This week’s blog departs from my usual preference to avoid getting too lawyerly . However, a recent case out of California leaves me with little choice because it raises an issue that has real-life implications even though it’s something only lawyers can love. The case is Loreto v. General Dynamics Info. Tech., Inc., Case No. 3:19-cv-01366-GPC-MSB, 2021 U.S. Dist. LEXIS 87745, 2021 WL 1839989 (May 7, 2021).

Cutting to the chase – here’s the point of the Loreto case. Cash payments made by Federal service contractors to satisfy fringe benefit obligations under the Service Contract Act (“SCA”) may, or may not, be added to their employees’ wages to come up with a boosted overtime payment rate. If you follow the U.S. Department of Labor’s (“DOL”) regulations, the cash-in-lieu payments aren’t part of the regular rate. Two federal court cases, however, ignore DOL’s view and add cash-in-lieu payments to the regular rate of pay. Left undecided in any of these cases is whether an employer’s good faith reliance upon the DOL regulations would be an absolute defense to back wage liability under the Portal-to-Portal Act. See 29 U.S.C. § 259(a) (“no employer shall be subject to any liability or punishment for . . . the failure to pay . . . overtime compensation” where the employer proves that the complained of act “was in good faith in conformity with and in reliance on any written administrative regulation, order, ruling, approval, or interpretation . . . or any administrative practice or enforcement policy of” DOL).

That means that as much as $4.54 per hour could be added to an employee’s hourly wage before determining overtime pay. If your business is among those that opt to pay cash in lieu of funding health plans or making 401k contributions, you may want to weigh your risks and think twice about how you structure your compensation and benefits programs. The tab for a boosted overtime rate could be substantial.

Now for the pesky law part. For any federal contract in excess of $2,500 that “has as its principal purpose the furnishing of services in the United States through the use of service employees,” contractors are required to pay prevailing wages and provide certain fringe benefits to their service employees. 29 U.S.C. § 6703. The DOL issues Wage Determinations (“WDs”) that establish the prevailing wage and benefits requirements (unless the service employees are covered by a collective bargaining agreement; click here for an overview of how CBAs are treated under the SCA).

Most, if not all, WDs provide for three general varieties of fringe benefits: paid vacation, paid holidays, and health and welfare (H&W) benefits, the last of which is the subject of this article. In the most commonly used WDs (specifically, those that are odd-numbered), the contractor is required to provide H&W benefits the value of which equals or exceeds a rate of $4.54 per hour paid up to 40 hours a week (or $4.22 per hour paid if the contract is subject to the federal sick leave requirement). Many employers meet this requirement through their employee benefits plans that provide health insurance, 401k or pension contributions, tuition support, and a variety of other “bona fide” fringe benefits.

However, the DOL regulations permit employers to discharge their fringe benefit obligations through the payment of a cash equivalent or some combination of cash and benefits. 29 CFR § 4.177. Indeed, many contractors opt for the simplicity of making “cash-in-lieu” payments to their employees. Likewise, some employees prefer the cash over the benefits or opt out of health plans if their spouse or domestic partner have access to a better plan. Regardless of the mode of providing benefits, the value of the benefits must meet the hourly rate requirement. Where cash is paid in lieu of benefits, the amount paid must be set forth on the employee’s pay stub separately so that it is easy to distinguish the wage payment from the fringe benefit payment.

Which brings us to the conundrum of this article—how are cash-in-lieu payments treated for the purpose of calculating overtime pay under the Fair Labor Standards Act (“FLSA”)? The FLSA requires employers to pay their workers “time-and-a-half” of their “regular rate” of pay for each hour worked in excess of 40 hours in a workweek. 29 U.S.C. § 207(a). The regular rate is an hourly rate that is arrived at by dividing the worker’s total remuneration in any workweek by the total number of hours actually worked in that workweek for which such compensation was paid. 29 U.S.C. § 207(e).

The FLSA and DOL’s regulations exclude certain payments from the total remuneration that goes into the calculation of the regular rate. See 29 U.S.C. 207(e); 29 C.F.R. § 778.200, et seq. Excluded items include gifts, discretionary bonuses, overtime premium pay, holiday and weekend premium pay, reimbursement of expenses incurred for the benefit of the employer as well as the value of benefits such as vacation, sick-pay, standby pay, parking benefits, wellness programs, gym access, fitness classes, employee discounts, contributions to a profit sharing or pension plan, and payments made for health and life insurance.

