Danny Flores v. City of San Gabriel

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

DANNY FLORES; ROBERT BARADA; Nos. 14-56421

KEVIN WATSON; VY VAN; RAY 14-56514

LARA; DANE WOOLWINE;

RIKIMARU NAKAMURA; D.C. No.

CHRISTOPHER WENZEL; SHANNON 2:12-cv-04884-

CASILLAS; JAMES JUST; STEVE JGB- JCG

RODRIGUES; ENRIQUE DEANDA,

Plaintiffs-Appellees/

Cross-Appellants, OPINION

and

CRUZ HERNANDEZ,

Plaintiff-Appellee,

and

GILBERT LEE; RENE LOPEZ,

Plaintiffs,

v.

CITY OF SAN GABRIEL,

Defendant-Appellant/

Cross-Appellee.

2 FLORES V. CITY OF SAN GABRIEL

Appeal from the United States District Court

for the Central District of California

Jesus G. Bernal, District Judge, Presiding

Argued and Submitted February 10, 2016

Pasadena, California

Filed June 2, 2016

Before: Stephen S. Trott, Andre M. Davis*,

and John B. Owens, Circuit Judges.

Opinion by Judge Davis;

Concurrence by Judge Owens

SUMMARY**

Labor Law

On an appeal and a cross-appeal, the panel affirmed in

part and reversed in part the district court’s summary

judgment partially in favor of the plaintiffs in an action under

the Fair Labor Standards Act, alleging that the City of San

Gabriel failed to include payments of unused portions of

police officers’ benefits allowances when calculating their

*

The Honorable Andre M. Davis, Senior Circuit Judge for the U.S.

Court of Appeals for the Fourth Circuit, sitting by designation.

**

This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.

FLORES V. CITY OF SAN GABRIEL 3

regular rate of pay, resulting in a lower overtime rate and a

consequent underpayment of overtime compensation.

The district court agreed with the plaintiffs that the City’s

cash-in-lieu of benefits payments were not properly excluded

from its calculation of the regular rate of pay, except to the

extent that the City made payments to trustees or third parties.

The district court held that the plaintiffs were restricted to a

two-year statute of limitations because the City’s violation

was not willful. The district court also found that the City

qualified for a partial overtime exemption, limiting its

liability for overtime to hours worked in excess of 86 in a

14-day work period.

The panel held that the City’s payment of unused benefits

must be included in the regular rate of pay and thus in the

calculation of the overtime rate for its police officers. The

panel held that the City’s violation of the Act was willful

because it took no affirmative steps to ensure that its initial

designation of its benefits payments complied with the Act

and failed to establish that it acted in good faith. Accordingly,

the plaintiffs were entitled to a three-year statute of

limitations and liquidated damages for the City’s violations.

The panel also concluded, however, that the City had

demonstrated that it qualified for the partial overtime

exemption under § 207(k) of the Act, limiting its damages for

the overtime violations.

Judge Owens, joined by Judge Trott, wrote that he

concurred fully in the majority’s opinion but believes that the

court’s willfulness caselaw is off track.

4 FLORES V. CITY OF SAN GABRIEL

COUNSEL

Brian P. Walter (argued) and Alex Y. Wong, Liebert Cassidy

Whitmore, Los Angeles, California, for Defendant-

Appellant/Cross-Appellee.

Joseph N. Bolander (argued), Brandi L. Harper, and

Christopher L. Gaspard, Gaspard Castillo Harper, APC,

Ontario, California, for Plaintiffs-Appellees/Cross-

Appellants.

OPINION

DAVIS, Circuit Judge:

Plaintiffs-Appellees and Cross-Appellants Danny Flores,

Robert Barada, Kevin Watson, Vy Van, Ray Lara, Dane

Woolwine, Rikimaru Nakamura, Christopher Wenzel,

Shannon Casillas, James Just, Steve Rodrigues, and Enrique

Deanda and Plaintiff-Appellee Cruz Hernandez (collectively,

“Plaintiffs”) are current or former police officers employed

by the City of San Gabriel, California (“City”). The Plaintiffs

brought suit against the City for violations of the Fair Labor

Standards Act (“FLSA”), 29 U.S.C. §§ 201–19, alleging that

the City failed to include payments of unused portions of the

Plaintiffs’ benefits allowances when calculating their regular

rate of pay, resulting in a lower overtime rate and a

consequent underpayment of overtime compensation. The

Plaintiffs asserted that the City’s violation of the FLSA was

“willful,” entitling them to a three-year statute of limitations

for violations of the Act, and sought to recover their unpaid

overtime compensation and liquidated damages.

FLORES V. CITY OF SAN GABRIEL 5

The City claimed that its cash-in-lieu of benefits

payments were properly excluded from the Plaintiffs’ regular

rate of pay pursuant to two of the Act’s statutory exclusions

and argued that it qualified for a partial overtime exemption

under § 207(k), which allows public agencies employing

firefighters or law enforcement officers to designate an

alternative work period for purposes of determining overtime.

The City denied that any violation of the FLSA was willful

and that the Plaintiffs were entitled to liquidated damages.

For the reasons that follow, we conclude that the City’s

payment of unused benefits must be included in the regular

rate of pay and thus in the calculation of the overtime rate for

its police officers as well. And because the City took no

affirmative steps to ensure that its initial designation of its

benefits payments complied with the FLSA and failed to

establish that it acted in good faith in excluding those

payments from its regular rate of pay, the Plaintiffs are

entitled to a three-year statute of limitations and liquidated

damages for the City’s violations. We also conclude,

however, that the City has demonstrated that it qualifies for

the partial overtime exemption under § 207(k) of the Act,

limiting its damages for the overtime violations alleged here.

I. BACKGROUND

A. Statutory background

Under the FLSA, an employer must pay its employees

premium overtime compensation of one and one-half times

the regular rate of payment for any hours worked in excess of

forty in a seven-day work week. Cleveland v. City of Los

Angeles, 420 F.3d 981, 984–85 (9th Cir. 2005) (citing

§ 207(a)). The “regular rate” is defined as “all remuneration

6 FLORES V. CITY OF SAN GABRIEL

for employment paid to, or on behalf of, the employee,”

subject to a number of exclusions set forth in the Act.

