The FLSA is very strict concerning proper deductions from exempt employee salaries.  Improper deductions can undermine the exemption for the individual employee and possibly the entire class of exempt employees.  One issue that I have dealt with several times is whether a deduction from accrued vacation time or PTO time is a salary deduction.  I never thought so and now the Third Circuit has ruled this is a correct legal position.  The case is entitled Higgins et al. v. Bayada Home Health Care Inc. and issued from the Third Circuit Court of Appeals.

The plaintiff was a RN and full-time, exempt, salaried employee.  Although there was no question that her duties qualified her for the professional exemption, the second part, a crucial part, of the exemption test is that the worker be paid a “salary.”  Under the FLSA, that is defined as the “employee regularly receives each pay period on a weekly, or less frequent basis, a predetermined amount constituting all or part of the employee’s compensation, which amount is not subject to reduction because of variations in the quality or quantity of the work performed.” The salary must always be at least $684 per week.

The employer required employees to accrue what it deemed as productivity points on a weekly basis.  If the employee failed to hit these targets, then the employer deducted from their PTO banks of time those hours needed to make the employee’s work week “whole” for that week. The plaintiff here charged this was illegal, thereby destroying the salary basis test, thereby rendering her (and all others similarly situated) as non-exempt and overtime eligible.  Significantly, the hospital would deduct from “pure” employee salary only if their PTO bank was exhausted and they wanted to take a day off (as is allowable under 29 CFR 541).

The key to the Court’s reasoning was that the PTO time was not part of the “salary” but was rather a fringe benefit, which was not salary.  As salary was a set amount paid each week, the Court ruled that “an employer does not violate those conditions by deducting from an employee’s PTO because, when an employer docks an employee’s PTO, but not her base pay, the predetermined amount that the employee receives at the end of a pay period does not change.”  The Court examined the regulations at issue as well as cases and treatises demarcating the wide difference between the “salary” of an employee and his fringe benefits.

The Takeaway

This is an important decision and explicitly clarifies a source of confusion that I have found plaintiff lawyers seeking to exploit.  As a caveat, employers should be aware they cannot use any portion of PTO time to count towards the salary as that $684 (at a minimum) per week must be able to stand on its own, independent of any accruing PTO time.  In any event, prior to making any deductions from exempt employee salaries, employers are well-advised to consult with labor counsel as one errant deduction may put into peril the exempt status for all such workers.

As the Sergeant in Hill Street Blues always said, be careful out there…

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