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March 15, 2023
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In Higgins v. Bayada Home Health Care, the Third Circuit Court of Appeals stated employers can deduct paid time off (PTO) from an exempt employee without violating the Fair Labor Standards Act (FLSA) and losing the employee’s exempt status. Here, clinicians providing medical and related support services for patients in their homes were paid a salary and accumulated “productivity points” each week for completing work tasks. When productivity minimums were exceeded, employees received additional compensation. When they were not met, the employer withdrew from their available PTO to supplement the difference between points expected to earn and what was actually earned. If the employee did not have enough PTO to cover a productivity point deficit, the employer did not deduct from the base salary.
A clinician who had her productivity minimum downgraded and failed to meet her minimum over several weeks was under the impression there were deductions taken from her base salary to compensate. However, the employer never docked her base salary. The employee and other clinicians filed a class action alleging the point system and deducting PTO for failure to meet productivity minimums meant their total compensation was related to the number of hours worked. Therefore, the employees were not FLSA exempt from overtime.
To be exempt from overtime, in addition to meeting the duties test, deductions cannot be taken from a guaranteed salary due to the quality or quantity of an employee’s work. The court found no evidence that the employer reduced the guaranteed base pay of any of the employees. As part of its ruling, the court looked to whether PTO is a part of salary. Neither the FLSA nor its regulations define “salary.” However, turning to dictionary definitions, salary is a fixed amount of compensation that an employee regularly receives. PTO has no monetary value and is more appropriately defined as a fringe benefit. As such, it has no effect on an employee’s salary or wages and it may be irregularly paid out. Therefore, since PTO is not a part of salary, deducting from a PTO bank is not an improper deduction that would result in the loss of the FLSA exempt status. Employers should continue to avoid docking salary of exempt employees to maintain their exemption.
- Review exempt and nonexempt employee classifications.
- Review procedures for wage deductions.
- Have appropriate personnel trained on exempt pay requirements.
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