§ 207(e). The FLSA also provides “a limited exemption from

the overtime limit to public employers of law enforcement

personnel or firefighters.” Adair v. City of Kirkland, 185 F.3d

1055, 1059 (9th Cir. 1999) (citing § 207(k)). The partial

overtime exemption in § 207(k) “increases the overtime limit

slightly and it gives the employer greater flexibility to select

the work period over which the overtime limit will be

calculated.” Id. at 1060 (citation omitted).

The FLSA provides a private cause of action for

employees to seek unpaid wages owed to them under its

provisions. § 216(b). The Act has a two-year statute of

limitations for claims unless the employer’s violation was

“willful,” in which case the statute of limitations is extended

to three years. § 255(a). An employer who violates the

FLSA’s overtime provisions is liable in the amount of the

employee’s unpaid overtime compensation, in addition to an

equal amount in liquidated damages. § 216(b). The Act

provides a defense to liquidated damages for an employer

who establishes that it acted in good faith and had reasonable

grounds to believe that its actions did not violate the FLSA.

§ 260.

B. Factual and procedural background

1. Flexible Benefits Plan

The City provides a Flexible Benefits Plan to its

employees under which the City furnishes a designated

monetary amount to each employee for the purchase of

medical, vision, and dental benefits. All employees are

required to use a portion of these funds to purchase vision and

FLORES V. CITY OF SAN GABRIEL 7

dental benefits. An employee may decline to use the

remainder of these funds to purchase medical benefits only

upon proof that the employee has alternate medical coverage,

such as through a spouse. If an employee elects to forgo

medical benefits because she has alternate coverage, she may

receive the unused portion of her benefits allotment as a cash

payment added to her regular paycheck.

In 2009, an employee who declined medical coverage

received a payment of $1,036.75 in lieu of benefits each

month. This amount has increased each year, so that

employees who declined medical coverage received

$1,112.28 in 2010, $1,186.28 in 2011, and $1,304.95 in 2012.

This payment appears as a designated line item on an

employee’s paycheck and is subject to federal and state

withholding taxes, Medicare taxes, and garnishment.

In 2009, the City paid $2,389,468.73 to or on behalf of its

employees pursuant to its Flexible Benefits Plan, and it paid

$1,116,485.77 of that amount, or 46.725% of total plan

contributions, to employees for unused benefits. While the

exact figures vary each year, the percentage of the total plan

contributions that the City pays to employees for unused

benefits has remained somewhat consistent. In 2010, the City

paid $1,086,202.56 to employees for unused benefits,

reflecting 42.842% of total plan contributions; in 2011,

$1,138,074.13, or 43.934% of total plan contributions; and in

2012, $1,213,880.70, or 45.179% of total plan contributions.

At some time prior to 2003, the City designated its cash-

in-lieu of benefits payments as “benefits” that were excluded

from its calculation of a recipient’s regular rate of pay, and,

accordingly, has not included the value of the payments in its

8 FLORES V. CITY OF SAN GABRIEL

calculation of employees’ regular rate of pay. The City has

not revisited its designation since that time.

2. Calculation of overtime

Since at least 1994, the City’s police officers have been

paid overtime when they have worked more than eighty hours

in a fourteen-day work period. Since at least 2003, the City’s

eighty-hour/fourteen-day work period has been memorialized

in several documents. A 2003 City resolution concerning the

“work week” states that police officers work eighty hours in

a bi-weekly period. This same eighty-hour/fourteen-day

work period was restated in the City’s Salary, Compensation

and Benefit Policy Manual, dated July 3, 2010, and in the

2005–2007 Memorandum of Understanding between the City

and the police officers’ collective bargaining unit. Because

the City’s cash-in-lieu of benefits payments are excluded

from its calculation of an officer’s regular rate of pay, the

benefits payments are not incorporated into the City’s

calculation of the officer’s overtime rate.

3. Litigation between the parties

The Plaintiffs instituted this suit against the City in 2012.

Following discovery, both parties moved for partial summary

judgment on the Plaintiffs’ claims. The district court agreed

with the Plaintiffs that the City’s cash-in-lieu of benefits

payments were not properly excluded from its calculation of

the regular rate of pay, except to the extent that the City

makes payments to trustees or third parties. Flores v. City of

San Gabriel, 969 F. Supp. 2d 1158, 1169–77 (C.D. Cal. 2013)

(“Flores I”). Finding that the City’s violation of the Act was

not willful, however, it held that the Plaintiffs were restricted

to the two-year statute of limitations for their claims. Id. at

FLORES V. CITY OF SAN GABRIEL 9

1177. The district court also found that the City qualified for

the § 207(k) partial overtime exemption and thus limited the

City’s liability for overtime to hours worked in excess of

eighty-six in a fourteen-day work period. Id. at 1177–79.

After receiving supplemental briefing, the district court

denied the Plaintiffs’ motion for partial summary judgment

on the issue of liquidated damages and sua sponte entered

summary judgment in favor of the City on that issue. Flores

v. City of San Gabriel, No. CV 12-04884-JDB (JCGx), 2013

WL 5817507, at *1 (C.D. Cal. Oct. 29, 2013) (“Flores II”).

The City timely appealed the district court’s rulings

concerning the exclusion of the cash-in-lieu of benefits

payments from the regular rate of pay. The Plaintiffs cross-

appealed, challenging the district court’s rulings that the

payments qualified for exclusion under the Act if made to a

trustee or a third party, that the City qualified for a § 207(k)

partial overtime exemption, that the applicable statute of

limitations was two years, and that the Plaintiffs were not

entitled to liquidated damages.

II. STANDARD OF REVIEW

We review a grant of summary judgment or partial

summary judgment de novo, applying the same standard of

review as the district court under Federal Rule of Civil

Procedure 56. Adair, 185 F.3d at 1059; Local 246 Utility

Workers Union of Am. v. S. Cal. Edison Co., 83 F.3d 292, 294

n.1 (9th Cir. 1996). Under Rule 56, a court “shall grant

summary judgment if the movant shows that there is no

genuine dispute as to any material fact and the movant is

entitled to judgment as a matter of law.” Fed. R. Civ. P.

