California Public Agency Labor & Employment Blog

California Public Agency Labor & Employment Blog

Useful information for navigating legal challenges

Ninth Circuit Denies En Banc Review Of Flores v. City Of San Gabriel – A Landmark Case On FLSA Regular Rate And Health Benefits Plans Remains The Law: Are You Really Ready Now?

Posted in Wage and Hour

hourglass-small.jpg

This post was authored by David Urban and Christina Rentz

On August 23, 2016, the U.S. Court of Appeals for the Ninth Circuit issued an order declining to reconsider en banc its decision in Flores v. City of San Gabriel. That case, decided in June of 2016, has had far-ranging and significant impacts on the way public agencies compensate employees and provide benefits.  The opinion in Flores was issued by a three-judge panel of the Ninth Circuit.  If the judges of the Court had voted for what is known as en banc review, then an eleven-judge panel would have reconsidered all or part of the decision, and could very well have reached a different result.

As described below, the Flores decision breaks significant new ground under the Fair Labor Standards Act (“FLSA”) for employers who use health plans that can pay employees cash in lieu of benefits.

The primary issue in Flores is whether the FLSA required the City of San Gabriel to include cash payments made in lieu of health benefits into its regular rate calculations for overtime pay purposes under the FLSA.  Four years after the lawsuit was filed, the Ninth Circuit held that such payments had to be included in the regular rate.

The following is a condensed discussion of the Flores decision that appeared in our firm’s special bulletin when the case was first decided in June 2016.

Legal Background

Under the FLSA, overtime hours must be compensated at a rate that is at least one-and-a-half times the employee’s hourly “regular rate.”  (29 U.S.C. sec. 207(a)(1).)  The FLSA “regular rate” is the hourly rate equivalent to what the employee was actually paid per hour for the normal, non-overtime workweek for which he or she is employed.  (29 C.F.R. sec. 778.108, citing Walling v. Youngerman-Reynolds Hardwood (1945) 325 U.S. 419.)  Generally speaking, all forms of remuneration or compensation for employment paid to an employee are included in the regular rate except for certain specifically excluded payments.  (29  U.S.C. sec. 207(e).)

The Flores Facts

The City of San Gabriel provided a “Flexible Benefits Plan” to employees under which a designated monetary amount was furnished to each employee for the purchase of medical, vision, and dental benefits.  Although employees were required to use the Plan’s funds to purchase vision and dental benefits, they could decline the purchase of medical benefits upon proof of alternate medical coverage.  An employee who elected to forgo medical benefits received the unused portion of the designated monetary amount as a cash payment added as a separate line item in the employee’s regular paycheck.  This cash payment is called “cash in lieu.”  Of the total amount the City paid on behalf of its employees pursuant to its Flexible Benefits Plan, between 42% and 47% of that amount was paid directly to employees as cash in lieu benefits each year.  Between 2009 and 2012, the monthly payment paid to employees who declined medical coverage was between approximately $1,000 and $1,300 per month.

The Ninth Circuit’s Holding On Inclusion of Cash In Lieu Benefits in the Regular Rate

The primary issue on appeal was whether the City’s cash in lieu payments were properly excluded from the City employees’ regular rate.

In its June 2, 2016 opinion, the Ninth Circuit rendered two far-reaching holdings.

First, the Court held that cash payments made to employees in lieu of health benefits must be included in the hourly “regular rate” used to compensate employees for overtime hours worked.  The City argued that the cash in lieu payments were not payments made as compensation for hours of employment and were not tied to the amount of work performed for the employer, and therefore were excludable from the regular rate of pay as are payments for leave used and expenses.  The Ninth Circuit disagreed, finding the payments were “compensation for work” even if the payments were not specifically tied to time worked for the employer.  The Ninth Circuit also determined that the cash in lieu payments could not be excluded from the regular rate as payments made irrevocably to a third party pursuant to a bona fide benefit plan for health insurance, retirement, or similar benefits pursuant to section 207(e)(4) of the FLSA since those payments were paid out directly to employees.  Thus, those payments must be added into the employee’s regular rate of pay for the time period that they cover for purposes of determining the employee’s FLSA overtime rate.

Second, the Court held that even payments on behalf of employees pursuant to the plan that were not paid out as cash had to be included in the regular rate.  The federal Department of Labor (“DOL”) interpretations state that a benefits plan can only pay out an “incidental” part of its benefits as cash to be considered a bona fide benefits plan.  (29 C.F.R. sec. 778.215.)  In 2003, the DOL issued an opinion letter that defined cash in lieu benefits as “incidental” if they amount to no more than 20% of the employer’s total contribution to the benefit plan.  The Ninth Circuit rejected the DOL’s 20% rule as unpersuasive, but nevertheless held that the City’s cash in lieu payments to employees were not incidental as they amounted to too great of a percentage of the City’s total benefits contribution (42-47%).  Since the cash in lieu payments were not “incidental,” the plan does not qualify as a bona fide plan under section 778.215.  Thus, the City must also include all amounts that it paid into the flexible benefits plan for employees in their regular rate of pay, not just the cash in lieu payments.  The Ninth Circuit acknowledged that this decision could force employers to discontinue cash in lieu plans, but stated that that is a policy decision for Congress or the DOL – not the courts – to address.

Other Holdings of the Decision

  • The Ninth Circuit affirmed that a City may establish a 207(k) work period for its public safety employees without specifically referencing the term “207(k),” as long as the work period is otherwise established and regularly recurs.
  • The fact that the City’s payroll department consulted the human resources department to categorize the cash in lieu payments as a “benefit” instead of compensation was insufficient to establish the City’s good faith defense to liquidated damages.
  • The officers proved the City’s exclusion of the cash in lieu payments was “willful” under the FLSA, entitling the officers to three years of back overtime pay (rather than the standard two-year period) because the City supposedly did not take affirmative steps to determine whether the payments should be included in the regular rate of pay.  In an unusual concurring opinion, a majority of the panel noted that the willfulness standard adopted by the Ninth Circuit in  Alvarez v. IBP, Inc. in 2003 is “off track” with the standard for willfulness previously established by the U.S. Supreme Court.  The majority explained that it felt compelled to find willfulness based solely on the precedent set by the Alvarez decision.

