Paying compensation to employees who opt out of costly health insurance and other benefits can be an appealing option for both employers and employees. The employer saves on premium contribution costs, and the employee gets extra spending money. But employers should beware: a new case out of the 9th Circuit Court of Appeals, Flores v. City of San Gabriel, 2016 WL 3090782 (June 2, 2016) highlights a risk that you may not have considered. According to this case, the cash opt out benefit increases the employee’s rate of pay for overtime purposes and must be included in the calculation. This ruling generally does not apply to benefit plan contributions that are made directly to a third party carrier or administrator.

In Flores v. City of San Gabriel, the City offered its police officer employees a self-administered “Flexible Benefits Plan” that allowed them a certain amount of money to spend on a variety of health insurance and other benefit plans. Employees who opted out of some or all of the benefits plans received a cash payment for the balance of their allotted funds. The City labeled these payments as “benefits” and did not include them in the police officers’ regular rate of pay when it calculated overtime payments. Thus overtime was calculated at a lower rate of pay than it would have been if the cash ‘benefits’ were included. The officers sued.

The court held that that the City’s cash-in-lieu-of benefits payments were “compensation for services” (similar to other types of bonuses) that must be included in the regular rate of pay for overtime purposes. The court also held that the City’s actions were a willful violation because the City did not do enough to determine if it was complying with the law.  As a result, the back pay period on the unpaid overtime was extended from 2 years to 3 years, and the employer was liable for liquidated (i.e. double) damages as penalty.

Wage and hour mistakes can be costly and this new decision only increases that potential.  Additionally, other types of add-on compensation –such as DPSST and educational incentives, premiums for special assignments, bilingual and longevity pay, which are common for public sector employers– must be added to the base on which overtime is computed. The same is true for private sector employers –commissions, incentives, shift differentials, production and other nondiscretionary bonuses, as well as other add-on compensation must be included in the computation of overtime. Special considerations apply to signing bonuses.

For more information and assistance in ensuring your organization is compliant with its wage and hour obligations, contact one of the PRH attorneys.