Third Circuit Finds Deductions from Accrued PTO Do Not Violate Salary Basis Requirement for Exempt Employees

The Third Circuit recently highlighted the flexibility afforded to employers when providing fringe benefits to salaried exempt employees. In Higgins v. Bayada Home Health Care Inc., No. 21-3286, 2023 WL 2518345 (3d Cir. Mar. 15, 2023), the Third Circuit held that employer-provided paid time off (PTO) is a fringe benefit that is not part of an exempt employee’s “salary” for purposes of assessing compliance with the “salary basis” requirement for certain “white collar” exemptions under the Fair Labor Standards Act (FLSA). As a result, an employer may deduct from an exempt employee’s PTO bank based on the quality or quantity of the employee’s work without compromising the employee’s exempt status under the FLSA.

The plaintiff worked as a registered nurse. The plaintiff’s employer classified her and other clinicians as exempt professional employees and paid them a guaranteed weekly salary. The employer tracked the clinicians’ productivity on a weekly basis. If a clinician fell below their designated productivity threshold, the employer deducted from their accrued PTO. Of importance, however, there was no evidence that the employer ever reduced a clinician’s minimum salary due to a productivity shortfall, even where the employee lacked available PTO.  The only circumstance in which the employer would reduce an employee’s salary is if the employee voluntarily took a full day off without sufficient PTO.

The plaintiff filed a collective action against the employer in which she claimed that the employer’s practice of reducing clinicians’ PTO balances based on productivity shortfalls meant that they were not paid on a “salary basis” and were therefore non-exempt under the FLSA. The district court, and then the Third Circuit, disagreed. The Third Circuit concluded that, under the FLSA, PTO constitutes a “fringe benefit” and not a part of an employee’s salary. The court identified that under the applicable regulations, an employee’s “salary” is just the “predetermined amount” that “the employee regularly receives each pay period.” Deducting from an employee’s PTO bank does not actually impact whether the employee receives that “predetermined amount” each pay-period. In other words, deducting from an employee’s PTO bank impacts only the benefits an employee may be entitled to receive, in addition to their salary, but it does not diminish the salary itself. Thus, reducing the value of the fringe benefit – with no corresponding adjustment to the employee’s actual salary – does not violate the “salary basis” requirement of the regulations.

The Third Circuit’s decision is consistent with prior U.S. Department of Labor guidance on the issue.1 The court’s decision, and the agency guidance that preceded it, all emphasize the same critical point: while an employer may deduct from an employee’s PTO bank for any number of reasons consistent with its policy (and subject to compliance with other applicable laws2), the employee must still be paid the full amount of their guaranteed weekly salary in order to be paid on a “salary basis” within the meaning of the regulations, subject only to the limited exceptions set forth in those regulations.3

See Footnotes

1 FLSA Opinion Letter, dated Dec. 4, 1998; and FLSA Opinion Letter FLSA2009-18, dated Jan. 16, 2009.

2 For example, the Supreme Court of Washington held that while mandatory partial-day deductions from an exempt employee’s accrued leave bank for absences occurring during normal business hours is not per se a violation of the Washington Minimum Wage Act, they may be considered by the court in its determination of whether an employee is exempt under state law. Webster v. Pub. Sch. Employees, 60 P.3d 1183 (Wash. 2003). Washington law also prohibits deductions from leave banks in increments of less than one hour. WAC 296-128-532(6)(b).

3 The exceptions can be found in 29 C.F.R. § 541.602(b).

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.