56(a). When the parties file cross-motions for summary

judgment, we review each separately, giving the non-movant

10 FLORES V. CITY OF SAN GABRIEL

for each motion the benefit of all reasonable inferences. Ctr.

for Bio-Ethical Reform, Inc. v. L.A. Cty. Sheriff Dep’t,

533 F.3d 780, 786 (9th Cir. 2008) (citation omitted).

III. ANALYSIS

“The FLSA is construed liberally in favor of employees;

exemptions ‘are to be narrowly construed against the

employers seeking to assert them . . . .’” Cleveland, 420 F.3d

at 988 (quoting Arnold v. Ben Kanowsky, Inc., 361 U.S. 388,

392 (1960)). The employer bears the burden of establishing

that it qualifies for an exemption under the Act. Id. We will

not find a FLSA exemption applicable “except [in contexts]

plainly and unmistakably within [the given exemption’s]

terms and spirit.” Id. (alterations in original) (quoting Klem

v. Cty. of Santa Clara, 208 F.3d 1085, 1089 (9th Cir. 2000)).

A. Calculation of regular rate of pay

1. Section 207(e)(2)

The City’s primary contention on appeal is that its cash-

in-lieu of benefits payments are properly excluded from the

regular rate of pay pursuant to § 207(e)(2) because they are

not compensation for hours worked by the Plaintiffs. Section

207(e)(2) excludes from the regular rate of pay

payments made for occasional periods when

no work is performed due to vacation,

holiday, illness, failure of the employer to

provide sufficient work, or other similar

cause; reasonable payments for traveling

expenses, or other expenses, incurred by an

employee in the furtherance of his employer’s

FLORES V. CITY OF SAN GABRIEL 11

interests and properly reimbursable by the

employer; and other similar payments to an

employee which are not made as

compensation for his hours of employment.

The City argues that this final phrase—“other similar

payments to an employee which are not made as

compensation for his hours of employment”—permits

exclusion of any payments that do not depend on when or

how much work the employee performs. The City does not

contend that its cash-in-lieu of benefits payments are not

compensation. Rather, because its payments of the Plaintiffs’

unused benefits are not tied to hours worked or amount of

services provided by the Plaintiffs, the City reasons, the

payments are properly excluded under § 207(e)(2). This is a

question of first impression in this and other circuits. While

a close question, we conclude that the City’s cash-in-lieu of

benefits payments may not be excluded under § 207(e)(2) and

therefore must be included in the calculation of the Plaintiffs’

regular rate of pay.

The Department of Labor’s interpretation of § 207(e)(2)’s

final phrase is set forth at 29 C.F.R. § 778.224,1 which

1

Section 778.224 is an interpretative bulletin containing an “official

interpretation[] . . . issued by the Administrator on the advice of the

Solicitor of Labor, as authorized by the Secretary.” 29 C.F.R. § 778.1.

“Interpretations such as those in opinion letters—like interpretations

contained in policy statements, agency manuals, and enforcement

guidelines, all of which lack the force of law—do not warrant Chevron-

style deference.” Christensen v. Harris Cty., 529 U.S. 576, 587 (2000)

(citations omitted). Such interpretations are instead “entitled to respect”

under Skidmore v. Swift & Co., 323 U.S. 134 (1944), but only to the extent

that the agency’s interpretation has the “power to persuade.” Id. (quoting

Skidmore, 323 U.S. at 140). Because the City does not challenge

12 FLORES V. CITY OF SAN GABRIEL

provides, in part:

Since a variety of miscellaneous payments are

paid by an employer to an employee under

peculiar circumstances, it was not considered

feasible to attempt to list them. They must,

however, be “similar” in character to the

payments specifically described in section

7(e)(2). It is clear that the clause was not

intended to permit the exclusion from the

regular rate of payments such as bonuses or

the furnishing of facilities like board and

lodging which, though not directly attributable

to any particular hours of work are,

nevertheless, clearly understood to be

compensation for services.

29 C.F.R. § 778.224(a). Section 778.224 also provides three

examples of payments that constitute “other similar

payments” under § 207(e)(2) and are thus properly excluded

under that subsection—amounts paid to an employee for the

rental of her vehicle; loans or advances made to the

employee; and “[t]he cost to the employer of conveniences

furnished to the employee such as parking space, restrooms,

lockers, on-the-job medical care and recreational facilities.”

§ 778.224(b). The Department of Labor’s interpretation of

§ 207(e)(2) is thus directly contrary to the interpretation of

the “other similar payments” clause that the City urges here.

Under § 778.224(a), a payment may not be excluded from the

regular rate of pay pursuant to § 207(e)(2) if it is generally

understood as compensation for work, even though the

§ 778.224 as unpersuasive, we consider it here without expressing an

opinion on its persuasiveness.

FLORES V. CITY OF SAN GABRIEL 13

payment is not directly tied to specific hours worked by an

employee. And indeed, the examples given in § 778.224(a)

of payments that were not intended to be excluded under the

“other similar payments” clause, such as bonuses or room and

board, are commonly considered to be compensation even

though such payments do not fluctuate in accordance with

particular hours worked by an employee.

We have similarly interpreted the “other similar

payments” clause to focus on whether the character of the

payment was compensation for work. In Local 246 Utility

Workers Union of America v. Southern California Edison

Co., the employer argued that payments made to supplement

the wages of disabled workers performing lower-wage work

than they had performed prior to their disability were not

“made as compensation for [the employee’s] hours of

employment” because the workers were paid a weekly, not

hourly, wage. Local 246, 83 F.3d at 295 (alteration in

original). We rejected this argument, explaining that “[t]he

key point is that the pay or salary is compensation for work”

and “[t]hus it makes no difference whether the supplemental

payments are tied to a regular weekly wage or regular hourly

wage.” Id. (emphasis added). In other words, the question of

whether a particular payment falls within the “other similar

payments” clause does not turn on whether the payment is

tied to an hourly wage, but instead turns on whether the

payment is a form of compensation for performing work.