Review in the U.S. Supreme Court

The next part of the appellate process is for the City to file a petition for a writ of certiorari in the U.S. Supreme Court, asking the Court to take up the Flores decision and reach a different result, in particular one that allows employers to have benefits plans that pay some amounts as cash-in-lieu of benefits but that does not present employers with a considerable threat of liability.  U.S. Supreme Court review could resolve the issues raised by Flores in a way that allows cash-in-lieu plans to exist and confer their desired benefits without doubt as to their FLSA consequences.

The U.S. Supreme Court decides to hear very few cases.  Flores is currently the law for employers in California (and other states like Arizona, Oregon, Washington, and Nevada that are in the Ninth Circuit).  It is important to know whether and how it applies to your agency.

Next Steps

If your agency provides cash payments to employees who opt-out of a health insurance plan, your agency should carefully evaluate the impact of Flores on payroll practices and FLSA liability.  The Flores decision could require either the cash in lieu amount or all plan benefits to be included in employees’ regular rate of pay for FLSA overtime purposes.  Many agencies provide contractual overtime in excess of FLSA minimum overtime requirements, such as overtime for working beyond scheduled hours in a workday (as opposed to overtime for working more than 40 hours in a week).  It is important to remember that the requirement to include cash in lieu or benefit plan amounts in the regular rate of pay only applies to FLSA overtime hours, not contractual overtime hours.  Finally, the Flores holdings on good faith and willfulness reiterate the importance of conducting and documenting regular reviews of all aspects of FLSA compliance for your agency.

Employers who offer cash-in-lieu may also face potential penalties under the Patient Protection and Affordable Care Act.  For more information on this topic, see our article here.

Employers should consult with wage and hour legal counsel before undertaking any remedial efforts based on the Flores ruling.

Courts Continue to Chip Away at Vested Rights

Posted in Retirement

Retirement-Sign.jpgThis post was authored by Erin Kunze

In the past few years, the courts have made it more difficult to establish a vested right to retiree medical benefits. We now have a decision that greatly reduces employee / retiree defenses that a change in benefits is unconstitutional.  The First District Court of Appeal last week upheld the Marin County Employees’ Retirement Association’s (“MCERA”) decision to prospectively limit the forms of pay and benefits included in the definition of “compensation earnable” and “pensionable compensation” – used to determine an employee’s final compensation for the purpose of determining pension benefits, finding that the change did not substantially impair current employees’ vested rights to a “reasonable” and “substantial” pension. Under this decision, the change was, thus, constitutional under state and federal law.

The Marin County Employees’ Retirement Association’s is subject to the County Employees Retirement Law of 1937 (“’37 Act”).  Following passage of the State’s Pension Reform Act of 2013, MCERA adopted a policy changing the definition of “compensation earnable” and “pensionable compensation,” used to determine an employee’s final compensation for the purpose of determining the employee’s retirement benefit.  Through the policy, MCERA specified new items of pay and benefits that would be excluded from the definition of compensation earnable and pensionable compensation.  Shortly after this change, employees and recognized employee organizations brought suit alleging, among other things, that the value and associated costs of these now excluded payments had been factors in determining the wage and benefits packages offered to MCERA members through collective bargaining.  In short, employees and their unions argued that the Pension Reform Act, and resultant change to MCERA’s compensation earnable and pensionable compensation definition, impaired members’ vested contract rights, in violation of state and federal constitution contract clauses.

The Court rejected the employees’ argument. While affirming that public employees have a “vested right” to a pension, the Court explained that the right is not an immutable entitlement to the “most optimal formula of calculating the pension.”  In reaching this conclusion, the Court relied on prior case law, reiterating that pension rights are a “limited” vested right, and that, until retirement, an employee’s entitlement to a pension is subject to change.  The Court explained that a governing body may make reasonable modifications and changes to a pension before the pension becomes payable. Until that time the employee does not have a right to any fixed or definite benefits but only to a “substantial or reasonable pension.” (Note: The Court’s decision pertained only to current employees and only prospectively. The Court did not address the power of either the state or local employers to decrease the pensions of retired employees.)

To determine whether changes to pension rights are reasonable, courts must look to the facts of “each case,” to assess what constitutes a permissible change.  To meet a “reasonableness” test, alterations of employees’ pension rights must bear some material relation to the theory of a pension system and its successful operation.  In addition, changes in a pension plan which result in disadvantage to employees should be accompanied by comparable new advantage.  As employees in this matter noted, a 1955 Supreme Court decision (Allen v. City of Long Beach (1955)) indicated that comparable new advantages “must” be provided when changes in a pension plan resulted in a disadvantage to employees. Accordingly, the Court in this matter examined the language of the 1955 Allen decision, and subsequent cases, to determine whether “should” or “must” is the preferred expression. The Court largely relied on an 1983 Supreme Court decision, Allen v. v. Board of Administration, 34 Cal.3d 114, in reaching its conclusion that changes in a pension plan which result in a disadvantage to employees “should,” but are not required to be, accompanied by comparable new advantages.  Regarding the facts specific to MCERA, the Court explained that a reduction in what is considered compensation earnable would invariably result in an increase to the employee’s net monthly compensation (i.e. take home pay) because it would result in lower contributions to MCERA, thus employees were not immediately disadvantaged by the changed plan. Ultimately, the Court found that the Pension Reform Act, and MCERA’s change to the compensational earnable and pensionable compensation definition thereunder, was reasonable, and thus did not violate state or federal constitution.

The First District Court of Appeal is available online: http://www.courts.ca.gov/opinions/documents/A139610.PDF

2016 is the Year of the FLSA Audit!

Posted in Wage and Hour

This blog post was authored by Jennifer Palagi.hourglass-small.jpg

A number of developments this year – the recent decision in Flores v. City of San Gabriel on the intersection of wage and hour law and employer health plans, the new changes coming December 1, 2016 to overtime exemption rules under the Fair Labor Standards Act (“FLSA”), and the U.S. Department of Labor’s (“DOL”) increased scrutiny of employers’ FLSA practices – together provide a resounding “wake-up call” to employers.  This is the year to assure FLSA compliance.  Indeed, litigation based on alleged violations of the FLSA and state wage laws continues to grow exponentially, with federal wage and hour filings up 450% since 2000 and hitting an all-time high in 2015.  A multitude of legislative, regulatory, and litigation developments highlight the need for agencies to audit their policies and practices for FLSA compliance.

