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HomeMy WebLinkAboutD-1 Staff Report - Amend FY 2017-18 Budgets for Retroactive Payroll PaymentsSCHEDULED ITEM D-1 TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL VIA: DON PENMAN, INTERIM CITY MANAGER FROM: TALIKA M. JOHNSON, DIRECTOR OF FINANCE DATE: DECEMBER 18, 2017 SUBJECT: AMEND FISCAL YEAR 2017-18 CITY BUDGET FOR RETROACTIVE PAYMENTS TO EMPLOYEES FOR CHANGES IN FLSA REGULATIONS SUMMARY: In connection with the Flores v. City of San Gabriel decision, in June 2016, new interpretation of law was established in which employers are now required to include cash-in-lieu of health coverage payments in the regular rate of pay for the calculation of overtime in accordance with the Fair Labor Standards Act (FLSA) regulations. Section 2-450 of Azusa’s Municipal Code requires budget amendments over $1.0M be approved through a public hearing process. The recommended actions request authorization to amend the Fiscal Year 2017-18 budgets for City Funds and Utility Funds, for a total of $1.5M, in order to make retroactive payments to employees in accordance with this new requirement under the FLSA. This $1.5M is based on a good-faith estimate of the approximate possible maximum amount of total retroactive payments to be made to all employees. RECOMMENDATION: Staff recommends the City Council take the following actions: 1) Open the Public Hearing, receive public testimony, close the Public Hearing; and 2)Adopt Resolution 2017-C78, A Resolution of the City Council of the City of Azusa amending the budget and approving appropriations for the City for the Fiscal Year commencing July 1, 2017 and ending June 30, 2018 in the amount of $1,000,000 for retroactive payments to employees for changes in FLSA regulations; and 3)Authorize Payroll Staff to move forward with recommended retroactive payments in accordance with the calculations outlined within this report. APPROVED CITY COUNCIL 12/18/2017 Amend FY 2017-18 City Budget December 18, 2017 Page 2 DISCUSSION: Background on Flores v. City of San Gabriel Decision In 2012, a group of police officers filed suit against their employer, the City of San Gabriel, for violations of the FLSA. The officers alleged the City failed to correctly calculate their overtime rate and thus they were owed overtime. Specifically, the officers argued the City was not treating cash paid to employees in lieu of health benefits in accordance with the FLSA. The case was brought as a collective action. The Ninth Circuit Court of Appeals decision was issued June 2, 2016 and provided a new interpretation of how employers should calculate overtime under FLSA. The City of San Gabriel petitioned the U.S. Supreme Court to re-examine the June 2016 ruling, but the petition was denied in May 2017. Statewide, agencies were awaiting the ruling on this petition before implementing payroll changes to include cash-in-lieu payments in the regular rate of pay/FLSA overtime rate, including the City of Azusa. Two main holdings resulted from the Flores v. City of San Gabriel decision (Flores v. City of San Gabriel (9th Cir. 2016) 824 F. 3d 890.): 1)Cash in lieu of health benefits made to a nonexempt employee cannot be excluded from FLSA regular rate of pay used to pay FLSA overtime. 2)If the total amount of cash paid in lieu of health benefits is more than 40% of an employer’s cafeteria plan payments as a whole, the plan is not “bona fide.” If a plan is not bona fide, all cash contributions paid by the employer to the plan, in addition to cash in lieu, must be included in the regular rate of pay. If the total amount of cash paid in lieu of health benefits is 20% or less of an employer’s cafeteria plan payments as a whole, then the plan is considered bona fide so only cash-in-lieu amounts are required to be included on the regular rate of pay. Clear guidance has yet to be provided for plans with cash-in-lieu amounts ranging from more than 20-40%. Thus, employers must use their own discretion with the advice of their legal counsel on whether to treat their plans as bona fide or non-bona fide when cash-in-lieu payments are within this range. A third holding had to do with the statute of limitations for back payment of overtime. FLSA violations have a two‐year statute of limitations unless the employer’s violation was “willful”. If willful, a three‐year statute of limitations applies. City of San Gabriel employees argued the City failed to do their due diligence in confirming whether cash-in-lieu payments should be included in the regular rate of pay. The Court decided the City of San Gabriel’s actions were willful, and therefore, required the City to pay back three years. Prior to this case, no agency in the State was including cash-in-lieu payments in their overtime rates. Thus, this is a new practice that agencies are just recently implementing or still working on implementing. The City of Azusa offers a cafeteria plan in which cash-in-lieu payments are made to employees who opt out of the City’s