How Cash-in-Lieu of Benefit Payments Affect Overtime Pay

Posted on behalf of Peter T. Nicholl in Unpaid Overtime Dec 30, 2021

keyboard with overtime buttonSome employers provide cash in lieu of benefits to their employees. For example, if an employee declines to participate in the employer’s group health insurance, the employer may give the employee the money it would have spent on his or her insurance plan.

Public employers often do this because they setup funds to allow each of their employees to buy health insurance. Sometimes employees decline coverage because they already have coverage, such as through a spouse’s plan. Since the employee is not using his or her portion of the fund, the employer includes that portion in the employee’s regular check. This is known as a cash-in-lieu of benefit.

Since the employee is receiving this payment in his or her regular paycheck, it may be considered part of his or her regular rate of pay. (This was established in Flores v. City of San Gabriel, a case that was decided in 2016 in California. The Supreme Court allowed the decision to stand after it was appealed by the city.)

That means these payments likely need to be considered when calculating the employee’s rate of pay for overtime hours. If cash-in-lieu of benefit payments are not included in the employee’s overtime pay, the employer may have violated the Fair Labor Standards Act (FLSA).

If you were denied overtime pay for the overtime hours you worked, our experienced unpaid overtime lawyers may be able to help you recover the wages you are owed. There are no upfront fees for our services, and we do not get paid unless you get paid.

Calculating an Employee’s Regular Rate of Pay

Your overtime wage is calculated based on your regular rate of pay – employees receive their regular rate plus a half for each hour of overtime they work.

The regular rate of pay for many employees is simply the amount they are paid per hour of work. However, there are many other payments made to employees that should also be included in the regular rate of pay. This includes things like:

  • Shift differentials
  • Non-discretionary bonuses
  • Promotional bonuses
  • Cost of living adjustments
  • And more

It is important to note some payments are specifically exempted from the regular rate of pay calculation. This includes:

  • Reimbursement payments
  • Premium payments for overtime work
  • Premiums paid for working on Saturdays, Sundays and holidays
  • Discretionary bonuses
  • Pay for times when no work is performed, such as for vacations, holidays or illness

When calculating the regular rate of pay, employers must subtract these exemptions from the total pay the employee received for the workweek.

The FLSA definition of a workweek is a regularly recurring period of 168 consecutive hours – seven consecutive 24-hour periods. Once the employer establishes its workweek, it is fixed and does not change based on the hours worked. That said, employers have the freedom to change their workweek, provided the change is permanent and not being done to avoid paying overtime to employees.

Court Ruling on Cash-in-Lieu of Benefit Payments

The Ninth Circuit ruled cash-in-lieu of benefit payments made to employees must be included when calculating employees’ regular rate of pay. The case involved an employee of the city of San Gabriel who was paid overtime, but the rate of overtime pay did not include cash-in-lieu of benefit payments.

The city’s lawyers tried to argue these payments should be excluded because they were not directly tied to the number of hours the employee worked. However, the court ruled payments that are clearly understood as compensation for services are not excluded from the regular rate of pay calculation.

It is unclear if courts in other states will rule similarly in these types of cases. However, excluding cash-in-lieu of benefit payments from an employee’s regular rate of pay may be a bad idea.  

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