On May 15, 2017, the Supreme Court of the United States (SCOTUS) rejected the City of San Gabriel, California's attempt to appeal a Ninth Circuit Court of Appeal's ruling. This case started when the City of Gabriel questioned the expansive interpretation of what employers must include as “wages” when establishing the regular rate of pay to calculate overtime under the Fair Labor Standards Act (FLSA). Specifically, the Court was to decide (1) whether the Fair Labor Standards Act, Section 207(e)(2), allows employers, when calculating the overtime rate, to exclude payments to an employee that are entirely unrelated to “his hours of employment,” as other courts of appeals (third, sixth and tenth circuits) have held in conflict with the U.S. Court of Appeals for the 9th Circuit; and (2) whether the 9th Circuit's outlier “willfulness” standard, triggered whenever a non-compliant employer “was on notice of its FLSA requirements” but failed to investigate further, contravenes this court's decision in McLaughlin v. Richland Shoe Company.
The Path to the Supreme Court
The City of San Gabriel provides a flexible benefits plan to its employees under which they receive a designated amount of money to be used to purchase medical, vision, and dental benefits. Employees can decline to purchase medical benefits and then receive the balance of their unspent dollars in the form of a “cash-in-lieu” payment. Based on Section 207(e)(2) of the FLSA, the city did not factor such “cash-in-lieu” payments into its overtime pay calculations. This Section of the FLSA authorizes employers to exclude from the regular rate “any payments made for occasional periods when no work is performed due to vacation, holiday, illness, failure of the employer to provide sufficient work, or other similar cause; reasonable payments for traveling expenses or other expenses incurred by an employee in the furtherance of the employer's interests and properly reimbursable by the employer; and other similar payments to an employee that are not made as compensation for his or her hours of employment.”
A group of police officers sued the city, alleging their overtime pay had been reduced because the city didn't count their “in-lieu” payment for benefits in its calculation of their regular rate of pay, which, in turn, reduced their overtime pay. The city employees claimed this practice amounted to a willful violation of the FLSA. The city won summary judgment in July of 2014, in a ruling holding that the city wasn't required to include the total value of the police officers' “in lieu” payments in its calculation of their regular rate of pay.
However, on appeal, the Ninth Circuit ruled on both issues:
- First, even though the “in lieu” amount wasn't a payment based on the number of hours worked, it was nonetheless compensation that must be included in the regular rate of pay for purposes of calculating overtime. According to the Court of Appeals, Section 207(e)(2), like other provisions in the FLSA, must be narrowly construed in the employees' favor.
- Second, San Gabriel failed to show that it attempted to comply with the FLSA in good faith and therefore reversed the district court's denial of liquidated (double) damages. The court of appeals found the city's compliance efforts and analysis of whether these payments should be considered “wages” for the purposes of calculating the regular rate of pay to be “paltry.” The Court stated that an employer that “fail[s] to take the steps necessary to ensure its practices complied with [the FLSA]” and that “offers no evidence to show that it actively endeavored to ensure such compliance” fails to avoid a finding of willfulness under the statute.
The City of San Gabriel filed a petition for certiorari, requesting the Supreme Court to clarify conflicting interpretations of Section 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. On May 15, the Supreme Court declined the petition in City of San Gabriel v. Flores, No. 16-911, allowing the Ninth Circuit decision to stand.
California Employment Law
California employers who provide “cash-in-lieu” payments should review their benefits plans to determine if they should include such payments in their regular rate of pay and calculation of overtime pay. Employers and employees alike should contact leading employment lawyers at Kingsley & Kingsley with any questions concerning California's wage and hour laws. Call and speak to an experienced California lawyer toll-free at (888) 500-8469 or click here to contact us via email.