Partial-Day Leave Deductions Lawful for Exempt Employees

by Fenwick & West LLP

A California court of appeal recently confirmed that employers may require exempt employees to use accrued leave for partial-day absences, even if shorter than four hours. In Rhea v. General Atomics, plaintiff Lori Rhea, on behalf of herself and other exempt managers, sued General Atomics claiming its practice of deducting exempt employee’s accrued leave for partial-day absences violated California law. Rhea and General Atomics jointly presented the issue to the court for resolution.

By way of background, General Atomics had an annual leave policy under which employees accrued paid time off to be used for vacation, illness and any other purpose. Under the policy, General Atomics required exempt employees to use accrued leave to cover both full- and partial-day. If the employee lacked sufficient leave to cover a partial-day absence, she still received her full salary.

Rhea alleged that leave deductions for partial-day absences defeated the salary-basis test for treating the class as exempt since the deductions resulted in an unlawful forfeiture of wages. She reasoned that, although such deductions were permitted under federal law, California law was more protective of accrued leave. While the appellate court agreed that accrued time off constitutes wages and California law prohibits forfeiture of accrued leave or wages, it rejected the further leap that the challenged practice resulted in a forfeiture.

The court distinguished between an unlawful forfeiture and a permissible requirement that an employee use accrued leave: “General Atomics does not take away or reclaim vested Annual Leave when an employee is absent for a partial day; it merely requires that the employee use the Annual Leave under the terms and conditions that it has created.” The court observed that employers are not required to offer vacation or leave, and have significant discretion in dictating use of leave. In support, the court cited Conley v. PG&E (reported in July 2005 FEB), which recognized that a policy requiring use of vested time off for partial-day absences “neither impose[d] a forfeiture nor operate[d] to prevent vacation pay from vesting as it is earned. All it [did was] regulate the timing of exempt employees’ use of their vacation time, by requiring them to use it when they want to need to be absent from work… .”

The court further rejected Rhea’s back-up argument that partial-day deductions were only permissible for absences of at least four hours: “We conclude that regardless of whether the absence is at least four hours or a shorter duration, a requirement that exempt employees use Annual Leave time for a partial-day absence does not violate the law.”

This decision provides helpful clarification and flexibility for employers in setting terms for use of accrued time off—whether under the rubric of vacation, PTO or leave—for partial-day absences. Other considerations should be taken into account before revising existing accrued time off policies—in particular, concepts of fairness in requiring leave deductions for short absences while not providing additional compensation for late and weekend hours, as well as the potential burden of tracking partial-day absences. Employers considering changes to their policy based on this decision should consult counsel about proper implementation and notice and, in all events, hold such changes until at least August 30, 2014, the deadline for the parties to seek review by the California Supreme Court.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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