Danny Flores v. City of San Gabriel, 824 F.3d 890

Background

Plaintiffs are current/former San Gabriel police officers who received cash "cash-in-lieu" payments when they declined city-provided medical benefits; those payments were shown on paychecks and taxed.
The City historically treated those cash-in-lieu payments as benefits and excluded them from the employees’ FLSA "regular rate," so overtime was computed without including those amounts.
Plaintiffs sued under the FLSA claiming the cash payments must be included in the regular rate, producing higher overtime and liquidated damages; they alleged the violation was willful (three-year statute).
The district court held cash-in-lieu payments must be included except when paid to a trustee/third party, found the City qualified for the § 207(k) partial exemption, and denied liquidated damages (two-year limitations). Both sides appealed.
The Ninth Circuit held cash-in-lieu payments are not excludable under § 207(e)(2) or (e)(4); the City’s Flexible Benefits Plan is not a "bona fide plan" because cash payments were not incidental (≈40%+ of plan contributions);
The court affirmed that the City qualifies for the § 207(k) law-enforcement partial overtime exemption; but reversed on willfulness and liquidated damages, finding the City did not act in good faith and its violation was willful, so three-year statute and liquidated damages apply.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether cash-in-lieu payments are excludable from the FLSA regular rate under § 7(e)(2)	Payments are compensation and must be included; they are not like vacation or reimbursements	Excludable as "other similar payments" because not tied to hours or services	Not excludable; focus is whether payments are compensation, not whether tied to hours; include in regular rate
Whether cash-in-lieu payments are excludable under § 7(e)(4) as contributions to a bona fide benefits plan	Plan payments (even if paid to trustee) are not bona fide because cash payments here are non-incidental	Excludable because plan generally meets § 7(e)(4) requirements; City administers plan itself	Not excludable: payments paid directly to employees fail § 7(e)(4); plan is not "bona fide" because cash payments are not incidental (≈40% of contributions)
Whether the City established a § 207(k) partial overtime exemption work period	N/A (Plaintiffs did not dispute eligibility)	City: adopted and consistently used an 80-hour/14-day work period since 1994/2003 documentation	City satisfied burden: adopted and regularly followed the work period; § 207(k) exemption applies
Liquidated damages & statute of limitations (willfulness; good faith)	City failed to show good-faith efforts to comply; violation was willful — liquidated damages and 3-year statute apply	City relied on internal payroll classification process and other compliance acts; argued no willfulness and good faith	City failed to show it took affirmative steps or relied on objective authority; violation was willful; award of liquidated damages mandatory and three-year statute applies

Key Cases Cited

Cleveland v. City of Los Angeles, 420 F.3d 981 (9th Cir. 2005) (FLSA exemptions construed narrowly; regular-rate principles)
Adair v. City of Kirkland, 185 F.3d 1055 (9th Cir. 1999) (§ 207(k) partial overtime exemption analysis)
Local 246 Utility Workers Union of Am. v. S. Cal. Edison Co., 83 F.3d 292 (9th Cir. 1996) (regular-rate exclusion analysis; compensation focus)
McLaughlin v. Richland Shoe Co., 486 U.S. 128 (1988) (definition of willfulness for FLSA statute of limitations)
Alvarez v. IBP, Inc., 339 F.3d 894 (9th Cir. 2003) (willfulness and employer’s affirmative steps to ensure compliance)
Reich v. Interstate Brands Corp., 57 F.3d 574 (7th Cir. 1995) (interpretation of § 7(e)(2) payments not tied to hours)
Balestrieri v. Menlo Park Fire Prot. Dist., 800 F.3d 1094 (9th Cir. 2015) (examples of payments excludable as non-working time)
Arnold v. Ben Kanowsky, Inc., 361 U.S. 388 (1960) (exemptions narrowly construed against employers)