An FLSA audit is an opportunity to examine an agency’s policies and practices to identify any possible FLSA violations.  FLSA audits may examine every applicable wage and hour issue, or may look at one or two pressing concerns.  Audits typically involve reviewing various documents, such as payroll records, memoranda of understanding, and agency rules, as well as interviewing agency employees who are familiar with certain practices.

Payroll Audits

Under the FLSA, all compensation that is “remuneration for employment” must be included in the regular rate unless it falls within one of several narrowly construed statutory exceptions.  The regular rate is not to be confused with the base hourly rate or salary and must include all requisite special pays in the overtime calculation.  Recently, in Flores v. City of San Gabriel the Ninth Circuit held that cash payments to police officers made in lieu of health benefits must be included in the regular rate for overtime purposes under the FLSA (and that under some circumstances, health plan payments made on behalf of employees must also be included).

A payroll audit can assess whether an agency includes all special pays required by the FLSA in determining a non-exempt employee’s regular rate of pay and whether the agency is calculating the FLSA regular rate of pay correctly.

Employee Classification Audits

On May 18, 2016, the DOL issued new regulations modifying the weekly salary and annual compensation threshold levels for white collar exemptions to FLSA overtime requirements.  These regulations become effective December 1, 2016.  One of the most significant changes is that the weekly salary threshold level is more than doubled from $455 per week ($23,660 annually) to $913 per week ($47,476 annually).  The upcoming regulations trigger new wage and hour obligations.  Thus, it is critical for agencies to become familiar with these new regulations and evaluate employee classifications.

Misclassifying employees as exempt or non-exempt is a common FLSA error.  Unless exempt, employees must generally be paid at the rate of 1.5 times their “regular rate” of pay for all hours worked  more than 40 in a week.  The most common exemptions, or “white collar” exemptions, apply to executive, administrative, professional, outside sales, and certain computer-related employees.  The burden is on the employer to show that an employee is properly classified as exempt.

There is no time like the present for agencies to use the upcoming December 1 deadline and FLSA changes as a catalyst to conduct a classification audit.  The audit may be based on the upcoming salary level changes for exemptions.  Alternatively, it could also involve a comprehensive review of the duties employees are actually performing and the percentage of time spent performing those duties to determine if employees qualify under one of the exemptions.

Hours Worked Audits

The DOL continues to increase its rate of audits and general scrutiny of employers’ FLSA compliance.  One area of focus is whether non-exempt employees are getting compensated for all “hours worked.”  Under the FLSA, overtime compensation must be paid for all hours worked over a maximum amount in a work period (usually 40 hours in a seven day FLSA work week).  Hours worked under the FLSA is broadly defined to include all hours employees are “suffered or permitted to work” for their employer, including time they are necessarily required to be on duty on the employer’s premises or time worked even if the employer did not request the employee to perform that work.  Thus, the issue is often ripe for challenge by employees.

An “hours worked” audit can identify whether an agency’s calculation of hours worked is correct when an employee, for example, travels for work or attends a training.  The audit can also examine whether employees work off-the-clock hours and can identify whether these hours are compensable under the FLSA.

Finally, the FLSA provides employers a defense to liquidated damages (double damages) if the employer can show that in good faith it tried to follow the FLSA and was reasonable in believing that it was in fact in compliance.  Thus, agencies should regularly audit FLSA compliance to help support a good faith defense.     

2016 is the year for agencies to take a close look at their policies and practices and ensure they are in strict compliance with the FLSA.   An essential preventive tool for agencies is an FLSA audit.  It is only through a comprehensive analysis into an agencies’ compensation, classification and time-keeping practices, and an examination of whether those particular practices comply with FLSA requirements that an agency can properly navigate the FLSA and its regulations and reduce the risk of FLSA lawsuits.

A Closer Look At The Restrictions On Hiring Retirees (And Also The Exceptions!)

Posted in Retirement

Retirement-Sign.jpgThis blog post was authored by Danny Y. Yoo.

CalPERS issued a Circular Letter on July 12, 2016, which provided information on its compliance review process and its most common findings, including employing retired annuitants.  In our practice, we have also observed some confusion surrounding the specifics on how to hire a retired annuitant.  Let’s take a look at the restrictions on hiring retired annuitants, and more importantly, the exceptions to those restrictions.

First of all, the general rule is that an agency cannot hire a retired annuitant to work for your agency without reinstating that individual back into CalPERS.

This may sound incorrect because you know of agencies (maybe even yours!) that have hired retired annuitants.  The California Public Employees’ Retirement Law and Public Employees’ Pension Reform Act of 2013 do outline exceptions to the general rule.  It is through these exceptions that agencies have been able to hire retired annuitants.  The two common exceptions are found in Government Code sections 21221(h) and 21224.  However, when an agency is utilizing either one of these exceptions, it must be aware of the strict and complicated requirements associated with these exceptions.

REQUIREMENTS COMMON TO SECTION 21221(H) AND 21224 APPOINTMENTS

Whether your agency appoints a retired annuitant to a vacant position under Section 21221(h) on an interim basis or hires an annuitant for a limited duration pursuant to Section 21224 for extra help, the following restrictions apply to both types of employment:

  1. The retiree may only work a combined total of 960 hours for all contracting agencies.If the retiree is working or has worked for two or more agencies that contract with CalPERS, the total combined hours cannot exceed 960 hours in a fiscal year.  Please be aware if the retiree is working for you and any other CalPERS agency.
  1. The compensation shall not exceed the maximum monthly based salary paid to other employees performing comparable duties as listed on a publicly available pay schedule for the vacant position divided by 173.333.Your agency is limited in how much it can pay a retiree.  The maximum rate is set by the publicly available pay schedule, and your agency cannot pay the retiree more than that rate.
  1. The retiree shall not receive any benefits, incentives, compensation in lieu of benefits, or any other forms of compensation in addition to the hourly rate.Your agency must only pay the retiree the hourly rate, as discussed above.  As a retiree, he or she cannot receive any benefits, such as health insurance, vacation days, or personal use of a company vehicle.
  1. The appointment must not be any sooner than 180 days after the retiree’s retirement date, unless there is an exception.There are exceptions to the 180-day wait period, and the two exceptions used most by our clients are the firefighter or public safety officer exception and the critically needed position exception, applicable to non-sworn employees.  If your agency is using the “critically needed position” exception, the governing body must certify the nature of the position and the necessity to fill a critical need.  This certification and resolution should be received by CalPERS before the retiree’s hire date.  Please note that certification for a “critically needed position” is different from the certification that the appointment requires “specialized skills.”

