Addressing the question for the first time, the U.S. Court of Appeals for the Third Circuit held that paid time off is not part of an employee’s salary under the Fair Labor Standards Act and, thus, deductions from an exempt employee’s PTO bank are not improper reductions in salary.
The FLSA provides for exemptions from its minimum wage and overtime requirements. In order to qualify for the exemption, among other things an employee must be paid a weekly salary that is not reduced because of variations in the quality or quantity of work. There is a limited and specific list of deductions that are permitted; however, deductions from salary for things such as lower productivity or lost/damaged equipment are not allowed.
In Higgins v. Bayada Home Health Care Inc., the exempt employees were paid extra for exceeding weekly productivity minimums, but if they failed to meet those minimums, the employer would deduct from their accrued PTO – but not their base salary – to supplement the difference between what they were paid and what they actually earned. The employees sued, arguing that this constituted an improper deduction from their salary in violation of the FLSA.
The Third Circuit, however, found that, under the FLSA, PTO is not part of an employee’s salary, but is a fringe benefit. Therefore, the employer’s actions with regard to PTO were not governed by the FLSA, even if the employee might be able at some point to convert the PTO to cash.
This decision opens up some interesting possibilities for employers who have felt constrained by the inability to deduct from an exempt employee’s pay for things such as damaged or lost equipment, missing funds, fines, etc. Under the Third Circuit’s reasoning (which has not yet been adopted by sister Circuits), it may be possible to deduct for such items from PTO, as long as the employee’s weekly salary remains intact. Any employer interested in doing this should consult with counsel, however, and should also keep in mind that state wage-hour and wage payment laws may differ from the FLSA.