A week ago, and for the first time ever, a U.S. appeals court ruled on the issue of whether paid time off (PTO) is part of an employee’s salary. The answer, according to the Third Circuit Court of Appeals, is “no” – and reinforced that employers can deduct earned but unused paid time off (PTO) from its salaried employees that are classified as exempt from the Fair Labor Standards Act (FLSA).
For employers, this ruling is significant, because salaried employees can become eligible for overtime pay if employers deduct from their wages.
The Case That Set a New Precedent
The case – Higgins v. Bayada Home Health Care Inc. – outlined how Bayada employed health care providers paid employees a salary and designated these employees as exempt under the FLSA. The employees were required to meet a weekly production minimum using a points system for completing work tasks. When the employees exceeded their productivity minimum they were paid additional compensation. However, if the employees failed to reach the weekly productivity minimum, Bayada withdrew from the employee’s available PTO to make up the difference.
Bayada also had a policy that it would not deduct from the employee’s base salary if the employee did not have enough PTO to cover the productivity point deficit. The plaintiff’s argued that the deduction of PTO is the same as deducting pay from the employee and therefore violates the FLSA exemption making the employees hourly workers eligible for overtime.
The court’s analysis centered on the definition of “salary.” Under the FLSA regulations, paying an employee a salary in order to meet a component of the exemption requires the employee to be regularly paid each pay period a predetermined amount which “is not subject to reduction because of variations in the quality or quantity of the work performed.” 29 C.F.R. §541.602(a) (2021). In other words, if an employer has an actual practice of making improper deductions from an employee’s guaranteed salary, then the employee is no longer being paid on a salary basis and the employee is no longer exempt from the FLSA’s overtime pay requirement.
PTO is a “Fringe Benefit”
The issue before the court was whether PTO constitutes part of an employee’s salary. The court determined that fringe benefits like PTO are not considered “salary” and when Bayada deducted PTO hours from the employee, it was not deducting from the employee’s salary. Rather, Bayada continued to pay the employees their full base salary in accordance with the FLSA regulations. The court held “so long as the employer does not dock that pre-determined part of the employee’s compensation, the employer has satisfied the salary basis test.”
As part of its reasoning, the court relied on the Department of Labor’s 2009 opinion letter explaining that the rule preventing employers from docking pay does not extend to nonmonetary compensation such as vacation time or sick leave. U.S. Dept of Labor, Wage & Hour Div., Opinion Letter on Fair Labor Standards Act (FLSA) (Jan. 16, 2009), 2009 WL 649020, at *1-2.
While this opinion is limited to the Third Circuit Court of Appeals (covering Delaware, New Jersey, and Pennsylvania), it is likely to be followed should this issue arise in other circuits. The use of the term “salary” in the FLSA and its regulations allowed the court to arrive at this decision.
However, the court did not consider the merits of the plaintiffs Pennsylvania state law claims under the Pennsylvania Minimum Wage Act stating that the plaintiffs waived their arguments. Plaintiffs stated the Pennsylvania law defined wages to include all earnings of an employee, including fringe benefits. While the Third Circuit has held the FLSA does not include fringe benefits in the definition of salary, state laws may define the term differently and lead to a different analysis and conclusion.