Employers may deduct from PTO bank of exempt employees without jeopardizing status

The Third Circuit Court of Appeals has answered a question that employers have asked: Is paid time off (PTO) considered part of an exempt employee’s salary? The answer: No.

The case

The employer classified Stephanie as an exempt employee under the federal Fair Labor Standards Act (FLSA), based on her duties, pay, and that she was paid on a salary basis.

Stephanie and her coworkers were required to meet a weekly productivity minimum. They had to accumulate a specified number of productivity points per week – each point being roughly equivalent to 1.33 hours of work – which were awarded in exchange for completing certain work tasks.

If employees failed to meet their weekly productivity minimums, the company deducted from the employees’ available PTO. If an employee didn’t have any PTO available, the company did not deduct from employees’ guaranteed base salary.

Stephanie thought, however, that if she failed to meet her productivity minimum and didn’t have PTO to cover the deficit, the company would deduct from her base salary.

The claim and ruling

Stephanie sued, arguing that the employer made improper deductions from employee PTO banks. The claim stated that the deductions were effectively reductions in salary and, therefore, violated the FLSA; that PTO qualifies as salary.

The court disagreed with Stephanie, saying that PTO deductions do not violate the FLSA because the company did not reduce the guaranteed base pay of salaried employees. Exempt employees were given their regular salary every week, as required by the FLSA. PTO is not part of an exempt employees’ salary; it’s a fringe benefit.

Summary

Employers may deduct fringe benefits from exempt employees for reasons such as if they fail to meet productivity quotas, as long as the deduction does not affect the employee’s guaranteed base salary. State employment laws, however, might prohibit employers from making these kinds of deductions if fringe benefits are considered wages.

Higgins v. Bayada Home Health Care, Inc., Third Circuit Court of Appeals, No. 21-3286, March 15, 2023.

Key to remember: This case shows that, under federal law, employers may deduct from an exempt employee’s PTO bank without risking the employee’s exempt status because PTO is a fringe benefit. State laws may differ, however.