Question: We offer health benefits to our employees. We also allow employees to “opt out” of our offered coverage if they can provide evidence that they have alternate coverage elsewhere. For those employees who “opt out” of our offered coverage, we provide a set amount of money each month. Do we have to include that amount of money in the regular rate of pay and in the calculation of the overtime rate?
Answer: Yes. The money you are providing to the employees for opting out of medical benefits is considered cash in lieu of benefits and should be included in the regular rate calculation for overtime pay. Money must be included in the employee’s regular rate of pay if it is generally understood as compensation for work, even when the money is not directly tied to specific hours worked by the employee. There are a few limited exceptions under the federal Fair Labor Standards Act (FLSA), such as vacation, holidays, sick pay, and business expense reimbursements (FLSA Section 207(e)(2)). But your payment doesn’t fit any of the exceptions. In your situation, the money the employee receives for opting out of certain medical benefits does not seem to be specifically tied to hours worked, but it is compensation for work; therefore, the money should be included in the employee’s regular rate of pay and the overtime rate of pay. The U.S. Ninth Circuit Court of Appeals recently confirmed that cash in lieu of benefits must be included in the regular rate calculation for overtime pay (Flores v. City of San Gabriel, 9th Cir, June 2016).
Tips: For more information on calculating overtime pay, contact your Vigilant employment attorney and see our Legal Guide, “At a Glance: Overtime”. Also, keep in mind that if you offer cash in lieu of benefits, you should only do so through a cafeteria plan. If you don’t pay the money through a cafeteria plan, then all employees, including those who select health benefits instead of cash, will be taxed based on the value of the cash paid.
This website presents general information in nontechnical language. This information is not legal advice. Before applying this information to a specific management decision, consult legal counsel.