Exempt employee PTO rules: Court says docking PTO is allowed

An employer may safely deduct paid time off (PTO) from a salaried employee without violating the Fair Labor Standards Act (FLSA) or risking the employee’s exempt status, according to a new ruling by the 3rd Circuit Court of Appeals.

The employees in Higgins v. Bayada Home Health Care were clinicians who were paid a salary and classified as exempt from overtime pay under the FLSA’s professional exemption. The company set weekly productivity point goals for each employee. If an employee exceeded their productivity goal, they were paid extra; but if they fell short, the employer deducted accrued PTO from the employee’s leave balance.

However, the employer did not take deductions from an employee’s guaranteed base salary if the employee lacked sufficient PTO to cover a productivity point deficit.

Key FLSA issue

To qualify as an exempt from overtime, an employee must meet the duties requirement of the FLSA regulations and be paid their full salary for any week in which the employee performs work, without regard to the number of days or hours worked. An employee is not paid on a salary basis if deductions are taken because of the quality or quantity of the employee’s work.

The court said that the key issue in determining an employee’s FLSA classification is not whether the pay structure approximated an hourly wage pay plan, or even whether the employer threatened to dock an exempt employee’s base salary, but whether the employer actually took a deduction from an employee’s guaranteed salary.

To resolve this case, the 3rd Circuit looked to the language of the FLSA and the meaning and historical usage of the terms “salary” and “fringe benefit.” It found that the two terms are mutually exclusive, with salary defined as fixed compensation paid regularly, while a fringe benefit is an employment benefit (such as a paid holiday, pension or health insurance) granted by an employer that involves a money cost without affecting basic wage rates. The court determined that PTO, though it has a monetary value, is more appropriately a fringe benefit and is not part of an employee’s salary.

As a result, the 3rd Circuit ruled that the employer did not make improper deductions from the employees’ salaries, because when an employer docks an employee’s PTO, but not their base pay, the predetermined amount the employee receives at the end of a pay period does not change. The ruling aligns with long-standing guidance from the federal Wage and Hour Division on allowable deductions from salaries.

Implications for employers

“The takeaway is that the 3rd Circuit concluded that employers may dock PTO from salaried employees without risk of violating the Fair Labor Standards Act because PTO is not considered part of salary” said attorney Eric Meyer, a partner at FisherBroyles and author of The Employer Handbook blog. “Beyond that, employers risk losing the FLSA’s overtime exemption when docking salary of exempt employees.”

The 3rd Circuit’s decision is binding in Pennsylvania, New Jersey, Delaware and the U.S. Virgin Islands.