Employers in DE, NJ, PA, and USVI: 3rd Circuit Holds PTO Not Part of Employee's Salary Under FLSA
On March 15, 2023, the United States Court of Appeals for the Third Circuit held that PTO is not part of an employee’s salary, thereby permitting employers to reduce accumulated PTO of employees exempt from minimum wage and overtime under the Fair Labor Standards Act for performance related reasons without jeopardizing their exempt status.
In order to be classified as exempt under Section 13(a)(1) of the FLSA, an employee employed in a bona fide executive, administrative, or professional capacity must meet both the salary basis requirement and a duties requirement. To be 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. The predetermined amount cannot be reduced because of variations in the quality or quantity of the employee’s work. Subject to exceptions . . ., an exempt employee must receive the full salary for any week in which the employee performs any work, regardless of the number of days or hours worked.” Fact Sheet #17G: Salary Basis Requirement and the Part 541 Exemptions Under the Fair Labor Standards Act (FLSA).
In Higgins v. Bayada Home Health Care, Inc., No. 21-3286 (3d Cir. 2023) the plaintiffs, home healthcare nurses classified by their employer as salaried exempt professionals, filed a collective and putative class action in the U.S. District Court for the Middle District of Pennsylvania alleging that (1) their PTO qualifies as salary under the FLSA and its related regulations, and (2) by deducting from their PTO, their employer, Bayada Home Health Care, Inc., made deductions from their salary in contravention of the FLSA requirements for exempt employees.
The plaintiff employees were required to meet weekly productivity point minimums. Employees could request an increase or decrease in their weekly productivity minimums corresponding to a commensurate increase or decrease in pay. If employees exceeded their weekly productivity minimums then they would be paid additional compensation. If, however, they failed to meet their required productivity minimums then their employer deducted the difference between the points they were expected to earn and what they actually earned from the employees’ available PTO. Productivity points were represented by a number of hours per week. If an employee had insufficient available PTO to cover any productivity deficit, Bayada would not deduct from the employee’s base salary and the employee would continue to receive his/her full salary.
Bayada would deduct from an employee’s base salary, however, if an employee voluntarily took a day off without having sufficient PTO to cover the absence.
The U.S. District Court for the Middle District of Pennsylvania granted partial summary judgment for Bayada and then certified the question for immediate appeal at the Plaintiffs’ request.
In a case of first impression, the Third Circuit affirmed the District Court holding that PTO is not part of an employee’s salary under the FLSA, and that an employer’s deduction of its employees’ accumulated PTO for failure to meet performance requirements did not jeopardize the employees’ exempt status under the FLSA.
In support of its holding, the Court reasoned that,
“Neither the FLSA nor its related regulations explicitly define the term ‘salary.’ There nevertheless appears to be a clear distinction between salary and fringe benefits like PTO. . . 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. . . That an employee might at some point be able to convert her PTO into cash does not alter that fact. The regulation requires only that the employee receive a predetermined amount of money each pay period that is “part of the employee’s compensation[.]” Id. (emphasis added). So long as the employer does not dock that pre-determined part of the employee’s compensation, the employer has satisfied the salary basis test.”
Employers in Pennsylvania, New Jersey, Delaware, and the U.S. Virgin Islands, the states and territory served by the U.S. Court of Appeals for the Third Circuit, should closely review this decision and their PTO policies and procedures concerning salary exempt employees under the FLSA.
The decision does not reflect the Court’s opinion on whether the employer’s PTO deductions were permissible under Pennsylvania wage and hour law, as the Court declined to consider that question citing plaintiff's forfeiture of that argument at both the District Court level and on appeal.
Disclaimer: The information contained herein is not intended to be construed as legal advice, nor should it be relied on as such. Employers should closely monitor the rules and regulations specific to their jurisdiction(s) and should seek advice from counsel relative to their rights and responsibilities.
By Megan Butz
General Counsel, HR Compliance, Checkwriters
Megan joined Checkwriters in 2020 and is responsible for reviewing, revising, and implementing internal policies of the company, advising on human resource, employment, and labor matters, and monitoring and publishing state and federal legal updates to the Checkwriters News and Compliance Center for distribution to thousands of clients around the country. Before joining Checkwriters, Megan served as a judicial law clerk for the justices of the Massachusetts Probate and Family Court performing legal research and writing, followed by private practice in Cape Cod.