A recent ruling by a federal appeals court has affirmed that employers do not violate the Fair Labor Standards Act when they involuntarily decrease their employees’ PTO balances. While this case primarily dealt with deductions based on productivity declines, it offers valuable insights applicable to scenarios where employers wish to utilize employees’ PTO for purposes like safeguarding their FLSA exemption status.
Who qualifies for exemption?
According to the U.S. Department of Labor, employees generally qualify for exemption when they receive at least $684 per week on a salary basis, with this predetermined amount remaining unchanged regardless of variations in work quality or quantity. With certain exceptions, exempt employees must receive their full salary for any week in which they perform any work, irrespective of the number of days or hours worked.
If an employer deducts from an employee’s predetermined salary due to business operating requirements, it means the employee is not being paid on a “salary basis.” Deductions cannot be made when an employee is ready, willing, and able to work but work is unavailable.
A recent decision from the Third Circuit, Higgins v. Bayada Home Health Care Inc., provided guidance to employers striving for FLSA compliance. The court approved of an employer’s practice of reducing employees’ paid leave when they failed to meet productivity standards and compensating them more when they exceeded these standards. Crucially, the employer never paid an employee less than their weekly salary. The court ruled that the FLSA did not prohibit this practice because PTO is not considered “salary” under the law.
Can employers similarly require employees to use PTO?
In the absence of contractual or statutory provisions, employers grant paid leave based on their policies rather than legal obligations. Consequently, most employers establish guidelines for the timing and conditions of paid leave use. While employees often have some say in when to use their accrued leave, employers often specify terms of use, such as not carrying over accrued time from year to year, requiring advance notice and approval before taking leave, and stipulating that leave must be taken in blocks of four hours or more.
Mandating employees to use paid leave at specific times is not fundamentally different. However, employers may encounter resistance from employees if they fail to adequately communicate their policies or practices regarding the use of paid leave. Employees might want to save PTO for special occasions or for medical or family leave, and they may be displeased if the employer’s actions reduce their balance. Employees can become possessive of their paid leave when the employer’s policies curtail their availability.
Because the FLSA prohibits employers from making deductions from an exempt employee’s salary, employees may attempt to argue that an employer’s unilateral use of paid leave constitutes a salary deduction. However, the Third Circuit unequivocally rejected this argument, emphasizing that paid leave is a benefit and that FLSA deduction regulations do not pertain to reductions or alterations in benefits.
Employers contemplating the use of paid leave to ensure FLSA salary compliance should keep the following in mind: (1) the FLSA does not forbid employers from using paid leave to guarantee employees receive a weekly salary; (2) paid leave is distinct from an employee’s salary; (3) employers cannot make deductions from an exempt employee’s salary except for specific reasons.
If an employer opts to deduct from an employee’s leave balance, it should clearly communicate and explain this process to employees.