Paid time off (PTO) is not part of an exempt employee’s salary under the Fair Labor Standards Act (FLSA) according to the Third Circuit Court of Appeals. This means employers can deduct PTO from exempt employees for disciplinary reasons such as performance failures or failure to meet business targets or productivity goals.
Some employees are exempt from the minimum wage and overtime requirements of the FLSA if they have certain job duties and if they are paid a guaranteed weekly salary each workweek of at least $684 per week (equivalent to $35,568 per year). Deductions from the guaranteed salary can only be made in tightly limited circumstances and cannot be made based on the quality or quantity of work performed. If the employer makes improper deductions, the exemption is lost, and the employer owes the employees overtime pay for overtime hours worked.
In the case, Higgins v. Bayada Home Health Care Inc., defendant Bayada Home Health Care Inc docked exempt employees’ PTO when they did not work required weekly hours. The employees argued that when the company deducted from their PTO banks for not hitting weekly productivity quotas, they were paid based on how much they worked violating the salary-basis requirements of the FLSA. The court disagreed. The court held PTO was a fringe benefit, not wages, and therefore not subject to FLSA restrictions on the limited circumstances in which an employer may deduct from an exempt employee’s wages. The court said, “[a]n employer does not violate those conditions by deducting from an employee’s PTO because, when an employer docks an employee’s PTO, but not her base pay, the predetermined amount that the employee receives at the end of a pay period does not change.”
What does this case mean for employers?
For those that have been making similar deductions from exempt employee PTO banks based on productivity, it provides some comfort that the practice is legal. For employers that have not done so and may be considering making the change, it provides justification for the practice, but in reality, it may not be particularly compelling. In general, exempt employees expect their pay to be consistent and likely view their PTO accrual as part of their pay. Making these sorts of deductions – particularly if it is a change to prior practice – will likely harm employee morale.
This case also highlights the importance of the narrow allowable deductions from exempt employee pay and the risks of being wrong in those decisions. It is also vital to remember state-level laws may have requirements governing PTO that exceed the protections of the FLSA and that PTO laws vary greatly from state to state. Employers are cautioned to consult with employment counsel before making any deductions from the pay or benefits of exempt employees.