    Also, note that these exceptions to the 180-day wait period are not available to retirees who accept an incentive to retire.

  1. If the retiree is under normal retirement age, there must be a bona fide separation in service.A bona fide separation requires: (1) no pre-determined agreement between the employer and the member to work after retirement; and (2) there is a 60-day separation from employment.  Please note that there are no exceptions to this 60-day separation.  This means that even if the retiree can meet an exception of the 180-day wait period, if he or she is under normal retirement age, he or she must still serve a 60-day wait period.
  1. The retiree cannot have received any unemployment insurance payments for retired annuitant work for any public employer within 12 months prior to the appointment date.The retiree must certify in writing to your agency that he or she did not receive any unemployment insurance payments within 12 months prior to the appointment for previously retired annuitant work with any CalPERS employer.

REQUIREMENTS FOR SECTION 21221(H) APPOINTMENTS

Appointments under Section 21221(h) are interim appointments into vacant positions.  In general, this exception is used for upper-level positions because the appointment must be made by the agency’s governing board.   The requirements for a Section 21221(h) appointment are as follows:

  1. The appointment must be an interim appointment of limited duration.The appointment must have a start and end date.  It should not be left open-ended or indefinite.  Note that this is different from the 960-hour limit discussed above.
  1. The appointment must occur during recruitment for a permanent appointment.Your agency should be conducting open recruitment during the period of the interim appointment.  If there is no longer an ongoing recruitment for whatever reason, the agency may need to terminate the interim appointment.
  1. The governing body must deem that the appointment requires specialized skills or is necessary during an emergency to prevent stoppage of public business.Under Section 21221(h), even though the authority to make interim appointments may be delegated to an individual, the statute requires that the governing body deem that the appointment requires specialized skills or is during an emergency. For many of your agencies, the governing body is a board or a council.
  1. The appointment can only be made once.The retiree cannot be appointed to the same position twice.  This also means the retiree’s appointment cannot be extended, even if he or she has not worked 960 hours in a fiscal year.

REQUIREMENTS FOR SECTION 21224 APPOINTMENTS

Appointments under Section 21224 are for “extra help,” such as eliminating a backlog, working on a special project, or performing work that is an excess of what permanent employees are able to do.  This exception should not be used to fill a vacant position.  The requirements for a Section 21224 appointment are as follows:

  1. The appointment must of limited duration.Similar to above, the appointment must have a start and end date, and it should not be left open-ended or indefinite.
  2. The appointing power must deem that the appointment requires specialized skills or is during an emergency to prevent stoppage of public business.Under Section 21224, the appointment may be made by anyone with the power to hire persons for employment.

As you can see, these requirements require analysis on the individual retiree and the work that will be performed. If your agency is considering hiring a retired annuitant, seek legal counsel to ensure that your agency is in compliance with the law to avoid potential ramifications.

Tips from the Table: Building Your Dream Team

Posted in Labor Relations, Negotiations

We are excited to continue our video series – Tips from the Table. In these monthly videos, members of LCW’s Labor Relations and Negotiations Services practice group will provide various tips that can be implemented at your bargaining tables. We hope that you will find these clips informative and helpful in your negotiations.

Don’t Blame the Payroll System!

Posted in Wage and Hour

One particularly difficult challenge in complying with the strict minimum wage and overtime requirements of the Fair Labor Standards Act is an employer’s computerized timekeeping, payroll and/or accounting systems.  For the vast majority of public sector employers, timekeeping is automated, as is payroll and the computation of wages owed; hard-copy timecards for employees and manual overtime calculations are a thing of the past. Despite their benefits, computerized payroll systems may be difficult to update or change, and appear inscrutable to non-IT employees.  In addition, many public agencies have set up automated systems of accountability to track overtime and other costs, which add additional layers to running payroll.

Unfortunately, payroll system vendors rarely offer products that are easily and affordably tailored to the needs of public agency employers – particularly those employers with lengthy labor agreements that include myriad special pays and premiums specific to each bargaining unit, as well as covering numerous types of employees with various alternative work schedules, including safety.  Nor do payroll companies offer easily-accessible updates or ways to keep up with the ever-evolving law on how employers must compensate employees under the FLSA.  However, are deficient payroll systems or inefficient accounting procedures defenses to FLSA violations?  Generally speaking, no.  Employers must correctly and timely pay their employees per the requirements of the FLSA, regardless of the challenges posed by payroll and/or timekeeping software.

It is important to remember that late-paid wages are a violation of the FLSA.  (Biggs v. Wilson (9th Cir. 1993) 1 F.3d 1537, 1541.)  An employee’s wages must be paid on the regular payday for the period in which those wages were earned.  Although an exception exists where it is not practicable to determine overtime compensation owed until sometime after the regular pay day, payment must be made as soon as possible and in no event may payment be delayed beyond the next payday.  (29 C.F.R. sec. 778.106.)  This exception is narrowly construed.  Indeed, the Department of Labor has taken the position that this exception only applies when it is not possible to ascertain the number of overtime hours worked prior to preparing payroll.  (DOL Opinion Letter, Oct. 8, 2004.)[1]  Generally speaking, an employer’s inefficient or non-FLSA compliant payroll system will not qualify for this exception.

