Even the Supreme Court doesn’t want to talk about the regular rate of pay.

The City of San Gabriel, California, provides a flexible benefits plan to its employees under which they receive a designated monetary amount to be used to purchase medical, vision, and dental benefits. Employees can decline to purchase medical benefits (say, because of coverage under a spouse’s plan), in which case they receive the balance of their unspent dollars in the form of a “cash-in-lieu” payment.  Based on § 207(e)(2) of the FLSA, which excludes from the overtime calculation “payments to an employee which are not made as compensation for his hours of employment,” the city did not factor such “cash-in-lieu” payments into its overtime pay calculations.  (Because the city pays the unused benefits directly to its employees and not to a trustee or third person, they cannot be excluded from the regular rate under FLSA § 207(e)(4).)

A group of police officers sued the city, alleging that the failure to include such payments in the overtime calculation amounted to a willful violation of the FLSA. The Court of Appeals for the Ninth Circuit affirmed the district court’s determination that the cash could not be excluded from the overtime calculation under § 207(e)(2), even though it was not specifically tied to the hours an employee works.  According to the Court of Appeals, § 207(e)(2), like other provisions in the FLSA, must be narrowly construed in the employees’ favor.

The Court of Appeals also rejected the city’s argument that liquidated damages were inappropriate and found the violation to be willful, supporting a longer statute of limitations. Under § 260 of the FLSA, if an employer shows that the act or omission giving rise to the violation was in good faith and that it had reasonable grounds for believing that it was not a violation, a court may decline to award liquidated damages.  Under its practice, San Gabriel’s payroll department consults its human resources department to determine whether or not a certain type of payment is includable in the overtime calculation.  Once a payment was classified in the payroll system as includable or not, the city conducts no further review of the designation, although the human resources department notifies the payroll department if it learns of new authority concerning the classification of a payment.  The Court of Appeals found these compliance efforts to be “paltry,” noting that an employer who “fail[s] to take the steps necessary to ensure its practices complied with [the FLSA]” and who “offers no evidence to show that it actively endeavored to ensure such compliance” has not satisfied the “heavy burden” to avoid a finding of willfulness under the statute.  The court remanded the case to the district court to enter judgment for the plaintiffs on liquidated damages.

On whether or not the city’s actions were “willful,” the Court of Appeals noted that the city was aware of its obligations under the FLSA and presented “no evidence of affirmative actions taken … to ensure that its classification of [such] payments complied with the FLSA.” Rejecting the city’s arguments that it had included other types of payments in the overtime calculation (demonstrating its good faith efforts at compliance) and that there was no authority in the circuit on whether “cash-in-lieu” payments must be included, the Court of Appeals observed that “only a small subset of FLSA violations would be considered willful if the existence of binding authority on the subject were our only consideration.”  (Under § 255 of the FLSA, willful violations carry a three-year statute of limitations, as opposed to the two-year statute of limitations for non-willful violations.)

The city filed a petition for certiorari, citing conflicting interpretations of § 207(e)(2) in the federal courts of appeal and arguing, among other things, that the Ninth Circuit misstated the “willfulness” standard under the FLSA. The Supreme Court denied the petition—in City of San Gabriel v. Flores, No. 16-911—on May 15, letting stand a troubling result for employers in California and elsewhere who provide “cash-in-lieu” of benefits payments without including such amounts in the overtime calculation.

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Photo of Allan Bloom Allan Bloom

Allan S. Bloom is a nationally recognized trial lawyer and advisor who represents management in a broad range of employment and labor law matters. As a litigator, Allan has successfully defended a number of the world’s leading companies against claims for unpaid wages…

Allan S. Bloom is a nationally recognized trial lawyer and advisor who represents management in a broad range of employment and labor law matters. As a litigator, Allan has successfully defended a number of the world’s leading companies against claims for unpaid wages, employment discrimination, breach of contract and wrongful discharge, both at the trial and appellate court levels as well as in arbitration. He has secured complete defense verdicts for clients in front of juries, as well as injunctions to protect clients’ confidential information and assets.

As the leader of Proskauer’s Wage and Hour Practice Group, Allan has been a strategic partner to a number of Fortune 500 companies to help them avoid, minimize and manage exposure to wage and hour-related risk. Allan’s views on wage and hour issues have been featured in The New York TimesReutersBloomberg and Fortune, among other leading publications. His class-action defense work for clients has saved hundreds of millions of dollars in potential damages.

Allan is regularly called on to advise boards of directors and senior leadership on highly sensitive matters such as executive transitions, internal investigations and strategic workforce planning. He also has particular expertise in the financial services industry, where he has litigated and arbitrated cases, including at FINRA and its predecessors, for more than 20 years.
A prolific author and speaker, Allan was the Editor of the New York State Bar Association’s Labor and Employment Law Journal from 2012 to 2017. He has served as an author, editor and contributor to a number of leading treatises in the field of employment law, including ADR in Employment Law (ABA/Bloomberg BNA, Senior Editor), Employment Discrimination Law (ABA/Bloomberg BNA, Final Proof Editor), Cutting Edge Advances in Resolving Workplace Disputes (Cornell University/CPR, Editor), The Employment Law Review (Law Business Research, U.S. Chapter Author), and The Complete Compliance and Ethics Manual (SCCE, Chapter Author).

Allan is a member of the NYSBA’s House of Delegates, sits on the Executive Committee of the NYSBA’s Labor and Employment Law Section, and is a Fellow of the College of Labor and Employment Lawyers. He has been recognized as a leading practitioner by Chambers since 2011.