New direction from court rulings has caught the attention of employment lawyers, signaling that employers should be auditing and adjusting their pay practices.

The rulings involve one of the oldest employment laws—the 85-year-old Fair Labor Standards Act—and judges are sticking to the basics when considering whether employers are in compliance.

Notably, the US Supreme Court has held that employees who are paid a daily rate and earning more than $200,000 annually are entitled to overtime. Conversely, the US Court of Appeals for the Third Circuit allowed an employer to deduct from the employee’s paid leave balance to ensure an exempt employee is paid on a salary basis.

FLSA Requirements

The FLSA covers enterprises with gross annual sales over $500,000. The FLSA also covers individual workers engaged in commerce or the production of goods for commerce. While exceptions may exclude certain enterprises from coverage, employers that are required to comply with the Act must be mindful of complying with overtime payment regulations.

Employers are required to pay overtime to non-exempt employees who work more than 40 hours a week. Employees exempt from this requirement must meet the tests for each category of exemption and be paid on a salary basis. To qualify for exemption, employees generally must be paid at least $684 per week on a salary basis, according to the Department of Labor.

Defining Salary

Being paid on a “salary basis” means an employee regularly receives a predetermined amount of compensation each pay period on a weekly or less frequent basis, which can’t be reduced because of variations in quality or quantity of work. Subject to certain exceptions, an exempt employee must receive the full salary for any week in which they perform work, and they don’t need to be paid for any workweek in which they perform no work.

If the employer makes deductions from an employee’s predetermined salary—i.e., because of the business’s operating requirements—that employee is not paid on a “salary basis.” If the employee is ready, willing, and able to work, deductions may not be made for time when work is unavailable.

In the Supreme Court case Helix Energy Solutions Group Inc. v. Hewitt, oil rig workers were paid a daily rate ranging from $963 to $1,341 and worked an 84-hour week. The court held that despite earning more than $200,000 annually, the employees were paid only when they worked and were not being paid a salary, therefore they were entitled to overtime.

This means when employers consider alternative pay practices such as a daily rate, they shouldn’t forget the basic definition of “salaried.”

The Third Circuit decision in Higgins v. Bayada Home Health Care provided favorable guidance to employers in their efforts to comply with paying the employee on a salary basis. The court agreed with the employer’s practice of using a combination of salary and paid leave when employees failed to meet productivity standards. The employer set productivity standards for this category of exempt employees for them to receive their full salary.

In the weeks when the standards weren’t met, the employer deducted from the employee’s leave balance to ensure they received their full salary each week. The employees received additional pay in the weeks when they exceeded the performance standard. The employee never paid the employee less than the week’s salary.

The FLSA doesn’t prohibit this process because the regulations do not dictate the source of the salary—only that the amount can’t be reduced.

Paid Leave Substituted for Salary

Absent contractual or statutory provisions, employers grant paid leave to employees as a matter of policy, not law. Because of this, most employers provide guidelines for when and how paid leave can be used. Many employers give employees choices about when leave can be used but often specify terms of use, such as:

• Accrued time can’t be carried over from year to year.
• Advance notice and approval must be obtained before taking leave.
• Leave can only be taken in blocks of four hours or more.

Substituting paid leave for salary is no different. Employers may face receiving pushback from employees if the employer has failed to fully communicate the policy or practice of using paid leave at times when the employee didn’t choose to use accrued time. Employees can become protective of “their” paid leave when the employer’s policy reduces the amount of time available to the employee.

Because the FLSA prohibits employers from making deductions from an exempt employee’s salary, employees may argue that the employer’s unilateral use of paid leave to adjust salary amounts to a deduction from salary, but the Third Circuit soundly rejected that argument. The court was clear that paid leave is a benefit and that the FLSA deduction regulations doesn’t address reductions or changes in benefits.

Attorneys advising employers on paid leave to ensure compliance with the salary provisions of the FLSA should remember the following:

• The FLSA doesn’t prohibit employers from using paid leave to ensure that an employee receives a salary each week. Paid leave is a benefit and is different from an employee’s salary.
• Employers may not make deductions from an exempt employee’s salary except for specified reasons. If an employer decides to make deductions from an employee’s leave balance, the process should be communicated and explained to employees.

Effect on Paid Benefits

At first glance, it may seem these rulings could affect how employers pay benefits to employees, but most benefits are provided as a matter of policy, not law. Employers have significant leeway in how some benefits are administered.

In a tight labor market, employers compete for employees, and benefits can be the deciding factor in attracting and keeping talent. If the process is well-documented and communicated, the employee will know their paid leave balances and other benefits so that they can avert potential problems.

This article was reproduced with permission from Bloomberg Law. Published June 16, 2023. Copyright 2023 The Bureau of National Affairs, Inc. 800-372- 1033. For further use, please visit http://www.bna.com/copyright-permission-request/