For example, in Dominici v. Board of Education of the City of Chicago, custodial workers sued their public employer for liquidated damages after repeated delays in their overtime payments.  Although the custodians had been paid all wages due to them, some of their overtime wages were paid up to one year late.  In their defense, the Defendant Board of Education explained the reason for the late payment was not something voluntary on the part of management, but was due to a new, complicated accounting procedure put into place that required charging the overtime payment to a valid “bucket number.”  If the custodial employees’ supervisor failed to charge their overtime to a valid bucket number, or if the correct bucket number had not yet been created, payment was delayed.  Since the delay was involuntary, argued the Defendant Board of Education, no liquidated damages should be assessed.  The Court disagreed, awarding the custodians liquidated damages for the late-paid wages and writing that “bureaucratic inertia in setting up its own timely payment of wages due to its own incompetence” was not a defense.  (Dominici v. Bd. of Ed. (N.D. Ill. 1995) 881 F. Supp. 315, 320.)

In an unreported case from Pennsylvania, the Defendant County tried to defend against an overtime claim by claiming no knowledge of plaintiff’s alleged overtime hours because the County’s computerized payroll system did not recognize the hours as overtime.  In ruling against the County, the Court wrote “the computer payroll system’s deficiencies [and] the County’s failure to acquire and utilize a payroll system that would recognize overtime [do] not excuse the County from paying its employees overtime wages as required under the FLSA.”  (Souryavong v. Lackawanna Cty. (M.D. Pa. 2015) 2015 WL 3409472, *7.)

These cases highlight the important role payroll systems can play in complying with the FLSA.  To ensure FLSA compliance, every employer must have comprehensive understanding of exactly how its payroll system calculated overtime rates and pays overtime wages.  Moreover, building payroll systems that are FLSA-compliant and devoting resources to maintaining compliant systems may be the best way to prevent FLSA claims.

[1] Note that this letter was not authored by the Wage and Hour Division Administrator and thus may not be relied on in defense of an FLSA claim.  However, in this specific example, the opinion letter is still instructive as to the Department of Labor’s interpretation of the FLSA.

Religion in the Public Sector Workplace

Posted in First Amendment

MP900289067Christianity, Judaism, Islam, Buddhism, and Hinduism are typically cited as the major religions of the world, although there are many others that have tens of millions of adherents or more.  The United States has no official established religion, and instead since its founding has guaranteed its citizens the right to free choice and exercise of religion.

For state agencies and local governments, these principles are not just abstractions but can come up in daily work.  In fact, public employers often face situations in which the religious beliefs of their employees become a major issue.  As a legal matter, the U.S. Constitution, the California Constitution, and state and federal statutes all demark boundaries that can guide public agencies in how to address these issues.  Unfortunately, lines in this area are often blurry.  Also, the scenarios can involve firmly held, personal beliefs on matters ranging in significance from the timing of daily religious practices to the very meaning of life.  Accordingly, workplace conflicts in this area can quickly escalate into matters of high emotional intensity that affect morale and harm productivity, and can easily develop into a grievance or lawsuit.

The following is a brief question and answer that explains the primary legal doctrines and addresses some commonly-occurring factual scenarios.

  1. What if employees seek to proselytize in the public sector workplace?

What if an employee spends a substantial amount of time in the government workplace talking to co-workers about religion?  What if he or she uses the email system to invite co-workers to church events or to explain positions on matters of faith?  These questions involve all of the sources of law mentioned above.  In particular, the First Amendment of the U.S. Constitution prevents the government from creating an “establishment” of religion, from prohibiting the “free exercise” of religion, and from abridging freedom of speech (including certain speech in the government workplace).  The California Constitution contains similar provisions.  Title VII, a federal civil rights statute and California’s Fair Employment and Housing Act (“FEHA”) prohibit employers (both public and private) from discriminating against employees on the basis of religion, and require reasonable accommodation of employee religious practices.

As is evident from this list, the laws sometimes appear to conflict – public employers cannot use their resources to promote religion (under the Establishment Clause) but cannot discriminate against employees on the basis of religion (under Title VII and the FEHA) and are restricted in their ability to allow expression of some viewpoints but not others (under constitutional free speech law), including views on matters of faith.

Given these potentially contradictory requirements, how does a public employer respond to employees who wish to speak, e-mail, or otherwise communicate about religion in the workplace?  One approach many employers use is to establish a policy limiting employees’ use of work time and the employer e-mail system to work-related matters only (typically with an allowance for incidental personal use, and a carve-out for use mandated by labor relations laws).  Pursuant to this type of rule, employees may freely express their views on their own time as long as they do not interfere with the work of others.  But if an employee spends too much time at work talking with co-workers about non-work-related matters, including religion, then this can be addressed as a violation of the personnel rule.  The same is true of the employer’s email system.  Lengthy emails on religious topics can be found to violate the policy, not because of the viewpoint expressed, but because of the lack of relationship to work.  The issue can certainly become more complicated, for example, if the religious themes interweave with matters that relate to work, or if the employer does not have this type of rule in place, and freely allows employees to use the email system for purposes that do not relate to work.  It is prudent to consult legal counsel in these circumstances.

  1. What if employees seek to take time out for prayer meetings in the public sector workplace – during the work day or on the agency’s property?

This type of scenario raises the same concerns as the previous one.  The First Amendment and the California Constitution limit a public agency’s ability to curb employee free speech and association.  But again, the use of government property to promote religion can infringe principles of separation of church and state, and violate the First Amendment’s Establishment Clause.  A public employer’s making special accommodations for, and expending resources to support, prayer meetings can be problematic, because it could easily be viewed as the government promoting religion.

To navigate these challenges, many government employers adopt an approach similar to that described in the previous section.  They allow employees to use a break room or facility to talk about basically any topic, on their own time.  Employees can then use the break room for prayer to the same extent employees are allowed to use the room to talk about any other type of topic.   For example, if employees are allowed to use empty areas to congregate on their own time and plan social events, employees should not be prohibited from using the area just because their speech happens to be on religion.

This is the simple answer – many circumstances will not present issues that are easily resolved.  If organized religious activities by some employees tend to create a hostile environment for other employees, this will raise concerns under state and federal laws that prohibit workplace harassment.  Also, as described in the next section, an employee may reasonably come forward and explain that his religion requires prayers at particular times during the workday, and claim a particular type of accommodation is necessary.  Federal and state statutes require reasonable accommodation of religious practices, and the employer will have to evaluate the situation carefully to comply with those laws.