health insurance plan, and therefore is required to re-do its overtime calculations in accordance with the FLSA requirement. Azusa is one of the agencies in the forefront of implementing Amend FY 2017-18 City Budget December 18, 2017 Page 3 the required payroll system changes to become compliant with the new law and has been diligent in developing a back payment plan for all employees impacted by this new legal holding. Overview of Azusa’s Cafeteria Plan and Cash-in-lieu Payments The City of Azusa implements a Section 125‐qualifying Cafeteria Plan, in which the City contributes a set monthly cafeteria amount, ranging from $1,100 - $1,649, to the Plan per employee in accordance with their respective Memorandum of Understanding (i.e. MOU or bargaining group). Employees may use their Cafeteria Plan contributions towards the City’s medical, dental, vision, and supplemental products programs. Employees may opt‐out of the City’s medical plan by providing evidence of alternative medical insurance coverage. Any unused Cafeteria Plan allowance is payable to the employee as taxable cash back (“cash-in-lieu”). However, through recent labor negotiations, the City was able to create a new tier of benefits for employees considered as “new hires”, in which those employees who opt‐out of City‐provided medical coverage are only eligible to receive a maximum allowance of $0 - $300 per month depending on the MOU. This new tier of benefits will help curtail the increased overtime exposure resulting from the change in overtime calculations as new hires replace more tenured employees. Provided in the table below is a summary of the City’s cash-in-lieu payments relative to the total cafeteria plan payments for the past four calendar years: Calendar Year Total Flex Health Premiums and Deferred Comp Cash % of Cash-in- lieu to total Plan 2014 $ 3,728,619 $ 2,332,026 $ 1,396,593 37% 2015 $ 3,877,170 $ 2,485,766 $ 1,391,404 36% 2016 $ 3,800,212 $ 2,679,516 $ 1,120,696 29% 2017 thru 8/31/17 $ 2,597,668 $ 2,059,397 $ 538,271 21% Recommended Overtime Retroactive Payment Plan Although Staff has been very diligent in making payroll system changes, which has been an exhaustive process requiring massive amounts of administrative hours, to come into compliance with the change in law and developing a back payment plan to pay employees for the underpayment of overtime, similar to the City of San Gabriel, Azusa was served with a lawsuit by two of its officers in June 2017 and a separate suit against the City was filed by two officers in October 2017. Despite the lawsuits, the majority of the City’s employees have been patient while Payroll Staff makes the necessary system changes and calculates back payments. Staff is moving forward with implementing payroll system changes effective on pay date January 4, 2018. Amend FY 2017-18 City Budget December 18, 2017 Page 4 Calculation of back payment liabilities for the employees named in the suit are being handled by the City’s legal counsel. For all employees, Staff recommends the City Council approve the following as part of the back payment plan: A.Make back payments to impacted employees from June 2014 - current B.Treat Cafeteria Plan as non-bona fide for June 2014 – December 2016, and bona fide thereafter C.Calculate overtime based on 160 hours per 28-day period vs. 171 hours for sworn personnel Staff does not believe the City acted willfully by not including cash-in-lieu payments in its overtime calculations because no agency in the State had a practice of doing so. However, in light of the court ruling in Flores v. City of San Gabriel, Staff believes it’s prudent to also make back payments in accordance with the three-year statute of limitations. While the City’s percentage of cash-in-lieu payments relative to its total cafeteria plan contributions was under 40% for each back payment year, in years 2014 – 2016 cash-in-lieu payments were clearly over the 20% threshold. Therefore, to mitigate the potential risk of litigation over this issue, Staff recommends treating plan years 2014, 2015, and 2016 as non-bona fide, whereby overtime costs would include 100% of the cafeteria contribution. Due to increasing medical premiums, cash-in-lieu payments in 2017 declined to 21% (as of 8/31), thus, 2017 and forward will be treated as a bona fide plan whereby overtime costs will only include cash-in-lieu amounts. The City has agreements with its labor units to pay overtime in excess of FLSA requirements. For example, under FLSA, an employer is only required to pay overtime for hours worked in excess of 40 in a work week. However, in accordance with Azusa’s MOUs, the City pays overtime to non-exempt employees for hours worked in a day in excess of their normal daily scheduled hours. For sworn personnel (required to work shift hours), the City agreed to pay overtime for hours worked in excess of 160 in a 28-day work period although FLSA only requires overtime be paid on hours in excess of 171. Although the above plan includes some overtime