A recent decision in the Ninth Circuit Court of Appeals has highlighted another problem with determining the rate of pay for paying  overtime hours worked by non-exempt employees.  Under the Fair Labor Standards Act, employees are required to be paid time and one-half their regular rate of pay when they work more than 40 hours in a work week.  There is often confusion regarding what is to be included in the regular rate for determining the time and one-half overtime rate.  This recent decision has held that any payments to an employee as cash reward for the employee not taking health insurance or other insurance benefits must be included as part of the regular rate calculation for that employee.  While the payment of cash-in-lieu of benefits would seem to be a benefit to that employee rather than a wage payment, this recent decision has held that the employer must include that payment (typically made on a monthly basis) as part of the regular hourly rate of pay for that employee. 

In this Ninth Circuit decision, the Court of Appeals held that the City of San Gabriel was required to pay overtime pay based upon a rate that included the cash-in-lieu of benefits payment for that particular employee.  Thus, if an employer has a benefit that provides that an employee would receive additional monthly compensation if the employee does not take a benefit such as health insurance, that additional monthly payment must be included in determining the regular rate of pay for that employee and then determine the time and one-half overtime rate based upon the regular rate with that additional payment included.  This results in a different overtime pay rate for every employee depending upon whether the employee takes insurance benefits or decides not to take insurance benefits.  This seems counter-intuitive because the company payment for health insurance premiums is not included as part of the regular rate of pay for an employee but the cash payment instead of taking insurance must be included.

In this lawsuit, a class action was brought by a group of employees which resulted in a significant payment being made by the city in the form of back wages for the failure to include this payment as part of the regular rate for the group of employees.  Employers should verify how they are handling this type of payment as part of their regular payroll calculations.  Employers need to consider this decision and analyze whether or not they need to adjust the overtime pay rate for certain employees if the company has this cash-in-lieu of benefit payment made to certain employees.