  1. What if employees request workplace accommodations for religious dress or practices?

One the most important and sometimes confusing obligations employers face is responding to requests for workplace accommodations based on religion.  Requests can include those relating to religious dress, for examples, headscarves, turbans, or burqas.  Others can be more difficult: what if an employee requests for religious reasons to carry a kirpan, a Hindu ceremonial knife that is supposed to be worn at all times, in the workplace, even in areas where weapons are prohibited?  What if an agency employee asks to have religious icons or images in offices or cubicles visible to the public whom the employee serves?  Similar issues can arise relating to Christmas or other holiday decorations, Bible quotes or religious content as part of workplace communications, refusals to take certain oaths, or requests not to work certain days of the week.

California law is the first place to look for answers.  In general, it requires reasonable accommodation of employees’ religious grooming and practices, unless accommodation would impose an “undue hardship.”  California’s FEHA sets forth specific requirements as follows.  It makes it unlawful for an employer “to refuse to hire or employ a person or . . . to discharge a person from employment or . . . discriminate against a person in compensation or in terms, conditions, or privileges of employment because of a conflict between the person’s religious belief or observance and any employment requirement, unless the employer . . . demonstrates that it has explored any available reasonable alternative means of accommodating the religious belief or observance . . . , but is unable to reasonably accommodate the religious belief or observance without undue hardship . . . .”  (Emphasis added.)  This obligation includes the employer’s exploring “the possibilities of excusing the person from those duties that conflict with his or her religious belief or observance or permitting those duties to be performed at another time or by another person.”  (Government Code section 12940(l)(1).)  Under the FEHA, undue hardship means “an action requiring significant difficulty or expense,” when considered in light of factors such as the “nature and cost of the accommodation needed,” financial resources of the facilities and of the employer, the size of the business, and the type of operations.  (Gov. Code section 12926(u).)

The applicable federal anti-discrimination law, Title VII, 42 USC sections 2000e-2(a)(1), 2000e(j), imposes its own accommodation requirement on employers, including public employers, and is in many ways similar to California law, although its accommodation requirements are considered not as extensive.  (The federal Equal Employment Opportunity Commission provides some helpful guidance on how to navigate the accommodation process under federal law.)

In practice, applying these standards often depends very much on individual facts and circumstances.  An employer should be proactive and diligent in considering accommodations, and cautious in asserting the defense of undue hardship.  Undue hardship can often be shown where accommodation of the employee’s religious practice would require significantly more than ordinary, administrative costs, impair workplace safety, cause co-workers inordinately to assume burden of work, or conflict with statute or regulation.

Finally, constitutional considerations can enter the analysis.  If a public employee demands, as an accommodation, to be able to display religious icons to the public in discharging work responsibilities or to proselytize to the public in some way, this could well create First Amendment Establishment Clause or other constitutional concerns.  In turn, this would support a public employer’s defense of undue hardship.

  1. What if an Employee invents his or her own religion?

If an employee invents his or her own religion, that employee can actually benefit from statutory anti-discrimination laws.  A religion in this context does not need to have existed for any length of time, or have any particular number of adherents.  It must, however, meet a definition of “religion” that has been thoughtfully constructed by the Courts.  In 2002, the California Court of Appeal in Friedman v. Southern Cal. Permanente Medical Group, interpreting the protections to individuals on the basis of religion that are afforded by the FEHA set forth a three-part test.  The test is designed to assure that the “beliefs, observances, or practices” at issue occupy in the person’s life “a place of importance parallel to that of traditionally recognized religions.”  The Court in Friedman described the three factors as follows: “First, a religion addresses fundamental and ultimate questions having to do with deep and imponderable matters.  Second, a religion is comprehensive in nature; it consists of a belief-system as opposed to an isolated teaching.  Third, a religion often can be recognized by the presence of certain formal and external signs,” meaning for example “teachers or leaders; services or ceremonies; structure or organization; orders of worship or articles of faith; or holidays.”  (The Court in Friedman, applying this test, found that veganism is not a religion.)

The test set forth above is California’s statutory test for defining a religion.  Under the U.S. Constitution, however, the test for what qualifies as a “religion” is more conservative, and based on history and tradition.  In Church of the Lukumi Babalu Aye, Inc. v. City of Hialeah, the U.S. Supreme Court concluded that Santeria, a hybrid African/Catholic faith mandating animal sacrifice, constituted a “religion” entitled to First Amendment protection, based in part on the “historical association between animal sacrifice and religious worship.”

In conclusion, in terms of practicalities, legal issues relating to religion in the workplace can have a strong emotional dimension for those concerned. Sensitivity and tolerance are extremely important in crafting solutions to these issues.  Also, management should consider at the outset that employees asking for accommodation of religious beliefs or practices will likely understand what is at stake for management and their co-workers, and will likely help management arrive at a way to resolve the issue.  Finally, working with legal counsel is very important in resolving disputes that arise in this complex area of the law.

The Fourth Circuit Holds that Fire Captains Are Non-Exempt Employees Under the FLSA Because Their Primary Job Duty Is Being a First Responder

Posted in Wage and Hour

hourglass-small.jpg

This blog post authored by Alison R. Kalinski.

The United States Court of Appeals for the Fourth Circuit (covering such east coast states as Virginia, West Virginia, and Maryland) recently held that a group of fire Captains are entitled to overtime under the FLSA because their primary duty is being a first responder.  The case, Morrison v. County of Fairfax, Virginia, was decided June 21, 2016

In Morrison, over 100 current and former fire Captains sued Fairfax County for denial of overtime pay.  The Captains fell into two groups:  (1) Shift Commanders and Safety Officers, and (2) Station Commanders and Emergency Medical Service Supervisors (“EMS Supervisors”).  The trial court granted summary judgment to the County finding that all of the Captains were exempt executives under the FLSA.  In reaching its conclusion, the trial court held that 29 C.F.R. §541.3, the “first responder regulation,” only applied to blue collar workers and did not apply to the Captains.  The Fourth Circuit reversed.

