?Paid time off (PTO) is not considered part of an employee’s salary, so it can be docked without jeopardizing the employee’s exempt status, the 3rd U.S. Circuit Court of Appeals recently ruled. In a March 15 opinion, the court held that PTO is a fringe benefit with monetary value, not a component of salary under federal law.
“Even though the employer prevailed in this case, one key lesson is that employers must carefully analyze any plan that would result in taking money away from exempt employees to ensure that the exemption is not lost,” said Steven Suflas, an attorney with Holland & Hart in Salt Lake City.
Background
A group of registered nurses, physical therapists and occupational therapists in Pennsylvania filed a class-action lawsuit in 2016, alleging that Bayada Home Care misclassified them as exempt from overtime pay and made improper deductions from their accumulated PTO. Bayada is a home health care and hospice provider based in Moorestown, N.J. It has approximately 29,000 employees and operates in 24 states.
The employees’ lawsuit argued that PTO counts as part of a person’s salary under the Fair Labor Standards Act (FLSA), which prohibits employers from taking salary reductions from exempt workers, except under limited circumstances. If the employer makes improper salary deductions, the employee loses exempt status and becomes eligible for overtime pay.
Bayada paid its employees a salary and required them to meet productivity quotas by accumulating a specified number of productivity points per week, based on the number of hours they spent on work tasks like home visits or staff meetings. If employees exceeded their productivity minimum, they received additional compensation. If employees fell short of their productivity minimum by a certain number of hours, Bayada subtracted an equivalent amount from their accrued PTO. It did not subtract from an employee’s guaranteed base salary if the employee lacked sufficient PTO to cover a productivity point deficit.
Bayada’s employees argued that they should not be classified as exempt because the point system pegged their total compensation to the amount of hours they worked. They claimed that Bayada intentionally misled workers to believe their pay would be docked if they didn’t earn their minimum weekly productivity points and their PTO was exhausted.
In 2021, the U.S. District Court for the Middle District of Pennsylvania ruled in favor of Bayada because the court saw a meaningful distinction between PTO and salary. The employees appealed the case. The 3rd Circuit ruled in favor of Bayada, stating, “There is no evidence here that Bayada reduced the guaranteed base pay of any of the plaintiffs.”
Under the FLSA, employees are exempt from overtime pay if they earn at least $35,568 per year on a salary basis (at least $684 per week) and perform executive, administrative, professional or outside sales work. The predetermined salary level cannot vary based on the quality or quantity of work.
“While the [court] decision suggests a green light to such [PTO] deductions, the light turns to yellow when other laws are considered,” said Jonathan Segal, an attorney with Duane Morris in Philadelphia. “Employers must consider not only the FLSA, but also the applicable state wage payment and collection law. Under wage payment and collection laws, the questions generally are whether the PTO is wages, whether the deduction is for a permissible purpose and whether authorization for the deduction is required.”
Before deciding to dock salaried employees’ PTO, businesses should consider the potential ramifications on recruiting, retention and reputation.
“Just because an employer can take a step like this doesn’t mean they should take a step like this,” Suflas said. “The effect on employee morale, hiring and retention should always be a primary consideration. Public image and brand factor in, as well.”
Reasons for PTO
Federal law does not guarantee any paid family and medical leave, but some states and cities require employers to provide a certain amount of paid sick days, bereavement leave or other paid leave per year. Illinois, Maine and Nevada have laws requiring paid leave for any reason.
For recruiting and retention purposes, many employers offer paid leave that exceeds legal requirements. Employers also aim to curb health care costs and limit the spread of disease by providing paid sick days. Some employers offer paid leave only to salaried employees, not hourly employees.
On average in 2021, private-sector workers received seven paid sick days and 11 paid vacation days per year after at least one year of service, according to the U.S. Bureau of Labor Statistics (BLS). Seventy-nine percent of private-sector workers had access to paid vacation days, while 77 percent had access to paid sick days in 2022, the BLS reported.
