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Court of Appeals: PTO to Remain Not Part of Salary

April 10, 2023

Written by Complete Payroll

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On March 15, a three-judge panel of the 3rd U.S. Circuit Court of Appeals ruled that Paid Time Off (PTO) is not part of an exempt employee’s salary as laid out in the Fair Labor Standards Act (FLSA). 

For employers, this means that you can deduct PTO from exempt employees if said employees do not meet certain targets or productivity goals. In a first-of-its-kind case, the panel ruled that a salary is a fixed amount of compensation paid to employees at regular intervals, and PTO is a fringe benefit that does not affect an employee’s wages. This means it can be paid irregularly. 

Background

The question of PTO being part of an employee’s salary was raised through a lawsuit filed by healthcare workers against their employer, Bayada Home Care. 

Classified as exempt employees, under FLSA, the plaintiffs were exempt from minimum wage and overtime requirements and were guaranteed a weekly salary. As such, deductions cannot be made from this salary except in a few specific instances and cannot be done based on the quality or quantity of work the employee performs. If deductions are made improperly, exemption status is lost, and the employer must pay overtime pay for any overtime employees. 

In Higgins v. Bayada Home Health Care, the defendant, Bayada Home Health Care, paid employees a guaranteed salary and required staff to meet productivity goals based on hours that were spent in-home visits or staff meetings. If employees exceeded their productivity goal, they were given additional compensation. However, if an employee fell short of their goal, an equivalent amount was deducted from the PTO they had accrued. It’s important to note that it was never deducted from an employee’s guaranteed base salary. 

A group of employees filed a lawsuit against Bayada Home Health Care, alleging that they violated the FLSA’s salary-based requirements with their productivity points system. They argued that when the company deducted from the PTO of employees not hitting their goals, they were being paid based on how much they worked, a violation for exempt employees. In that case, they were owed overtime pay as their exempt status was null. 

The Court of Appeals upheld the previous decision in the case, stating in their decision, “[a]n employer does not violate those conditions by deducting from an employee’s PTO because, when an employer docks an employee’s PTO, but not her base pay, the predetermined amount that the employee receives at the end of a pay period does not change.”

What Does This Mean for Employers?

This is an important decision in favor of employers. Likely, Bayada Home Health Care is not the only employer making deductions based on productivity. This decision provides peace of mind for other employers with similar policies that this is a legal practice. 

It also provides companies looking to make similar policies a good argument for implementing one. However, it’s important to look hard at such a policy and decide if it’s the best thing for the company, even though it’s legal. Most exempt employees view their accruing PTO as part of their salary and not just a fringe benefit. These kinds of deductions could affect your employee morale, especially if the deductions are a new policy. 

If nothing else, this case making headlines gives companies an excellent opportunity to refresh themselves on FLSA and the variety of deductions that can and cannot be made from an exempt employee’s wages. It’s also a good time for companies to review what state laws govern PTO, as these can vary from state to state and exceed the protections of the FLSA. 

While the employers were the winners in this lawsuit, it’s always best to consult with legal counsel before deciding whether or not to make any deductions from exempt employees’ wages or benefits. 

Check out the Complete Payroll blog today for up-to-date information on all legal decisions affecting your business. 

DISCLAIMER: The information provided herein does not constitute the provision of legal advice, tax advice, accounting services or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional legal, tax, accounting, or other professional advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation and for your particular state(s) of operation.

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