The Fourth Circuit’s analysis is based on the first responder regulation in 29 C.F.R. §541.3.  This regulation was passed to clarify whether the overtime exemptions for administrative, executive, and other white collar employees found in 29 C.F.R. §541 (the “white collar exemptions”) would apply to first responders and manual laborers.  29 C.F.R. §541.3(b)(1) provides that the white collar exemptions “do not apply to … fire fighters … regardless of rank or pay level, who perform work such as preventing, controlling or extinguishing fires of any type; rescuing fire, crime or accident victims … or other similar work.”  Section (b)(2) goes on to explain that “[s]uch employees do not qualify as exempt executive employees because their primary duty is not management of the enterprise in which the employee is employed.  Thus, for example, a … fire fighter whose primary duty is to … fight fires is not exempt … merely because the… fire fighter also directs the work of other employees in … fighting a fire” (emphasis added).  The Fourth Circuit determined that under this regulation, whether the Captains are exempt employees depends upon whether their primary duty is management or administrative work directly related to management.  Four factors are considered in determining whether exempt duties comprise the primary duty of an employee:

  1. The importance of the exempt duties compared to other duties;
  2. Amount of time spent performing exempt work;
  3. Amount of freedom from direct supervision; and
  4. Comparison of the employee’s salary and with wages paid to other employees for non-exempt work.

In Morrision, the Fourth Circuit found that the evidence failed to show that the Captains’ primary duty was management-related.  Rather, the Court found that the Captains’ primary job duty was responding to emergency calls.  The Captains lacked discretion to refuse to respond to emergency calls, which take priority over all other aspects of their job.  The Captains respond to every emergency call that comes in during their shift and is assigned to their engine.  “[A]n engine cannot leave the station without its Captain on board.”  At the scene, Station and Shift Commanders work side-by-side with subordinates to fight fires and rescue victims.  EMS Supervisors and Safety Officers also have no discretion to refuse to respond to calls and are responsible for transporting equipment and rendering emergency care at the scene.

Like most firefighters, the Captains only spend a small amount of their time actually fighting fires.  Most of their time goes to training for their responder duties and physical fitness training.  The Court, however, rejected the County’s argument that the Captains were exempt because they spent only a small portion of their time actually responding to emergency calls.  It did so for three reasons.  First, the nature of first-responder work is to wait for an emergency, not only to respond to emergency calls.  Thus, the significant time spent waiting cannot be ignored.  Second, the regulation focuses not on the time spent doing non-exempt work, but on the time spent performing exempt work.  Just because a Captain only spends a small amount of time actually engaged in first responder work does not mean that he or she is spending that remaining time engaged in exempt work.  Third, the Captains’ training, which is the same as all firefighters, is to enable them to perform their first responder work and “underscores the importance of those direct response duties.”

The evidence showed that while the Captains do have some tasks that are distinct from their first-responder duties, such as completing annual evaluations, reporting disciplinary infractions and administering discipline, updating station policies, and creating wish lists of supplies.  The Court reasoned, however, that all of these tasks combined take at most 25 hours out of 2600 hours of work per year.  The Captains also have no responsibility for setting or controlling the budget, hiring/firing employees, setting staffing levels, changing work schedules, or approving overtime.

Nor did the evidence show the Captains were free from direct supervision.  The Captains’ role was to carry out their supervisors’ orders, and they were in constant contact with their supervisors.  Finally, there was no significant pay gap between the Captains and non-exempt Lieutenants just below them in rank.

Application to California Fire Departments:

Morrison is from outside of California and the Ninth Circuit (the federal appellate court covering California), and is not controlling authority in this state.  Nevertheless, it provides guidance on how fire departments in California should consider treating their employees under the FLSA.  For any exempt firefighters, regardless of their rank or pay, the fire department should evaluate whether the employee’s primary duty is to fight fires or act as first responder, regardless of the amount of hours the employee actually spends engaged in those tasks.  In addition, the focus of any inquiry should be the amount of time the employee is engaged in exempt work (such as managerial or other administrative tasks), rather than the amount of time spent being a first responder.  If the primary duty is fighting fires or being a first responder, the employee likely will not be exempt under the FLSA.

 

IRS Releases Proposed Regulations Regarding the Affordable Care Act’s Calculation of Coverage Affordability for Employers Offering Opt-Out Payments

Posted in Healthcare

Healthcare.jpgThis Special Bulletin was authored by Heather DeBlanc and Shardé Thomas.

On July 8, 2016, the Internal Revenue Service (IRS) released proposed regulations implementing some of the rules previously announced in IRS Notice 2015-87.  The proposed regulations will apply for taxable years beginning after December 31, 2016.

Among other topics, Notice 2015-87 introduced a rule that employers offering opt-out payments (also known as “cash-in-lieu”) must add the cash amounts to each employee’s premium contribution when calculating coverage affordability for the Affordable Care Act’s (“ACA”) employer mandate.

Notice 2015-87 distinguished between “unconditional” and “conditional” opt-out arrangements.  Unconditional opt-out arrangements are those in which the opt-out payments are conditioned solely on an employee declining the employer-sponsored coverage (i.e. an employee declines coverage and gets cash).  Conditional opt-out arrangements are those in which the opt-out payments are conditioned on an employee declining coverage and satisfying some other meaningful requirement related to the provision of health care, such as a requirement to provide proof of coverage by a spouse’s employer (i.e. an employee declines coverage, but to get the cash he/she must provide proof of alternative group health coverage).

The proposed regulations clarify that employer contributions to a Section 125 Plan that may be used by an employee to purchase minimum essential coverage are not opt-out payments subject to these rules.  However, an employer offering cash-in-lieu under a Section 125 Plan still may face affordability issues under the employer mandate.  For more information on this, see our prior article at: http://www.lcwlegal.com/IRS-Releases-Further-Guidance-on-Application-of-the.

The most notable employer impact created by these proposed regulations is a new requirement that if an employer offers cash-in-lieu, the offer must be made under an “eligible opt-out arrangement” to avoid increasing an employee’s premium contribution by the cash amount when the employer calculates affordability for the employer mandate.

