Key Points:

• In a matter of first impression, the Third Circuit rejected the argument of the plaintiffs, who were salaried employees, that paid time off (PTO) qualifies as salary under the FLSA. 
• In doing so, the court determined that PTO is a “fringe benefit,” the deduction of which does not constitute a violation of the FLSA.

In Higgins v. Bayada Home Health Care Inc., 62 F.4th 755 (3d Cir. 2023), the the plaintiffs, who were salaried employees, filed a class action suit contending that their employer impermissibly deducted paid time off (PTO) from their salaries in violation of the Fair Labor Standards Act (FLSA) and the Pennsylvania Minimum Wage Act. In a matter of first impression, the Third Circuit held that PTO is not part of an employees’ salary under the FLSA. 

As part of their employment, the plaintiffs were required to meet certain “productivity minimums” by completing “a specified number of ‘productivity points’ each week.” While employees received additional compensation for exceeding their productivity minimums, the failure to meet these minimums resulted in a withdrawal from their available PTO. However, the employer did not take any deductions from their guaranteed base salary when one of them had insufficient remaining PTO to cover a productivity-point deficit. 

Nonetheless, the plaintiffs alleged: “PTO qualifies as salary under the FLSA and its related regulations, and that, by deducting from their PTO, Bayada made deductions from their salary, which is something the FLSA and regulations forbid.” The District Court held in favor of the employer, finding a difference between PTO and salary under the FLSA. The Third Circuit agreed. In its analysis of the issue, the Third Circuit recognized that “[t]here appears to be a clear distinction between salary and fringe benefits like PTO.” 

While recognizing that federal law requires exempt employees to “receive the full salary for any week in which the employee performs any work without regard to the number of days or hours worked[,]” PTO is not part of an employee’s guaranteed salary. The Third Circuit, thus, concluded that an employer does not violate the FLSA “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 received at the end of a pay period does not change.” As such, the reduction in PTO as a fringe benefit did not constitute a violation of the FLSA, so long as the employees received their entire guaranteed salary. 
    
In light of this decision, employers should be mindful that the FLSA does prohibit a deduction from an employee’s salary. However, under Higgins, the reduction of a fringe benefit, such as PTO, does not necessarily constitute a violation of the FLSA, so long as an exempt employee receives their salary regardless of the hours worked.