California and Nevada employers need to be aware of the intricacies of the regular rate of pay (“RROP”). RROP is used to determine overtime compensation and other payments, such as meal period premiums in California. The federal Fair Labor Standards Act (“FLSA”) and its regulations describe those payments that must be included in the RROP and those that can be excluded. Failing to include compensation in the RROP can result in underpayments of overtime and associated penalties. Employers are often surprised by some of the payments that should be part of the RROP. Recent court actions have provided some clarity for the western states.

On Monday, May 15, 2017, the United States Supreme Court denied review of Flores v. City of San Gabriel, 824 F.3d 890 (9th Cir. 2016). At issue was whether “cash-in-lieu of benefits” was a payment that needed to be included in the RROP. The Ninth Circuit said “yes,” raising a circuit-split. Denial by the Supreme Court means the Ninth Circuit’s June 2016 decision stands and is the law of the Ninth Circuit, which includes California and Nevada.

In Flores, the City allocated money for police officers to get medical, dental, and vision insurance. The police officers were required to get dental and vision insurance, but could opt-out of medical insurance if covered by a spouse’s plan or other source. When this occurred, the remaining amount was cashed-out and paid to the officer.

The Court explored the FLSA statutes and regulations that govern RROP, particularly Section 207(e)(2). While the City argued that the cash-out was a payment for a period of non-work, similar to vacation or sick pay, the Court found that it did not fall into the category of “other similar payments to an employee which are not made as compensation for his hours of employment.” In essence, the benefits payments were derived from the officers’ employment and should be part of the RROP.

The Court held that the cash-out payment should be part of the RROP in large part because there is not an exclusion that includes such payments. Vacation and sick pay are arguably benefits that are derived from “hours of employment,” but there is an express exclusion in Section 207(e)(2). Likewise, the medical benefits without the cash-out portion fit into the Section 207(e)(4) category for irrevocable contributions “to a trustee or third person pursuant to a bona fide plan for providing old-age, retirement, life, accident, or health insurance or similar benefits for employees.”

Advice for Employers

• Become familiar with the types of payments that must be included in RROP and when RROP is used to determine compensation.
• Know the proper methodology for calculating the RROP (which can change depending on the item).
• Consult with qualified legal counsel if you have questions about your compensation plan and whether items should be included in RROP.

City of San Gabriel v. Danny Flores et al., case number 16-911, U.S. Supreme Court.