Interesting Question from an ECFC Member

4/19/2016

BACKGROUND

The ruling is on a summary judgement motion to dismiss claims from employees that the City did not correctly determine that amount of overtime pay. Under the Fair Labor Standards Act (FLSA), an employer must pay overtime time to eligible employees at a rate equal to one and one half times “the regular rate at which he is employed.”  Under the facts in this case, the City provided bonuses to its employees under a new bonus system; a portion of the bonus was added to their regular pay and, if payment of the bonus amount through the employee’s annual pay resulted in the employee exceeding the maximum amount for the employees’ job classification, that bonus amount was instead paid to the employee in a lump sum.  The City also provided a HRA which was used to reimburse employees for otherwise unreimbursed medical expenses.  Employees of the City claimed that the lump sum payments of the bonus and the reimbursements from the HRA should have been treated as part of their regular rate of compensation and included in any overtime pay they received.  The City filed a motion to dismiss the employees’ claims saying that the bonus payments and HRA reimbursements did not have to be included in determining overtime pay under the Fair Labor Standards Act.  On February 5, 2016, the district court ruled against the City’s motion and now the case will go to trial on the merits.

FAIR LABOR STANDARDS ACT

The Fair Labor Standards Act (29 U.S.C. §201 et. seq.) sets out various standards for payment to employees including the federal minimum wage.  It also sets out the minimum standard for overtime pay which is one and one half times the regular rate at which the employee is employed.  (29 U.S.C. §207)  Under the FLSA, all remuneration for employment paid to, or on behalf of, the employee is considered as the regular rate with exceptions for certain types of remuneration.  It is these exceptions which were the subject to the court decision.

Under the FLSA, sums paid in recognition of services performed during a given period would not be included in the regular rate if the “payment is to be made and the amount of the payment are determined at the sole discretion of the employer at or near the end of the period and not pursuant to any prior contract, agreement, or promise causing the employee to expect such payments regularly.”  29 U.S.C. §207(e)(3).  The City argued that the lump sum bonuses paid to the employees fit into this exception since the bonus was discretionary; although the City did include the portion of the bonus paid as part of their regular compensation was part of the employee’s regular rate and included in payments for overtime.  The FLSA also provides that “contributions irrevocably made by an employer 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” would not be included in the regular rate of compensation.  29 U.S.C. §207(e)(4).  The City argued that the HRA reimbursements were pursuant to health insurance plan and would not be part of the employee’s regular rate of compensation.

THE COURT’S DECISION

In his decision, the judge ruled against the City on both issues.  In ruling that the HRA reimbursements were not exempted from the regular rate of pay, the judge stated that the HRA reimbursements were not “irrevocable contributions made to a trustee or third person” and therefore the exemption did not apply.  The judge stated that even though the HRA administrator would reimburse the employees for the medical expense and in turn be reimbursed by the City, in his opinion that arrangement did not meet the plain language of the statutory exemption.  Consequently, the judge ruled that the HRA reimbursements must be included when determining an employee’s regular rate of pay for overtime purposes.  The City has the opportunity to appeal the judge’s ruling.  If an appeal is not filed (I have not been able to determine if the City will appeal), the case goes to court to determine the damages the City must pay for failing to calculate overtime correctly.

THOUGHTS ON THE COURT’S DECISION AND IMPACT ON HRA ADMINISTRATION

In my role as Legislative and Technical Director of ECFC, I cannot provide legal advice to ECFC membership.  But it seems to me that the judge in this decision did not quite understand how an HRA works and why it should be treated no differently than other forms of employer-sponsored health insurance.  Consequently, if employers or HRA administrators are concerned about the impact of this opinion on their HRA programs, they should contact legal counsel for advice.  I would anticipate that most legal counsel will be able to advise their clients that reimbursements from an HRA would not be counted in determining regular rate of pay for overtime purposes and that this decision should not impact their current program.  In particular, employers in the Eastern District of Wisconsin, where this opinion originated, will want to consult legal counsel to determine whether the opinion in this district would necessary apply to their program.



William F. Sweetnam
Legislative and Technical Director
Employers Council on Flexible Compensation - ECFC
1444 I Street NW, Suite 700
Washington, DC 20005

Media Contact:

Martin Trussell
(202) 659-4300
mtrussell@ecfc.org

About Employers Council on Flexible Compensation

The Employers Council on Flexible Compensation (ECFC) is a non-profit organization dedicated to the maintenance and expansion of private employee benefit programs on a tax-advantaged basis. The organization has two driving missions. The first is to represent and promote flexible compensation programs through effective lobbying. The second is to provide information on flexible compensation programs to member, national opinion leaders and the general public to help create a positive climate for the growth of flexible compensation.