Treatment of Cash in Lieu SAN MATEO COUNTY COUNSEL 11/9/2016

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1 Treatment of Cash in Lieu SAN MATEO COUNTY COUNSEL 11/9/2016

2 Background Some employers allow an employee to decline coverage under the employer s group health plan because the employee has coverage under a spouse s group health plan. Some employers require employees to certify that they have other coverage in order to opt out of the group health plan, while others allow employees to opt out even if they do not certify they have other coverage. Note: although it is legal to offer a cash incentive to employees who opt out of the employer s group health plan, this option will always be taxable. If the option is offered through a cafeteria plan, employees who elect group health plan coverage instead will not have taxable income.

3 Background Cash-in-lieu is not intended to be offered with the intent that the employee will purchase individual coverage Typically only in play when spousal coverage is available Must be offered to all classes of employees eligible for coverage Should not be offered primarily or exclusively to employees with high claims

4 Flores v. City of San Gabriel City provided a Flexible Benefits Plan to employees under which a designated monetary amount was furnished to each employee for the purchase of medical, vision, and dental benefits. Although employees were required to use the Plan s funds to purchase vision and dental benefits, they could decline the purchase of medical benefits upon proof of alternate medical coverage. An employee that elected to forgo medical benefits received the unused portion of the designated monetary amount as a cash payment added as a separate line item in the employee s regular paycheck.

5 Flores v. City of San Gabriel Of the total amount the City paid on behalf of its employees pursuant to its Flexible Benefits Plan, between 42% and 47% of that amount was paid directly to employees as cash in lieu benefits each year. Between 2009 and 2012, the monthly payment paid to employees who declined medical coverage was between approximately $1,000 and $1,300 per month.

6 Flores v. City of Gabriel City treated the cash in lieu payments as benefits, not compensation, and thus excluded the payments from employees regular rate of pay for purposes of calculating an overtime rate of pay. The regular rate is defined as all remuneration for employment paid to, or on behalf of, the employee, subject to a number of exclusions set forth in the Act.

7 Flores v. City of San Gabriel In 2012, a small group of the City s police officers brought suit, alleging the cash in lieu payments were compensation for hours worked that must be included in the City s regular rate calculation for overtime payments. The primary issue on appeal was whether the City s cash in lieu payments were properly excluded from the City s regular rate.

8 Flores v. City of San Gabriel City argued that the cash in lieu payments were not compensation for hours of employment and were not tied to the amount of work performed for the employer, and therefore were excludable from the regular rate of pay (as are expenses, or compensation for leave used). Exclusion for other similar payments to an employee which are not made as compensation for his hours of employment

9 Flores v. City of San Gabriel The Ninth Circuit disagreed with City, finding the payments were compensation for work even if the payments were not specifically tied to time worked for the employer. Cash in lieu payments could also not be excluded from the regular rate as payments made irrevocably to a third party pursuant to a bona fide benefit plan for health insurance, retirement, or similar benefits pursuant to section 207(e)(4) of the FLSA since those payments were paid out directly to employees.

10 Flores v. City of San Gabriel A benefits plan can only pay out an incidental part of its benefits as cash to be considered a bona fide benefits plan. (29 C.F.R. sec ) Department of Labor has issued an opinion letter that defined cash in lieu benefits as incidental if they amount to no more than 20% of the employer s total contribution to the benefit plan. Ninth Circuit rejected the 20% rule, but found that City s payment of 42 47% of its benefits in the form of cash-in-lieu was not incidental, so the City s whole plan does not qualify as a bona fide plan under section Effect: City must also include all amounts that it paid into the flexible benefits plan for employees in their regular rate of pay, not just the cash in lieu payments.

11 Effect Cash in lieu payments must be added into the employee s regular rate of pay for the time period that they cover for purposes of determining the employee s FLSA overtime rate. All flexible benefit plan contributions by the employer must be included in employees regular rate of pay for FLSA overtime purposes, if the amount paid in the form of cash-in-lieu is not incidental (possibly greater than 20%; definitely less than 42%). This was a reinterpretation of some language in the FLSA. It does not change the effective daily rate of pay for other purposes, such as separation, but this may eventually change under state law.

12 FLSA Overtime Rate FLSA overtime hours, not contractual overtime hours. FLSA rate is one and one-half times the employee's regular rate of pay, with this case modifying the meaning of regular rate of pay for FLSA purposes only If your collective bargaining agreement already provides an overtime rate greater than required by the FLSA, you need not stack the cash-in-lieu amounts on the contractual rate for purposes of calculating the actual rate paid! Does not apply at all to FLSA-exempt employees, even if contractually paid overtime

13 Questions?