In other words, the value of some of the very fringe benefits that the SCA requires service contractors to provide are not counted as remuneration for determining the regular rate of pay. Accordingly, DOL takes the position that cash-in-lieu payments are not part of the remuneration to be counted for regular rate purposes. See 29 CFR § 4.177 (providing that “cash payments [that] discharge the employer’s obligation to furnish . . . fringe benefits may be excluded pursuant to [the SCA] from the employee’s regular or basic rate of pay in computing any overtime pay. . . .”). This makes sense. After all, the monies are being paid and reported separately from the employee’s prevailing wages solely for the purpose of discharging fringe benefit requirements.

Indeed, the SCA itself states that “[i]n determining any overtime pay to which a service employee is entitled under Federal law, the regular or basic hourly rate of pay . . . does not include any fringe benefit payments computed under [the SCA] which are excluded from the definition of “regular rate” under section 7(e) of the [FLSA].” 41 U.S.C. § 6707(e). Moreover, the payments are not made as compensation for hours worked; therefore, they are akin to the catch-all “other similar payments to an employee which are not made for his hours of employment.” 29 C.F.R. § 778.224 (citing 29 U.S.C. § 207(e)(2)).

As the Loreto court noted, there are differences of opinion. An Indiana federal court has held that 29 CFR § 4.177 is a reasonable interpretation of a statute that is silent or ambiguous regarding the treatment of cash-in-lieu payments under the regular rate computation. See Phelps v. Parsons Technical Support, Inc., 2010 U.S. Dist. LEXIS 116197, 2010 WL 4386920 (S.D. Ind. 2010) (concluding “as a matter of law that [employer’s] cash payments made in lieu of fringe benefits pursuant to the SCA were excludable from the Plaintiffs’ regular rate for purposes of calculating overtime.”). Thus, cash-in-lieu payments should not be added to the regular rate.

On the other hand, a competing pair of opinions reached the opposite conclusion and held that cash-in-lieu payments are included in the regular rate of pay unless the particular cash payment is of the type enumerated in the FLSA at § 207(e) as excluded from the regular rate. These courts held that FLSA § 207(e) unambiguously does not exclude cash-in-lieu payments from the regular rate. Therefore, according to them, the DOL’s interpretation under 29 C.F.R. § 4.177 should be disregarded. See, e.g., Barnes v. Akal Sec., Inc., Case No. 04-1350-WEB, 2005 U.S. Dist. LEXIS 12268 at *14 (D. Kan. June 20, 2005); accord Bonner v. Metro. Sec. Servs., Case No. SA-10-CV937-XR, 2011 WL 9022522011 U.S. Dist. LEXIS 26251 at *10-13 (W.D. Tex. March 15, 2011).

So there you have it. As the Loreto case recognized, there’s disagreement in the courts over how cash-in-lieu payments for SCA-mandated fringe benefits are to be treated under the FLSA. DOL’s regulation, however, is well settled and unlikely to change—cash-in-lieu payments will not be factored in the regular rate of pay and, therefore, won’t boost the time-and-a-half overtime rate. If it were left up to DOL, a service contractor could safely make cash-in-lieu payments without the risk of needing to pay boosted overtime. We think that’s the right result. However, if you’re sued—a court could see it differently and you could be required to pay more overtime. Nevertheless, it’s our view that a contractor should be able to rely upon DOL’s view that cash-in-lieu payments are not to be included in the regular rate computation so as to be excused from back wage liability if it turns out that DOL’s position is invalid. See 29 U.S.C. § 259(a) (no liability for failure to pay overtime where the employer acted in good faith, in conformity with, and in reliance on DOL regulations and guidance).

This leaves service contractors with several basic options. First, you could take your chances and pay overtime based on your employees’ hourly wage rates. Second, you could pay boosted overtime based on a rate that includes the cash-in-lieu amounts. Third, you could consider asking DOL to issue a formal opinion letter on the subject. Regardless, we would encourage all to look at their bottom lines and decide a course of action that accounts for the risk of being wrong.

Finally, I should note that the Loreto court did not actually issue a ruling on this point. Rather, it reviewed the current state of the law to assess the fairness of a class action settlement. Because the court found conflicting cases on the treatment of “cash-in-lieu” payments, the parties’ compromise settlement reflected the risk that the outcome of the case would be in doubt. There you go – another lawyerly point for good measure.