Indeed, we opined that, “[e]ven if payments to employees are

not measured by the number of hours spent at work, that fact

alone does not qualify them for exclusion under section

207(e)(2).” Id. at 295 n.2 (citing Reich v. Interstate Brands

Corp., 57 F.3d 574, 577 (7th Cir. 1995)).

14 FLORES V. CITY OF SAN GABRIEL

The City contends that Local 246 must not be read so

broadly because the distinction at issue there was between

weekly and hourly wages, not between compensation that

was tied to hours worked and compensation that was not.

That is true. However, the City fails to grapple fully with our

reasoning for rejecting the employer’s distinction between

weekly and hourly wages—that the “key point” is whether

the payment is “compensation for work”—and makes no

mention of our observation that payments that “are not

measured by the number of hours spent at work” are not

automatically excludable under § 207(e)(2). This reasoning

forecloses the City’s interpretation of § 207(e)(2).

Neither Reich v. Interstate Brands Corp. nor Minizza v.

Stone Container Corp. Corrugated Container Division East

Plant, 842 F.2d 1456 (3d Cir. 1988), persuades us that our

reading of § 207(e)(2) is incorrect. Reich concerned the

classification of payments made to bakers for working a

schedule without two consecutive days off. 57 F.3d at

575–76. While the Seventh Circuit concluded that the “other

similar payments” clause “refers to other payments that do

not depend at all on when or how much work is performed,”

it rejected the employers’ interpretation that the clause

excluded any payment “not measured by the number of hours

spent at work,” the same reading of the statute that the City

espouses here. Id. at 577–78. The Reich court determined

that a payment for working an inconvenient schedule is

unlike vacation pay and the reimbursement of expenses—the

other two kinds of payment enumerated in § 207(e)(2)—and

is instead similar to “a higher base rate compensating the

employee for smelly or risky tasks, foul-tempered

supervisors, or inability to take consecutive days off.” Id. at

578–79. Accordingly, the court held that the schedule

payments could not be excluded under § 207(e)(2). Id. At

FLORES V. CITY OF SAN GABRIEL 15

bottom, the Seventh Circuit’s reading of the statute is not so

different from our own—both look to whether the payment at

issue is generally understood as compensation to the

employee, not whether the payment is tied to specific hours

worked by the employee.

In Minizza, the Third Circuit considered the treatment of

lump sum payments made to employees pursuant to a

collective bargaining agreement. 842 F.2d at 1458. The

payments were made in lieu of a wage increase and as an

inducement to ratify the agreement. Id. The Third Circuit

determined that these lump sum payments were properly

excluded under § 207(e)(2), rejecting the district court’s

conclusion that the payments could not be excluded because

they were not sufficiently similar to vacation time and

reimbursements. Id. at 1461–62. The Third Circuit

interpreted § 207(e)(2)’s “other similar payments” clause to

encompass “payments not tied to hours of compensation, of

which payments for idle hours and reimbursements are only

two examples.” Id. at 1461. This reading, too, ultimately

focuses on whether a given payment is a form of

compensation for an employee’s service or, like vacation time

and reimbursements, is instead a payment that would not

generally be considered compensation for an employee’s

work. Admittedly, the Third Circuit’s greater focus on a

direct tie to hours worked or services provided hews more

closely to the interpretation that the City urges here. We

decline to adopt a similar requirement. We observe, however,

because the purpose of the payments in Minizza was to secure

the employees’ ratification of a collective bargaining

agreement, such payments are not compensation for work

performed, and would similarly be excludable under our

interpretation of § 207(e)(2).

16 FLORES V. CITY OF SAN GABRIEL

Accordingly, consistent with our precedent and the

Department of Labor’s interpretation, we focus our inquiry on

whether a given payment is properly characterized as

compensation, regardless of whether the payment is

specifically tied to the hours an employee works, when

determining whether that payment falls under § 207(e)(2)’s

“other similar payments” clause.

As noted previously, the City does not contend that its

cash-in-lieu of benefits payments are excluded from the

regular rate of pay because they are not compensation, but

rather because they are not compensation for hours of work

performed or an amount of services provided. Even if the

City had not made this concession, however, we would

conclude that the payments at issue here are properly

considered compensation for work. The other payments we

have found to be excluded under § 207(e)(2)’s “other similar

payments” clause are payments for non-working time, similar

to vacation or sick time, which are expressly excluded under

§ 207(e)(2). See Balestrieri v. Menlo Park Fire Prot. Dist.,

800 F.3d 1094, 1103–04 (9th Cir. 2015) (leave buyback

payments); Ballaris v. Wacker Siltronic Corp., 370 F.3d 901,

909 (9th Cir. 2004) (lunch periods). The payments at issue

here are not similar to payments for non-working time or

reimbursement for expenses.

Moreover, the FLSA’s inclusion of a separate exemption

specifically addressing benefits, § 207(e)(4), suggests that

payments related to benefits would otherwise be considered

compensation. Inclusion of a separate exemption also

indicates that Congress did not understand § 207(e)(2)’s

“other similar payments” clause to already exempt payments

related to benefits. See Reich, 57 F.3d at 578. To be sure,

“the subsections of § 7(e) are not mutually exclusive; that a

FLORES V. CITY OF SAN GABRIEL 17

payment cannot be excluded under one subsection does not

imply that every other subsection is inapplicable.” Id. While

the inclusion of a separate exemption addressing benefits is

by no means dispositive, it provides insight into the intended

scope of § 207(e)(2). As the Seventh Circuit reasoned, “we

hesitate to read § 7(e)(2) as a catch-all, one that obliterates

the qualifications and limitations on the other subsections and

establishes a principle that all lump-sum payments fall

outside the ‘regular rate,’ for then most of the remaining

subsections become superfluous.” Id.

For these reasons, and in light of the command that we

interpret the FLSA’s exemptions narrowly in favor of the

employee, we conclude that the City has failed to carry its

burden to demonstrate that its cash-in-lieu of benefits

payments “plainly and unmistakably” constitute excludable

payments under § 207(e)(2). Cleveland, 420 F.3d at 988.

