An employee’s exempt status under both federal and California law is dependent on the employee’s duties falling within one of the exemptions (administrative, professional, executive) and the employee being paid on a “salary basis.” In general, the “salary basis” test requires, with limited exceptions, that an exempt employee be paid their full salary for any workweek in which the employee performs work. Limited exceptions allow the employer to deduct for full day absences for personal reasons or for sick leave pursuant to a bona fide sick leave plan. However, the salary basis test has historically created risk for an employer who wants to deduct from accrued vacation or sick leave for an exempt employee’s partial day absences.
Lawyers representing employees take the position that an exempt employee is entitled to a full salary under the salary basis test even if that employee may take a partial day absence during the workweek. The argument being that the concept of salary does not relate to specific hours worked but rather includes a salary for work performed, not measured by hours worked on any given day.
In 2005, the California Court of Appeal decided in Conley v. PG&E that it was lawful for an employer to require an employee to use accrued vacation for partial day absences of at least four hours. The court did not address increments of less than four hours. In 2009, the Division of Labor Standards Enforcement (DLSE) issued an opinion letter approving the practice of covering an exempt employee’s partial day absence, of any duration, with sick leave, PTO or vacation, however, no court had approved the practice up to now and some employers were understandably hesitant to follow the DLSE opinion letter for fear of a court later determining the employer had violated the salary basis test and destroyed an employee’s exempt status through the practice.
In Rhea v. General Atomics, the California Court of Appeal finally decided that an employer may deduct from vacation time for an exempt employee’s absences of any duration without destroying the employee’s salary basis and thus the employee’s exempt status. On behalf of herself and a class of exempt employees, Rhea challenged the employer’s practice of requiring exempt employees to use their annual leave (an entitlement that includes sick, vacation, personal time) for partial day absences of any duration. On its face, the employer policy under challenge could theoretically require the exempt employee to use annual leave in an increment of as little as one-tenth of one hour. In fact, the evidence showed that the vast majority of exempt employees used annual leave for an absence of an hour or more. However, the employer policy did not require an exempt employee to use any annual leave if the exempt employee had worked 40 or more hours during the week in question, notwithstanding the partial day absence.
The Rhea opinion should give California employers who wish to require deductions from vacation or PTO for partial day absences some comfort that they are not destroying an exempt employee status by doing so. Notwithstanding the positive analysis in the Rhea opinion, employers should carefully draft any policy requiring deductions for partial day absences to avoid language that could support an argument that the exempt employee is no longer paid on a salary basis. In addition, employers should not interpret the Rhea opinion as giving employers carte blanche to deduct from vacation or PTO anytime an exempt employee leaves work a few minutes early. Notwithstanding the acceptance in Rhea of deductions for absences of less than four hours, consistent deductions from an exempt employee’s PTO or vacation for only a few minutes on any given day could well present a fact pattern that allows the employee to take a position that they are being paid on an hourly basis not a salary basis. Finally, it’s also important to emphasize the distinction between deducting from the pay of an exempt employee for a partial day absence (which is not permitted by California law), and deducting from an accrued vacation balance or PTO balance (which is permitted). Employers should never deduct from the salary or wages of an employee who is absent for a partial day, regardless of whether deductions from vacation or PTO are possible.
The Rhea opinion gives employers a legitimate basis for changing their policy regarding partial day deductions from an exempt employee’s vacation, PTO or sick leaves.