The 3rd Circuit Federal Court of Appeals recently reviewed the question of whether paid time off (PTO) is considered part of the salary of an employee. Specifically, does the docking of PTO violate the salary basis requirement for exempt employees under the FLSA? The court said no.
In Higgins v. Bayada Home Health Care Inc, No. 21-3286 (3rd Circuit Court of Appeals, 3/15/23), Higgins is a registered nurse who formerly worked for Bayada, a company providing medical and related support services for patients in their homes. Under the terms of employment, they had to meet weekly productivity minimums or their PTO would be docked.
To meet their productivity minimums, they must accumulate a specified number of “productivity points” per week – each point being roughly equivalent to 1.33 hours of work – which are awarded in exchange for completing work tasks. A routine visit to a patient’s home, for example, is assigned one point. If an employee anticipates that they will not meet their productivity minimum, they can make up the deficit by performing office work or additional home visits.
When employees failed to meet their productivity minimums, their PTO was reduced by the hours equivalent to their productivity point deficit. Bayada does not, however, deduct from an employee’s guaranteed base salary when the employee lacks sufficient PTO to cover a productivity point deficit. The only circumstance in which Bayada would reduce an employee’s salary is if the employee voluntarily takes a day off without sufficient PTO.
Higgins sued Bayada alleging that Bayada’s practice of deducting PTO when employees failed to meet their productivity minimums constitutes an improper salary deduction under the FLSA and destroyed the overtime exemption. However, the trial court found that PTO is distinct from an employee’s salary and granted partial summary judgment in Bayada’s favor to this specific point.
On appeal, the Third Circuit agreed with the trial court. Higgins argued on appeal that because productivity points correlate to the amount of time the employer expects a job task to take, Bayada’s productivity point system is a proxy for compensating employees on an hourly basis. The Third Circuit did not buy this argument and found that that there is a “clear distinction” between salary and fringe benefits like PTO, and that while PTO may have a monetary value, it is similar to a fringe benefit because it may be irregularly paid out and has no effect on the employee’s wages.
The court then ruled that an employer does not violate the salary basis test by deducting from an employee’s PTO, but not their base pay, because the predetermined amount the employee receives each pay period does not change.
This decision makes sense as PTO is about days off with pay, not about a pay rate for days off. Further, in Michigan and like other states, PTO does not have to be paid if an employee leaves the employer if an employer’s policy so states.
If deducting an employee's PTO counts as a fluctuation in pay, the employee would not meet the test for overtime exemption. Further, state laws may have other characterizations of PTO, and deductions could cause a state law liability. Before taking any steps to using PTO a deduction tool, consult with your legal counsel.
Source: Duane Morris LLP 3/23/23, Law360 3/24/23