The City warns us that a ruling in favor of the Plaintiffs in

this case will encourage municipalities to discontinue cash-in-

lieu of benefits payment programs due to the consequent

increase in overtime costs to the detriment of municipal

employees. As we have observed before, such arguments are

“more appropriately . . . made to Congress or to the

Department of Labor, rather than to the courts.” Bratt v. Cty.

of Los Angeles, 912 F.2d 1066, 1071 (9th Cir. 1990). The

potential effect of our ruling on municipal decision-making

does not give us license to alter the terms of the FLSA.

Accordingly, we affirm the district court’s ruling that the

City’s cash-in-lieu of benefits payments are not properly

excluded under § 207(e)(2).

18 FLORES V. CITY OF SAN GABRIEL

2. Section 207(e)(4)

The City also argues that its cash-in-lieu of benefits

payments are properly excluded pursuant to § 207(e)(4).

Section 207(e)(4) excludes from the regular rate of pay

“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.”

Because the City pays the unused benefits directly to its

employees and not “to a trustee or third person,” its cash-in-

lieu of benefits payments cannot be excluded under

§ 207(e)(4). We rejected a similar argument in Local 246

when the employer had proffered no evidence that any of the

payments at issue were made to a trust rather than directly to

the employees because “[s]ection 207(e)(4) deals with

contributions by the employer, not payments to the

employee.” Local 246, 83 F.3d at 296. That reasoning

applies equally here.

The City urges us to find that its cash-in-lieu of benefits

payments fall within the ambit of § 207(e)(4) even though the

payments are not made to a trustee or third party because the

payments “generally” meet the requirements of that

subsection, arguing that it should not be penalized for

administering its own flexible benefits plan. But “[w]here

‘[a] statute’s language is plain, the sole function of the courts

is to enforce it according to its terms,’ because ‘courts must

presume that a legislature says in a statute what it means and

means in a statute what it says there.’” Cleveland, 420 F.3d

at 989 (quoting United States v. Ron Pair Enters., Inc.,

489 U.S. 235, 241 (1989); Conn. Nat’l Bank v. Germain,

503 U.S. 249, 253–54 (1992)). The City’s cash-in-lieu of

FLORES V. CITY OF SAN GABRIEL 19

benefits payments are not made to a trustee or third party, and

therefore those payments do not meet the requirements of

§ 207(e)(4). We are not at liberty to add exceptions to the

clear requirements set forth in the statute for payments that

“generally” satisfy the requirements of that provision. This

is particularly true here, where exemptions to the FLSA’s

requirements are to be narrowly construed in favor of the

employee. Cleveland, 420 F.3d at 988 (citing Arnold,

361 U.S. at 392). We thus have no trouble concluding that

the City’s cash-in-lieu of benefits payments are not properly

excluded from the regular rate of pay pursuant to § 207(e)(4).

Whether benefit payments made directly to a trustee or

third party pursuant to the City’s Flexible Benefits Plan are

properly excluded from the regular rate of pay under

§ 207(e)(4) is a closer question. The district court answered

the question in the affirmative, a holding that the Plaintiffs

challenge in their cross-appeal. The Plaintiffs argue that the

Flexible Benefits Plan is not a “bona fide plan” under

§ 207(e)(4), and thus even payments made to a trustee or third

party pursuant to the Plan are not properly excluded under

that subsection. We agree.

Under § 207(e)(4), payments made to a trustee or third

party “pursuant to a bona fide plan for providing old-age,

retirement, life, accident, or health insurance or similar

benefits for employees” may be excluded from the regular

rate of pay. The statute does not define the term “bona fide

plan.” The Department of Labor’s interpretation of that term

is set forth at 29 C.F.R. § 778.215.2 The parties’ dispute

2

Like § 778.224, § 778.215 is an interpretative bulletin accorded respect

under Skidmore to the extent that the interpretation has the “power to

persuade.” Christensen, 529 U.S. at 587 (quoting Skidmore, 323 U.S. at

20 FLORES V. CITY OF SAN GABRIEL

concerns only one provision of that section:

The plan must not give an employee . . . the

option to receive any part of the employer’s

contributions in cash instead of the benefits

under the plan: Provided, however, That if a

plan otherwise qualified as a bona fide benefit

plan under section 7(e)(4) of the Act, it will

still be regarded as a bona fide plan even

though it provides, as an incidental part

thereof, for the payment to an employee in

cash of all or a part of the amount standing to

his credit . . . during the course of his

employment under circumstances specified in

the plan and not inconsistent with the general

purposes of the plan to provide the benefits

described in section 7(e)(4) of the Act.

§ 778.215(a)(5).

The Department of Labor interpreted this provision in a

2003 Opinion Letter, which states that cash-in-lieu of benefits

140). Because neither party challenges the district court’s reliance on

§ 778.215 to determine whether the City’s payments to a third party may

be excluded under § 207(e)(4), we apply § 778.215 here without

expressing an opinion as to its persuasiveness. To the extent that the City

later suggests that we need not consider the Department’s interpretation

because the term “bona fide” in § 207(e)(4) is unambiguous, we disagree.

The City cites Black’s Law Dictionary, which defines “bona fide” as “1.

Made in good faith; without fraud or deceit. 2. Sincere; genuine,” as

evidence that the term has an ordinary, unambiguous meaning. The very

definition that the City quotes, however, illustrates that the term “bona

fide” has multiple reasonable interpretations. The term is thus ambiguous

and resort to the Department of Labor’s interpretation for guidance is

appropriate.

FLORES V. CITY OF SAN GABRIEL 21

payments are “incidental” under § 778.215(a)(5) if they

account for no more than 20% of the employer’s total

contribution amount. July 2, 2003 Dep’t of Labor Op. Letter,

2003 WL 23374600, at *2. The Opinion Letter explains that

the Department has historically used a 20% limitation on cash

payments per employee to determine if such payments are

more than “incidental” under § 778.215(a)(5). Id. However,

the 2003 Opinion Letter modifies the application of the 20%

cap:

We continue to believe that this 20% cap is an

appropriate method for assessing whether any

cash payments are an incidental part of a bona

fide benefits plan under 778.215(a)(5)(iii).

