The U.S. Court of Appeals for the Third Circuit has ruled that paid time off (PTO) is not considered part of an employee’s salary under the Fair Labor Standards Act (FLSA). According to the Third Circuit’s decision in Higgins v. Bayada Home Health Care Inc.,[1] the dispute was an issue of first impression and clears the way for employers in Delaware, Pennsylvania and New Jersey to dock salaried employees’ PTO without violating the salary basis requirement for the so-called white-collar exemptions to overtime under the FLSA and exposing themselves to potential liability for overtime pay under the FLSA.

Employers, however, must still ensure compliance with applicable state wage-and-hour laws and wage payment laws, which may not permit such deductions.

Background

To qualify for an exemption from the FLSA’s overtime requirement, employees must be paid at least the minimum salary level (currently $684) per week on a salary basis. Employees must also satisfy the “duties” test for the applicable exemption, which was not at issue in this case. While the FLSA is silent as to what constitutes a “salary,” Section 541.602(a) defines the phrase “salary basis” to mean that the employee “receives each pay period on a weekly, or less frequent basis, a predetermined amount . . . not subject to reduction because of variations in the quality or quantity of the work performed.” If the employer makes deductions from an employee’s salary, that employee is not paid on a salary basis and the employer loses the overtime pay exemption for the employee (and, potentially, similarly situated employees), thus exposing itself to potential liability for unpaid overtime.

The plaintiff in Higgins formerly worked for Bayada, a home healthcare company, as a registered nurse. She filed a putative collective and class action alleging that Bayada violated the FLSA by improperly deducting from employees’ accumulated PTO for failing to meet productivity targets, claiming that as a result she and similarly situated employees were eligible for unpaid overtime compensation. The employees at issue were salaried workers whom Bayada required to meet weekly “productivity minimums.” In order to meet these productivity minimums, employees must accumulate a certain number of “productivity points” per week in exchange for completing work tasks. When employees exceeded their productivity minimums, they received additional compensation. When employees failed to meet their productivity minimums, their PTO was reduced by the hours equivalent to their productivity point deficit.

Importantly, where an employee lacked sufficient PTO to cover a productivity deficit, Bayada did not deduct from the employee’s base salary.

The plaintiff argued that Bayada’s practice of deducting PTO when employees failed to meet their productivity minimums constitutes an improper salary deduction under the FLSA that destroyed the overtime exemption.

The district court disagreed, finding PTO is distinct from an employee’s salary and granting partial summary judgment in Bayada’s favor.

The Third Circuit Court's Decision

On appeal, the plaintiff argued that because productivity points correlate to the amount of time the employer expects a job task to take, Bayada’s productivity point system is a proxy for compensating employees on an hourly basis. The Third Circuit rejected this argu-ment, stating it “miss[es] the mark” because:

[T]he key question when determining the legal classification of an employee for FLSA purposes is not whether a pay structure approximates an hourly wage or even whether an employer threatens to dock a salaried employee’s base pay; it is whether an employer made an actual deduction from an employee’s base pay.

The parties did not dispute the fact that the employer deducted from plaintiffs’ PTO, therefore the case hinged on whether PTO counts as part of an employee’s salary under the FLSA. If PTO is considered part of an employee’s salary, then Bayada’s practice of deducting from PTO would run afoul of the FLSA’s salary basis requirement for white-collar overtime exemptions, and affected employees would be eligible for overtime.

The Third Circuit sided with Bayada, finding that it did not make any improper deductions from salary when it docked exempt employees PTO. The Third Circuit reasoned that there is a “clear distinction” between salary and fringe benefits like PTO, and that while PTO may have a monetary value, it is more akin to a fringe benefit because it may be irregularly paid out and has no effect on the employee’s wages. Therefore, an employer does not violate the salary basis test by deducting from an employee’s PTO, but not their base pay, because the predetermined amount the employee receives each pay period does not change.

What this Means for Employers

The Third Circuit’s decision is favorable to employers as it per-mits them to deduct from employees’ PTO without violating the FLSA – at least for employees who work in Delaware, New Jersey and Pennsylvania. Notably, the ruling does not apply to employees subject to the FLSA who do not work in those three states, and we are not aware of any other circuit court of appeal having ruled on the issue.

Furthermore, all employers – including those with employees in Delaware, New Jersey and Pennsylvania – must ensure that their practices comply with applicable state law. Although many state age-and-hour laws generally are interpreted consistently with the FLSA, many such laws differ from the FLSA in important aspects and may not permit deductions of exempt employees’ PTO. Furthermore, PTO constitutes wages under many state wage payment laws, and even if a policy or practice of deducting PTO does not adversely impact overtime exemptions, it may run afoul of wage payment laws that can carry significant penalties for employers who violate such laws.

Accordingly, employers should consult with employment counsel regarding the legality of any policy or practice to deduct PTO.

Note

1. Higgins v. Bayada Home Health Care Inc., No. 21-3286 (3d Cir.).

This article has been republished with permission.