The following article was sourced from SHRM.org

Takeaway: Employees who opt out of sponsored health plans and pay an opt-out fee for doing so are not entitled to have this fee treated as part of their “regular rate” of pay for determining overtime compensation.

Employees who opted out of their union and employer-sponsored health plans received a credit. A portion of the credit was deducted to fund insurance from which plaintiffs had opted out. The plaintiffs argued that this opt-out fee should be treated as part of their “regular rate” of pay for calculating overtime pay under the Fair Labor Standards Act (FLSA). An appeals court, however, ruled that the fees are not part of the employees’ regular rate of pay because they are contributions to health insurance, even if the insurance is not specifically for the employees in question.

The plaintiffs are county employees who largely are members of two unions. The county provides employees a “flex credit” to purchase health benefits on a pretax basis. If the premium for their selected health insurance is more than the flex credit, the balance owed is deducted from the employee’s pretax earnings. If the premium is less, the remainder is paid to the employee in cash as taxable earnings.

Under the flexible benefits program, employees receive a cash payment for the balance of the flex credit after the opt-out fee is deducted. The opt-out fee is either directed to the unions to fund the employee health plans, or, for nonunion employees, to the third parties administering the plans.

The plaintiffs opted out of the county’s flexible benefits program, through which the county manages employee health benefits. Those who opt out are provided the flex credit but must pay an opt-out fee. The flex credit appears on an employee’s paystub under “earnings,” and the opt-out fee appears as a “before tax deduction.”

The county subtracts the opt-out fee from the flex credit and remits the balance to the employee in cash. The county treats this payment as part of the plaintiffs’ regular rate of pay when calculating overtime compensation, but it does not do the same for the opt-out fee.

Except for the small portion of the opt-out fee used for health services, the remainder of the fee is remitted to the unions to offset the amounts they pay for employee insurance through the union-sponsored plans, or to the county for a similar purpose.

The plaintiffs filed this putative class action in district court, arguing that excluding the opt-out fee from their regular rate of pay caused the county to underpay them for overtime, in violation of the FLSA. The district court granted summary judgment to the county, concluding that the opt-out fee was properly excluded from the plaintiffs’ regular rate of pay under an FLSA exception for health plan contributions.

The plaintiffs appealed.

The FLSA defines “regular rate of pay,” according to the court, “to include all remuneration for employment paid to, or on behalf of, the employee,” subject to certain exceptions. One such exception is “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.”

The appeals court rejected the plaintiffs’ argument that the opt-out fee should be treated like “cash-in-lieu payments,” stating that the fee “does not function like cash.”

The plaintiffs also argued that the health care exception does not apply because their opt-out fee was not used to support the plaintiffs’ own health care, but the health care of others.

The appeals court disagreed, stating that the FLSA “permits an employer to exempt from an employee’s regular rate of pay employer contributions made pursuant to bona fide health plans that are designed to alleviate the burden of a shrinking risk pool for the employees who choose to remain in the plans. When an employer, as here, decides to allow employees to retain some portion of an unused health insurance credit, it can permissibly structure the program to prop up the employee health plans without treating the full amount of the health credit as part of the FLSA regular rate of pay.”

The plaintiffs also argued that the program in question is not “bona fide,” but the appeals court disagreed. The appeals court affirmed the decision of the district court.

Sanders v. County of Ventura, 9th Cir., No. 22-55663 (Nov. 30, 2023).