However, because section 7(e) of the FLSA

provides for the exclusion of employer

contributions for benefits that are made

pursuant to a bona fide plan, on further review

we believe that the focus of the question

should be whether the plan as a whole is a

bona fide benefits plan. Therefore, we believe

that the 20% test should be applied on a plan-

wide basis. Moreover, such a plan-wide 20%

test is more consistent with the regulatory

language which allows “all or a part of the

amount” standing to an employee’s credit to

be paid in cash, so long as it occurs under

circumstances which are consistent with such

a plan’s primary purpose of providing

benefits.

Id. The City urges us to disregard the 2003 Opinion Letter as

insufficiently reasoned and inconsistent with § 778.215(a)(5).

Like the Department’s interpretative bulletins, opinion letters

22 FLORES V. CITY OF SAN GABRIEL

are “entitled to respect” under Skidmore only to the extent

that the agency’s interpretation has the “power to persuade.”

Christensen, 529 U.S. at 587 (quoting Skidmore, 323 U.S. at

140). Under Skidmore, whether an agency’s interpretation is

accorded deference “will depend upon the thoroughness

evident in its consideration, the validity of its reasoning, its

consistency with earlier and later pronouncements, and all

those factors which give it power to persuade, if lacking

power to control.” Skidmore, 323 U.S. at 140.

We agree with the City that the 2003 Opinion Letter is

unpersuasive. The Department of Labor wholly fails to

explain its reasoning for the adoption of the 20% ceiling.

Rather, the agency explains that it previously used a 20% cap

on cash payments per employee and then discusses its

reasoning for transitioning to a 20% cap on cash payments

plan-wide. Nowhere does it provide any rationale for why

20% was chosen as the percentage at which cash payments

are no longer an “incidental” part of a plan.

Even setting aside the 20% threshold in the 2003 Opinion

Letter, however, we cannot find that the City’s Flexible

Benefits Plan qualifies as a “bona fide” plan under

§ 778.215(a)(5). Forty percent or more of the City’s total

contributions are paid directly to employees rather than

received as benefits. While the City correctly points out that

its cash-in-lieu of benefits payments are less than half of its

total contributions, benefits payments constitute only a bare

majority of its total contributions. The City’s cash payments

are simply not an “incidental” part of its Flexible Benefits

Plan under any fair reading of that term. Because the City’s

Flexible Benefits Plan is not a “bona fide plan” under

§ 207(e)(4) pursuant to the requirements of § 778.215(a)(5),

even the City’s payments to trustees or third parties under its

FLORES V. CITY OF SAN GABRIEL 23

Flexible Benefits Plan are not properly excluded under

§ 207(e)(4).

B. Section 207(k) partial overtime exemption

In response to the Plaintiffs’ FLSA claims, the City had

argued before the district court that it was entitled to a partial

overtime exemption under § 207(k). The court agreed and

granted summary judgment to the City on this issue. The

Plaintiffs do not contest the City’s eligibility for the

exemption; the only question before us is whether the City

has actually established a § 207(k) work period.

The City bears the burden of establishing that it qualifies

for the exemption. Adair, 185 F.3d at 1060 (citations

omitted). “Generally, the employer must show that it

established a [§ 207(k)] work period and that the [§ 207(k)]

work period was ‘regularly recurring.’” Id. (citing McGrath

v. City of Philadelphia, 864 F. Supp. 466, 474 (E.D. Pa.

1994); 29 C.F.R. § 553.224). “Whether an employer meets

this burden is normally a question of fact.” Id. (citing

Spradling v. City of Tulsa, 95 F.3d 1492, 1505 (10th Cir.

1996); Barefield v. Vill. of Winnetka, 81 F.3d 704, 710 (7th

Cir. 1996)).

It is undisputed that the City adopted an eighty-

hour/fourteen-day work period for its police officers at least

as early as 2003 and that the City has paid overtime in

accordance with this work period since at least 1994. Nor do

the Plaintiffs dispute that the City memorialized its adoption

of the eighty-hour/fourteen-day work period in a 2003 City

resolution and restated it in the City’s Salary, Compensation

and Benefit Policy Manual, dated July 3, 2010, and in a

2005–2007 Memorandum of Understanding between the City

24 FLORES V. CITY OF SAN GABRIEL

and the Plaintiffs’ collective bargaining unit. The Plaintiffs

nonetheless argue that the City does not qualify for a § 207(k)

exemption because the City does not reference § 207(k) in

any of these documents. They contrast the City’s references

to its work period for police officers with language in the

City’s Salary, Compensation and Benefit Policy Manual

expressly stating that the City and the firefighters’ collective

bargaining unit “agree to use the 7k partial overtime

exemption.”

An employer need not expressly identify § 207(k) when

establishing a § 207(k) work period in order to qualify for the

exemption. In Adair, we held that the employer carried its

burden to show that it had established a § 207(k) exemption

“when it specified the work period in the [Collective

Bargaining Agreement] and when it actually followed this

period in practice.” 185 F.3d at 1061. The Collective

Bargaining Agreement read, “[f]or purposes of complying

with the Fair Labor Standards Act, the Patrol Division work

period shall be eight days and the Detective Division seven

days.” Id. at 1060 (alteration in original) (citations omitted).

While the Plaintiffs attempt to distinguish Adair by pointing

to that provision’s specific reference to the FLSA, we placed

no weight on this language when discussing whether the

employer established the § 207(k) exemption. All we

required then—and all we require now—is that the employer

show that it established a § 207(k) work period and that the

§ 207(k) work period was regularly recurring. Id. (citations

omitted). Specific reference to § 207(k) is not necessary to

satisfy this standard. Consistent with our sister circuits, we

decline to require more of employers to qualify for the

§ 207(k) exemption. See Rosano v. Twp. of Teaneck,

754 F.3d 177, 187–88 (3d Cir. 2014); Calvao v. Town of

Framingham, 599 F.3d 10, 16–17 (1st Cir. 2010); Brock v.

