On March 15, 2023, the U.S. Court of Appeals for the Third Circuit held that paid time off (PTO) is not part of an employee’s salary for purposes of the Fair Labor Standards Act (FLSA). In Higgins v. Bayada Home Health Care Inc., the Third Circuit upheld the partial grant of summary judgment by the U.S. District Court for the Middle District of Pennsylvania in favor of the employer, Bayada Home Health Care (Bayada), finding that Bayada’s deductions from FLSA-exempt employees’ accumulated PTO was not an improper deduction from their salary under the FLSA.

Under the FLSA, employees are classified as either exempt or non-exempt from the FLSA minimum wage and overtime requirements. To qualify as exempt, an employee generally must meet certain tests regarding their job duties and be paid on a salary basis (currently at not less than $684 per week under federal law). The “salary basis” part of this test means that an employee is guaranteed a base salary, paid at a predetermined amount each pay period, regardless of the number of days or hours worked. Employers may make deductions from an exempt employee’s predetermined amount of compensation only in very limited circumstances. Variations in the quality or quantity of the employee’s work are not a basis for deducting from exempt employees’ pay.

Court Decision: Higgins v. Bayada Home Health Care Inc.

Bayada provides in-home medical and related support services to patients. Bayada healthcare employees, such as Higgins and her six co-plaintiffs, are exempt salaried employees. Bayada requires these employees to meet a weekly “productivity minimum,” which requires them to accumulate a certain number of “productivity points” each week. These points are the equivalent of a certain number of hours and are earned by completing work tasks. Employees who exceed the required minimum points receive additional compensation; those who fail to meet the minimum receive a deduction from their accumulated PTO bank to make up the difference between the minimum and the points earned. However, if an employee fails to meet the weekly minimum but does not have sufficient PTO available to make up the difference, Bayada does not deduct from an employee’s predetermined base salary to cover the difference.

The plaintiffs brought this lawsuit under the FLSA and the Pennsylvania state law equivalent, alleging that through the “productivity points” and Bayada’s practice of deducting from employees’ available PTO, Bayada improperly treats its salaried exempt employees as non-exempt employees. More specifically, they argued that this point system is essentially a means of compensating exempt employees based on the number of hours worked (i.e., the basis for determining compensation of a non-exempt employee), since the points are equivalent to the number of hours that Bayada expects job tasks to take. The plaintiffs also argued that Bayada “actively and deliberately” raises confusion about its practice of deducting from PTO to make up for productivity shortfalls and intentionally leads employees to believe that, if they do not have sufficient PTO and fail to meet the minimum weekly points, they will be paid only for the productivity points they earned that week.

In rejecting both arguments, the Court explained that the key question for determining FLSA classification “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 Court found that there was no evidence that Bayada actually reduced Higgins’ salary or that of any of Higgins’ co-plaintiffs.

The Court further held that fringe benefits, such as PTO, are not considered part of an employee’s “salary” under the FLSA. The Court reasoned that although the term “salary” is not defined in the FLSA and its related regulations, they indicate a clear distinction between salary and fringe benefits. The Court explained that because the “salary basis” test requires that employees be paid their full predetermined amount for each week they perform work, regardless of the number of days or hours worked, deductions from available PTO do not violate this test because there is no deduction from the employee’s base pay, and, thus, the predetermined amount paid each pay period remains the same.

Employer Takeaways

Although the Third Circuit’s decision in Higgins now suggests that employers have the green light to implement a practice of deducting from exempt employees’ accumulated fringe benefits, employers would be wise to consider and fully understand the implications of such practices before making any changes to their pay and benefit practices.

This is particularly relevant for employers that are located outside of Delaware, New Jersey, Pennsylvania, or the Virgin Islands, where the Third Circuit’s decisions are binding. Although other jurisdictions may look to Higgins for guidance in future rulings on this issue, it remains to be seen how this decision will be followed. Employers in states with more restrictive wage and hour laws or in judicial districts where permissible deductions have been narrowly interpreted should be particularly wary of implementing a practice of deducting from employees’ fringe benefits. This type of practice may also impact employee morale in the workplace, particularly where employees have become accustomed to reaping the benefits of employer-provided fringe benefits under prior policies that would be changed by implementing a deduction practice.

Source: Venable LLP – Jeffery A. Meyer and Sarah Fucci

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