hours beyond what the City is obligated to include in its back payment calculations, after careful consideration of the costs associated with potential litigation and the administrative hours required to resolve this matter, Staff feels the above plan is favorable to employees and in the best interest of the City. With Council’s approval of the above plan and adoption of the attached resolutions to amend the FY 2017-18 budgets to make retroactive payments to employees, Staff plans to process a special payroll in January 2018 to pay impacted employees. Amend FY 2017-18 City Budget December 18, 2017 Page 5 FISCAL IMPACT: The estimated fiscal impact of implementing the new overtime calculations on a going forward basis is about $155,000 annually. Necessary budget amendments for FY 2017-18 increased payroll costs and consulting fees for payroll system changes will be considered during Mid-Year Budget Review. Approval of Staff’s recommended retroactive payment plan will result in a one-time outlay of approximately $1,500,000 city-wide. This $1.5M is based on a good-faith estimate of the approximate possible maximum amount of total retroactive payments to be made to all employees. Of the $1.5M, approximately $900,000 will be a direct impact to the General Fund, $500,000 to the Light & Water Funds, and the remaining $100,000 being charged to other Funds. Prepared by: Reviewed and Approved: Talika M. Johnson Louie F. Lacasella Director of Finance Senior Management Analyst Reviewed and Approved: Don Penman Interim City Manager Attachment: 1) Resolution 2017-C78, A Resolution of the City Council of the City of Azusa amending the budget and approving appropriations for the City for the Fiscal Year commencing July 1, 2017 and ending June 30, 2018 in the amount of $1,000,000 for retroactive payments to employees for changes in FLSA regulations RESOLUTION NO. 2017-C78 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF AZUSA AMENDING THE BUDGET AND APPROVING APPROPRIATIONS FOR THE CITY OF AZUSA FOR THE FISCAL YEAR COMMENCING JULY 1, 2017 AND ENDING JUNE 30, 2018 IN THE AMOUNT OF $1,000,000 FOR RETROACTIVE PAYMENTS OF OVERTIME TO EMPLOYEES FOR CHANGES IN FLSA REGULATIONS WHEREAS, in connection with the Flores v. City of San Gabriel decision, in June 2016, and new law was established in which employers are now required to include cash-in-lieu of health coverage payments in the regular rate of pay for the calculation of overtime in accordance with the Fair Labor Standards Act (FLSA) regulations; and WHEREAS, the City of Azusa offers a cafeteria plan in which cash-in-lieu payments are made to employees who opt out of the City’s health insurance plan; and WHEREAS, the City Council approved a retroactive payment plan for under payment of overtime to employees from June 2014 through December 2017; and WHEREAS, on the 19th day of June, 2016, City Council of the City of Azusa adopted the Fiscal Year 2017-2018 Operating Budget for the City of Azusa, which did not provide for payment of retroactive overtime costs; and WHEREAS, Azusa Municipal Code Section 2-450 requires that during the fiscal year after adoption of the budget, amendments exceeding $1,000,000.00 may be approved by the City Council following a public hearing held by the city council on the proposed and shall be formalized by the adoption of a resolution; and WHEREAS, a public hearing for this matter was conducted at a regular meeting of the City Council on the 18th day of December, 2017 to amend the FY 2017-18 City-wide Operating Budget (including Utilities) by a total of $1,500,000 ; and WHEREAS, an amendment in the amount of $1,000,000 to the City of Azusa operating expense budget will be adequate to make payments to employees for retroactive overtimes costs. NOW, THEREFORE, BE IT RESOLVED that the City Council of the City of Azusa does hereby find, determine and declare as follows: SECTION 1. That the FY 2017-2018 City of Azusa Operating Budget (including all Funds except Utilities) is amended in the amount of $1,000,000 to be appropriated in accordance with the payroll distribution accounts of the employees impacted by the retroactive payments of overtime. RESOLVED FURTHER that a copy of this Resolution shall be made available to the impacted employees. PASSED, APPROVED and ADOPTED this 18th day of December, 2017. ATTACHMENT 1 ___________________________________ Joseph Romero Rocha Mayor ATTEST: ___________________________________ Jeffrey Lawrence Cornejo, Jr. City Clerk STATE OF CALIFORNIA ) COUNTY OF LOS ANGELES ) ss. CITY OF AZUSA ) I HEREBY CERTIFY that the foregoing Resolution No. 2017-C78 was duly adopted by the City Council of the City of Azusa at a regular meeting thereof, held on the 18th day of December, 2017, by the following vote of Council: AYES: COUNCILMEMBERS: NOES: COUNCILMEMBERS: ABSENT: COUNCILMEMBERS: ___________________________________ Jeffrey Lawrence Cornejo, Jr., City Clerk APPROVED AS TO FORM: ___________________________________ Best Best & Krieger, LLP City Attorney