FLORES V. CITY OF SAN GABRIEL 25

City of Cincinnati, 236 F.3d 793, 810 (6th Cir. 2001);

Freeman v. City of Mobile, 146 F.3d 1292, 1297 n.3 (11th

Cir. 1998); Spradling, 95 F.3d at 1505; Barefield, 81 F.3d at

710; see also Milner v. Hazelwood, 165 F.3d 1222, 1223 (8th

Cir. 1999) (per curiam) (holding that employer need not

establish the exemption through public declaration).

The City has satisfied the criteria for application of the

§ 207(k) exemption by adopting an eighty-hour/fourteen-day

work period for its law enforcement officers and by paying

overtime in accordance with that period since 1994—facts

that are not disputed by the Plaintiffs. Accordingly, we

affirm the district court’s grant of summary judgment to the

City on this issue.

C. Liquidated damages

The Plaintiffs also challenge the district court’s finding

that they are not entitled to liquidated damages. An employer

who violates the FLSA “shall be liable to the employee or

employees affected in the amount of their unpaid minimum

wages, or their unpaid overtime compensation, as the case

may be, and in an additional equal amount as liquidated

damages.” § 216(b). However, if the employer shows that it

acted in “good faith” and that it had “reasonable grounds” to

believe that its actions did not violate the Act, “the court may,

in its sound discretion, award no liquidated damages or award

any amount thereof not to exceed the amount specified in

section 216.” § 260. To avail itself of this defense, the

employer must “establish that it had ‘an honest intention to

ascertain and follow the dictates of the Act’ and that it had

‘reasonable grounds for believing that [its] conduct

complie[d] with the Act.’” Local 246, 83 F.3d at 298

(alterations in original) (quoting Marshall v. Brunner,

26 FLORES V. CITY OF SAN GABRIEL

668 F.2d 748, 753 (3d Cir. 1982)). If an employer fails to

satisfy its burden under § 260, an award of liquidated

damages is mandatory. Id. at 297 (citing EEOC v. First

Citizens Bank of Billings, 758 F.2d 397, 403 (9th Cir. 1985)).

Whether the employer acted in good faith and whether it had

objectively reasonable grounds for its action are mixed

questions of fact and law. Bratt, 912 F.2d at 1071 (citing

29 C.F.R. § 790.22(c)). Questions involving the application

of legal principles to established facts are reviewed de novo.

Id.

To establish its good faith, the City relies exclusively on

the deposition testimony of Linda Tang, an employee in its

payroll department, who testified about the City’s process for

determining whether a particular payment must be included

in the regular rate of pay. Ms. Tang testified that the City’s

payroll and human resources departments work together to

determine whether a particular type of payment should be

included in the calculation of the regular rate of pay when the

payment is first provided. After a payment’s initial

classification, the City conducts no further review of a

payment’s designation, although Ms. Tang testified that the

human resources department notifies the payroll department

if it learns of new authority concerning the classification of a

payment. Because the cash-in-lieu of benefits payments were

classified as a “benefit” in the payroll system during this

initial review, they have never been included in the

calculation of the regular rate of pay.

Such paltry evidence is not sufficient to carry the City’s

burden to demonstrate that it acted in good faith. The City

has presented no evidence of what steps the human resources

department took to determine that the cash-in-lieu of benefits

payments were appropriately classified as a “benefit” under

FLORES V. CITY OF SAN GABRIEL 27

the FLSA and excluded from the calculation of the regular

rate of pay. That the payroll department consulted the human

resources department to find out how a given payment should

be categorized in the City’s payroll system sheds no light on

how either department determined that the payment’s

designation as a “benefit” complied with the FLSA. An

employer who “‘failed to take the steps necessary to ensure

[its] [] practices complied with [FLSA]’” and who “offers no

evidence to show that it actively endeavored to ensure such

compliance” has not satisfied § 260’s heavy burden. Alvarez

v. IBP, Inc., 339 F.3d 894, 910 (9th Cir. 2003) (alterations in

original) (emphasis added) (quoting Herman v. RSR Sec.

Servs. Ltd., 172 F.3d 132, 142 (2d Cir. 1999)); see also Chao

v. A-One Med. Servs., Inc., 346 F.3d 908, 920 (9th Cir. 2003)

(upholding an award of liquidated damages where the

employer believed that it was not required to pay overtime

because employees divided their hours between two legal

entities that were operated together, but had failed to consult

an objective authority or seek advice on the legality of its

position).

Grasping at straws, the City argues that its good faith is

also demonstrated by its inclusion of other types of payments

in the regular rate of pay and its payment of overtime more

generously than the FLSA requires. These arguments miss

the mark. Evidence that the City complied with its other

obligations under the Act or that it agreed to pay overtime

more generously than required by law do not demonstrate

what the City has done to ascertain whether its classification

of the payments at issue here complied with the FLSA.

Because the City has failed to demonstrate that it

attempted to comply with the Act in good faith, we conclude

that the Plaintiffs are entitled to liquidated damages and

28 FLORES V. CITY OF SAN GABRIEL

remand this case to the district court to enter judgment for the

Plaintiffs accordingly.

D. Statute of limitations

Pursuant to § 255(a), the two-year statute of limitations

for actions under the FLSA may be extended to three years if

an employer’s violation is deemed “willful.” Alvarez,

339 F.3d at 908 (citing McLaughlin v. Richland Shoe Co.,

486 U.S. 128, 135 (1988); § 255(a)). A violation is willful if

the employer “knew or showed reckless disregard for the

matter of whether its conduct was prohibited by the [FLSA].”

Chao, 346 F.3d at 918 (alteration in original) (quoting

McLaughlin, 486 U.S. at 133). An employer need not violate

the statute knowingly for its violation to be considered

“willful” under § 255(a), Alvarez, 339 F.3d at 908, although

“merely negligent” conduct will not suffice, McLaughlin,

486 U.S. at 133. The three-year statute of limitations may be

applied “where an employer disregarded the very ‘possibility’

that it was violating the statute,” Alvarez, 339 F.3d at 908–09

(citing Herman, 172 F.3d at 141), “although [a court] will not

presume that conduct was willful in the absence of evidence,”

id. at 909 (citing Cox v. Brookshire Grocery Co., 919 F.2d

354, 356 (5th Cir. 1990)). Like its determination regarding

liquidated damages, a district court’s determination of

willfulness under § 255(a) is a mixed question of fact and

law, with de novo review of the district court’s application of

the law to established facts. See id. at 908 (citations omitted).

