CC - Item 5E - Retroactive Payments for Changes in FLSA RegulationsROSEMEAD CITY COUNCIL
STAFF REPORT
TO: THE HONORABLE MAYOR AND CITY COUNCIL
FROM: GLORIA MOLLEDA, CITY MANAGER ,&0 -
DATE:
0"
DATE: JUNE 19, 2018
SUBJECT: RETROACTIVE PAYMENTS FOR CHANGES IN FLSA REGULATIONS
SUMMARY
On June 2, 2016, the Ninth Circuit Court of Appeals issued their decision for the Flores v. City
of San Gabriel case. The City of San Gabriel tried to appeal the case ruling and was denied the
petition on May 2017. Thus, the new interpretation of law was established in which employers
are now required to include cash -in -lieu of health coverage payments in the regular rate of pay
for the calculation of overtime in accordance with the Fair Labor Standards Act (FLSA)
regulations.
In 2012, a group of police officers filed lawsuit against their employer, the City of San Gabriel,
for violations of the FLSA. The officers alleged the City failed to correctly calculate their
overtime rate and thus they were owed overtime. Specifically, the officers argued the City was
not treating cash paid to employees in lieu of health benefits in accordance with the FLSA.
The Ninth Circuit Court of Appeals decision was issued June 2, 2016 and two main holdings
resulted from the Flores v. City of San Gabriel 824 F. 3d 890 (9th Cir. 2016):
1. Cash in lieu of health benefits made to nonexempt employees cannot be excluded from
FLSA regular rate of pay used to pay FLSA overtime.
2. If the total amount of cash paid in lieu of health benefits is more than 40% of an
employer's cafeteria plan payments as a whole, the plan is not "bona fide." If a plan is
not bona fide, all cash contributions paid by the employer to the plan, in addition to cash
in lieu, must be included in the regular rate of pay. If the total amount of cash paid in lieu
of health benefits is 20% or less of an employer's cafeteria plan payments as a whole,
then the plan is considered bona fide so only cash -in -lieu amounts are required to be
included on the regular rate of pay.
ITEM NO. 5.E
City Council Meeting
June 19, 2018
Page 2 of 3
Clear guidance has not been provided with cash -in -lieu amounts ranging from more than
20%-40%. Legal counsel's advice is recommended on whether to treat their plans as
bona fide or non -bona fide.
3. A third holding had to do with the statute of limitations for back payment of overtime.
FLSA violations have a two-year statute of limitations unless the employer's violation
was "willful". If willful, a three-year statute of limitation applies.
Prior to this case, cities were not including cash -in -lieu payments in their overtime rates. Thus,
this is a new practice for cities.
The City of Rosemead offers a cafeteria plan in which cash -in -lieu payments are made to
employees who opt out of the City's health insurance plan, and therefore is required to
recalculate its overtime calculations in accordance with the FLSA requirements. Rosemead has
been diligent in developing a back payment plan for all employees impacted by this new legal
holding.
The City of Rosemead contributes a set cafeteria amount of $1,700 per month; employees may
use their cafeteria plan contributions towards the City's medical, dental, and vision programs.
Employees may opt -out of the City's medical plan by providing evidence of alternative medical
insurance coverage. Any unused cafeteria plan allowance is payable to the employee as taxable
cash back (cash -in -lieu). Rosemead's cash -in -lieu payments relative to the total cafeteria plan
payments is currently 42.6%, which makes it a non -bona fide plan. Therefore, the City is
required to include the cash -in -lieu health benefits in the calculation of the FLSA regular rate of
pay used to pay FLSA overtime. With City Council's approval, staff plans to process a special
payroll in June 28, 2018 to pay impacted employees.
STAFF RECOMMENDATION
It is recommended that the City Council:
1. Make back payments to impacted employees from July 1, 2014 to current.
2. Approve Resolution No. 2018-35 approving the appropriation from the unassigned
General Fund Balance of $40,000 for retroactive payments to employees for changes in
FLSA regulations;
FISCAL IMPACT
The estimated fiscal impact of the recommended retroactive payment plan will result in an
appropriation of $40,000 from the unassigned General Fund Balance in order to comply with
FLSA regulations.
STRATEGIC PLAN IMPACT —None
City Council Meeting
June 19, 2018
Page 3 of 3
PUBLIC NOTICE PROCESS
This item has been noticed through the regular agenda notification process.
Prepared by:
Pearl Lieu, Finance Director
Attachment A: Resolution 2018-35
Attachment A
Resolution No. 2018-35
RESOLUTION NO. 2018-35
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF ROSEMEAD,
CALIFORNIA, APPROVING AN APPROPRIATION OF $40,000 FOR
RETROACTIVE PAYMENTS OF OVERTIME TO EMPLOYEES FOR
CHANGES IN FLSA REGULATIONS
WHEREAS, in connection with the Flores v. City of San Gabriel decision, in June 2016,
and new law established in which employers are now required to include cash -in -lieu of health
coverage payments in the regular rate of pay for the calculation of overtime in accordance with
the Fair Labor Standards Act (FLSA) regulations; and
WHEREAS, the City of Rosemead offers a cafeteria plan in which cash -in -lieu
payments are made to employees who opt out of the City's health insurance plan; and
WHEREAS, the City Council approved a retroactive payment plan for under payment of
overtime to employees from July 1, 2014 through June 30, 2018; and
NOW, THEREFORE, THE CITY COUNCIL OF THE CITY OF ROSEMEAD, DOES
HEREBY RESOLVE, DECLARE, DETERMINE, AND ORDER AS FOLLOWS:
SECTION 1. That the City Council approves an appropriation of $40,000 from the
unassigned General Fund Balance to make retroactive payments of overtime to comply with
FLSA regulations.
SECTION 2. The City Clerk shall certify to the adoption of this resolution and hereafter
the same shall be in full force and effect.
PASSED, APPROVED, AND ADOPTED this 19th day of June, 2018.
Steven Ly, Mayor
APPROVED AS TO FORM: ATTEST:
Rachel Richman, City Attorney
Ericka Hernandez, City Clerk
STATE OF CALIFORNIA )
COUNTY OF LOS ANGELES)
CITY OF ROSEMEAD )
I, Ericka Hernandez, City Clerk of the City Council of the City of Rosemead, California, do hereby
certify that the foregoing City Council Resolution, No. 2018-35, was duly adopted by the City
Council of the City of Rosemead, California, at a regular meeting thereof held on the 19th day of
June, 2018, by the following vote, to wit:
AYES:
NOES:
ABSENT:
ABSTAIN:
Ericka Hernandez, City Clerk