In a boon for employers with exempt employees, the Third Circuit held earlier this year as an issue of first impression that paid time off (PTO) is not part of an exempt employee’s salary under the federal Fair Labor Standards Act (FLSA). Thus, although PTO arguably has a monetary value, employers will not be liable under the FLSA for deducting from a salaried employee’s PTO time.

In Higgins v. Bayada Home Health Care Inc., 62 F. 4th 755 (3d Cir. 2023), Plaintiff, a registered nurse employed by Defendant, Bayada, a home health care company, filed a collective action on behalf of herself and other full-time, salaried employees, arguing that Bayada made improper deductions from their accumulated PTO in violation of the FLSA, 29 U.S.C. § 201, et seq.[1] As part of their employment, each Plaintiff was required to meet a weekly productivity minimum. While each Plaintiff was paid a pre-determined salary, each Plaintiff was also required to accumulate a specific number of “productivity points” per week commensurate with their salary for completing routine tasks. When they exceeded their productivity minimums, they would receive additional compensation. However, if they failed to meet their weekly productivity minimums, Bayada would withdraw from their available PTO time in order to make up for the difference. In filing their lawsuit, Plaintiffs argued that their PTO time constituted part of their salary under the FLSA and, therefore, Bayada violated the FLSA by deducting from their PTO.

The Third Circuit disagreed. In affirming the district court’s grant of summary judgment in favor of Bayada, the court of appeals reasoned that there is “a clear distinction between salary and fringe benefits like PTO.”[2] Specifically, when an employer docks an employee’s PTO without docking their base pay, the predetermined salary the employee receives does not change. “In other words, ‘the employee [will continue to] regularly receive[] each pay period . . . a predetermined amount constituting all or part of the employee’s compensation’” in accordance with the FLSA and its correspondent regulations.[3] The fact that an employee may be able to convert her PTO into cash down the road is no matter.

The Third Circuit’s decision comes with caveats. Perhaps most importantly, there was no evidence that Bayada ever docked any of the Plaintiffs’ actual salaries for failing to meet their productivity minimums. If Bayada had, the Plaintiffs have been able to argue that Bayada violated the FLSA, as the FLSA prohibits employers from deducting from exempt employees’ salaries so long as they work within a given week.  Furthermore, the Higgins decision has no impact on any comparable state statutes, which generally afford employees more protections than the FLSA.

The Third Circuit decision also comes with important implications. First, will employers like Bayada be liable under the FLSA if they deduct from a salaried employee’s guaranteed base pay when the employee lacks sufficient PTO to cover any productivity deficits? Higgins dictates yes, as employers are required under the FLSA to pay their exempt employees the same base salary for each pay period they work.

Conversely, are employers in the Third Circuit now permitted to deduct other “fringe benefits” due to exempt employees’ lack of productivity under the FLSA? The wording of Higgins appears to dictate yes, and several other courts of appeals appear to agree. See, e.g., Coates v. Dassault Falcon Jet Corp., 961 F.3d 1039, 1043 (8th Cir. 2020) (quoting Ellis v. J.R.’s Country Stores, Inc., 779 F.3d 1184, 1200 (10th Cir. 2015) (“[e]mployers ‘may take deductions from [salaried employee] leave accounts’ and may require exempt employees ‘to record and track hours,’ so long as the employee’s predetermined salary is not reduced”)); Schaefer v. Ind. Mich. Power Co., 358 F.3d 394, 400 (6th Cir. 2004) (exempt status under the FLSA “is only affected by monetary deductions for work absences and not by non-monetary deductions from fringe benefits such as personal or sick time”).

Finally, are employers required under the FLSA to pay out accrued, but unused, PTO time when an employee leaves a company? Because the Higgins court considered PTO a “fringe benefit,” it appears not, at least within the Third Circuit. See Higgins, 62 F. 4th at 762 (“So, whereas salary is a fixed amount of compensation that an employee regularly receives, PTO, though having a monetary value, is more appropriately defined as a fringe benefit, which has no effect on the employee’s salary or wages, and which may be irregularly paid out, such as when an employee separates from a company.”). However, an employer may nonetheless be required to pay out PTO or other fringe benefits pursuant to a valid contract or a corresponding state statute.

[1] Higgins v. Bayada Home Health Care Inc., 62 F. 4th 755, 756 (3d Cir. 2023).

[2] Id. at 761.

[3] Id. (citing 29 C.F.R. § 541.602(a)(1)).

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