An employer’s violation of the FLSA is “willful” when it

is “on notice of its FLSA requirements, yet [takes] no

affirmative action to assure compliance with them.” Id. at

909; see also Haro v. City of Los Angeles, 745 F.3d 1249,

1258 (9th Cir. 2014) (citing Alvarez, 339 F.3d at 909). Such

FLORES V. CITY OF SAN GABRIEL 29

is the case here. Ms. Tang’s testimony regarding the City’s

process for designating payments as either a “premium” or a

“benefit” to distinguish between payments included in the

City’s calculation of an officer’s regular rate of pay shows

that the City was aware of its obligations under the FLSA.

And despite notice of the Act’s requirements, the record

yields no evidence of affirmative actions taken by the City to

ensure that its classification of its cash-in-lieu of benefits

payments complied with the FLSA. Indeed, it is undisputed

that the City failed to investigate whether its exclusion of

cash-in-lieu of benefits payments from the regular rate of pay

complied with the FLSA at any time following its initial

determination that the payments constituted a benefit.

To be sure, as the district court correctly noted, there was

no case authority on the proper treatment of cash-in-lieu of

benefits payments under the FLSA in this circuit. But the

absence of binding authority directly on point is not

dispositive here. It is likely to be the exception, rather than

the rule, that controlling case law addresses the precise

question faced by an employer trying to determine its

obligations under the FLSA, and thus only a small subset of

FLSA violations would be considered willful if the existence

of binding authority on the subject were our only

consideration. More to the point here, the absence of

controlling case authority cannot be dispositive when the City

has put forth no evidence that it ever looked to see whether

such authority existed. Cf. Serv. Emps. Int’l Union, Local

102 v. Cty. of San Diego, 60 F.3d 1346, 1355–56 (9th Cir.

1994) (finding that evidence that employer relied on

substantial legal authority and consulted with experts and the

Department of Labor on its obligations under the FLSA

established that the employer’s violation was not willful).

30 FLORES V. CITY OF SAN GABRIEL

The City has put forth no evidence of any actions it took

to determine whether its treatment of cash-in-lieu of benefits

payments complied with the FLSA, despite full awareness of

its obligation to do so under the Act. We therefore conclude

that its violation of the FLSA was willful and that the Act’s

three-year statute of limitations applies. We accordingly

reverse the district court’s ruling concerning the statute of

limitations, and remand the matter for further proceedings.

IV. CONCLUSION

For the reasons set forth above, we hold that the City’s

cash-in-lieu of benefits payments are not properly excluded

from the calculation of the regular rate of pay under either

§ 207(e)(2) or (e)(4). And because the City’s Flexible

Benefits Plan is not a “bona fide plan” under § 207(e)(4),

even the City’s payments to trustees or third parties may not

be excluded from the regular rate of pay under that

subsection. The City does, however, qualify for the partial

overtime exemption in § 207(k). We further hold that the

City has not shown that it attempted to comply with the

FLSA in good faith and that the Plaintiffs are therefore

entitled to liquidated damages under the Act. Finally,

because the City’s violation of the FLSA was willful, we hold

that the Act’s three-year statute of limitations applies. We

therefore affirm in part, reverse in part, and remand this

matter to the district court for further proceedings and entry

of a judgment consistent with this opinion. Each party shall

bear its own costs on appeal.

AFFIRMED IN PART, REVERSED IN PART, AND

REMANDED.

FLORES V. CITY OF SAN GABRIEL 31

OWENS, Circuit Judge, with whom TROTT, Circuit Judge,

joins, concurring:

I concur fully in the majority’s opinion. I write separately

because I believe that our willfulness caselaw in the context

of the FLSA statute of limitations is off track.

In McLaughlin v. Richland Shoe Co., 486 U.S. 128

(1988), the Supreme Court stressed that willfulness was more

than mere negligence, and that “[i]f an employer acts

unreasonably, but not recklessly, in determining its legal

obligation,” the two-year FLSA statute of limitations would

apply. Id. at 132–35 & n.13. In formulating this definition,

the Court emphatically rejected the so-called “Jiffy June”

standard that expanded the statute of limitations anytime “an

employer knew that the FLSA ‘was in the picture.’” Id. at

132 (quoting Coleman v. Jiffy June Farms, Inc., 458 F.2d

1139, 1142 (5th Cir. 1972)); see also Hazen Paper Co. v.

Biggins, 507 U.S. 604, 615 (1993) (noting that

“[s]urprisingly, the Courts of Appeals continue to be

confused about the meaning of the term ‘willful’ in” the Age

Discrimination in Employment Act, even though McLaughlin

“[o]nce again . . . rejected the ‘in the picture standard’”).

In Alvarez v. IBP, Inc., 339 F.3d 894, 908–09 (9th Cir.

2003), aff’d on other grounds, 546 U.S. 21 (2005), a panel of

this court correctly cited McLaughlin when analyzing an

FLSA willfulness question. But then the panel concluded that

the employer acted willfully because it “was on notice of its

FLSA requirements, yet took no affirmative action to assure

compliance with them,” and that it “‘could easily have

inquired into’ the meaning of the relevant FLSA terms and

the type of steps necessary to comply therewith.” Id. at 909

32 FLORES V. CITY OF SAN GABRIEL

(quoting Herman v. RSR Sec. Servs. Ltd., 172 F.3d 132, 142

(2d Cir. 1999)).

This gloss on McLaughlin comes very close to a

qyburnian resurrection of the Jiffy June standard. And it is

this gloss – and not the tougher standard that the Supreme

Court set out – which compels me to join Part III.D of the

majority opinion. Absent Alvarez, I would affirm the district

court on the statute of limitations question.