as our wage and hour experts will discuss the significance of this decision and the way it will impact California’s public employers.