Determining Affordability with an Unconditional Opt-Out Arrangement

For employers offering unconditional opt-out payments, the proposed regulations adopt the rule that an employee’s required premium contribution includes the amount the employee could receive if he or she had declined coverage.  In other words, the cash an employee could receive for declining coverage will be added to the employee’s premium toward the lowest cost plan when the employer runs the affordability calculation.  The proposed regulations analogized the scenario to a salary reduction and reasoned that, in both situations, an employee must forego a specified amount of cash compensation to enroll in coverage.  Therefore, the opt-out payment effectively increases the employee’s required contribution.

For example, XYZ offers employees the lowest cost health plan at a total premium of $400 per month.  Employees must contribute $80 toward the premium if they enroll in coverage.  However, employees who opt-out of coverage get $350 per month.  The IRS will consider this to be an unconditional opt-out arrangement because the employee automatically gets cash for opting out without having to satisfy any additional condition.  When XYZ calculates affordability, the employee contribution toward the lowest cost health plan will be $430 ($350 + $80), thereby making the coverage unaffordable.  XYZ will have exposure to potential penalties for offering unaffordable coverage under the ACA’s employer mandate.

Determining Affordability with an Eligible Opt-Out Arrangement

Notice 2015-87 stated that employers with a conditional opt-out arrangement were not required to add the cash opt-out amount to the employee’s premium contribution when calculating affordability.  According to this Notice, it appeared that an employer who required employees to provide proof of alternative group health coverage in order to receive cash-in-lieu would not have to add the cash amounts to the affordability determination.

However, the new proposed regulations state that only an arrangement that qualifies as an “eligible opt-out arrangement” will escape the requirement that the cash be added to the employee’s premium contribution.  An “eligible opt-out arrangement” means an arrangement that requires the following:

  1. The employee must provide proof of minimum essential coverage (“MEC”) through another source (other than coverage in the individual market, whether or not obtained through Covered California). This requirement includes government sponsored programs such as most Medicaid coverage, Medicare part A, CHIP, and most TRICARE coverage;
  2. The proof of coverage must show that the employee and all individuals in the employees expected tax family have (or will have) the required minimum essential coverage. An employees expected tax family includes all individuals for whom the employee reasonably expects to claim a personal exemption deduction for the taxable year(s) that cover the employer’s plan year to which the opt-out arrangement applies;
  3. The employee must provide reasonable evidence of the MEC for the applicable period. Reasonable evidence may include an attestation by the employee;
  4. The arrangement must provide that the evidence/attestation be provided every plan year;
  5. The evidence/attestation must be provided no earlier than a reasonable time before coverage starts (e.g. open enrollment). The arrangement can also require the evidence/attestation to be provided after the plan year starts; and
  6. The arrangement must provide the opt-out payment cannot be made (and the employer must not in fact make payment) if the employer knows that the employee or family member doesn’t have the alternative coverage.

If these conditions are met, the opt-out arrangement is an “eligible opt-out arrangement,” meaning that the amount of the opt-out payment is excluded from the employee’s required premium contribution for the affordability calculation.  Employers who wish to maintain cash-in-lieu arrangements outside of a Section 125 Plan should start revising the terms of the arrangement to meet the “eligible opt-out arrangement” definition.

Eligible Opt-Out Arrangement Rules Continue to Apply if Alternative Coverage Terminates before End of Plan Year

In some cases, an employee’s or a member of the employee’s expected tax family’s alternative coverage may terminate before the end of the employer’s plan year.  The proposed regulations provide that, in such cases, an employer may continue to exclude the amount of the opt-out payment from the affordability determination for the remainder of the plan year as long as the reasonable evidence rule is satisfied.

Opt-Out Payments under Collective Bargaining Agreements Get Some Relief

The proposed regulations adopt the general transition relief provided in Notice 2015-87.  All employers are not required to increase the amount of the employee’s contribution by the opt-out amount until the January 1, 2017 plan year, as long as the employer maintained the arrangement prior to December 16, 2015.

Employers with collective bargaining agreements (CBA) now have additional relief.  Employers are not required to increase the amount of an employee’s required premium contribution by opt-out payments that do not qualify under an eligible opt-out arrangement, until the later of: (1) the beginning of the first plan year that begins following the expiration of the CBA in effect before December 16, 2015 (disregarding any extensions on or after December 16, 2015), or (2) the applicability date of the regulations.  The proposed regulations clarified that there will not be a permanent exception for opt-out arrangements provided under CBAs.

Individual Mandate & Exchange Rules

The proposed regulations also contain information regarding the Individual Mandate and exchange coverage.  Some of the ways in which the proposed regulations will impact individuals are as follows:

  • Until the IRS issues final regulations, individuals may treat their employer’s opt-out payments under any opt-out arrangement as increasing their required premium contribution for purposes of the individual mandate and to determine subsidy eligibility.
  • When an individual declines to enroll in employer-sponsored coverage for a plan year and his/her employer fails to offer the opportunity to enroll in future plan years, the exchange will treat him/her as ineligible for employer-sponsored coverage during those future plan years. The individual could receive a subsidy and trigger employer penalties.

Employers who offer cash-in-lieu should also be aware that cash payments made to employees in lieu of health benefits must be included in the regular rate for overtime purposes under the FLSA.  For more information, see http://www.lcwlegal.com/files/144107_June%202016%20-%20Flores.pdf.

We previously detailed IRS Notice 2015-87 in the Client Update.  The article can be found here http://www.lcwlegal.com/IRS-Releases-Further-Guidance-on-Application-of-the.

The complete text of the proposed regulations can be accessed here https://www.federalregister.gov/articles/2016/07/08/2016-15940/premium-tax-credit.

If you have questions about this issue, please contact Heather DeBlanc or Shardé C. Thomas at 310.981.2000 or our Los Angeles, San Francisco, Fresno, San Diego, or Sacramento office.

Tips from the Table: Establishing Rapport During Negotiations

Posted in Labor Relations, Negotiations

We are excited to continue our video series – Tips from the Table. In these monthly videos, members of LCW’s Labor Relations and Negotiations Services practice group will provide various tips that can be implemented at your bargaining tables. We hope that you will find these clips informative and helpful in your negotiations.