Can You Dock PTO from a Salaried Employee’s Leave Balance Without Affecting Their FLSA Exempt Status?

Yes, according to a significant federal appeals court ruling, you can deduct Paid Time Off (PTO) from a salaried employee’s leave balance without violating the Fair Labor Standards Act (FLSA) or jeopardizing their exempt status, provided you do not touch their guaranteed base salary.

This conclusion, stemming from the Higgins v. Bayada Home Health Care case decided by the 3rd U.S. Circuit Court of Appeals, provides crucial clarity for employers on managing exempt employee compensation. The court drew a clear legal distinction between an employee's salary and fringe benefits like PTO, affirming that deductions from the latter do not constitute an impermissible deduction from pay.

What Was the Core Legal Issue in the Higgins v. Bayada Case?

The case centered on a group of clinicians classified as exempt under the FLSA’s professional exemption. This means they were paid a predetermined salary and were not eligible for overtime pay. Bayada implemented a system with weekly productivity goals. Employees who exceeded their goals received extra compensation, while those who fell short had accrued PTO deducted from their leave balance. Critically, the employer never made deductions from an employee’s guaranteed base salary, even if the employee had no PTO left to cover a deficit.

The central question was whether docking PTO violated the "salary basis" test, a key requirement for maintaining an employee's exempt status. Under FLSA rules, an exempt employee must receive their full salary for any week in which they perform work, regardless of the number of hours worked. Deductions based on the "quality or quantity of work" typically destroy the salary basis and risk reclassifying the employee as non-exempt.

How Did the Court Distinguish Between Salary and a Fringe Benefit?

The 3rd Circuit’s ruling hinged on the definitions of "salary" and "fringe benefit." The court analyzed the FLSA's language and historical context, concluding these terms are mutually exclusive.

• Salary was defined as a fixed amount of compensation, paid regularly, for a fixed period (like a week or month).
• Fringe Benefit was defined as an employment benefit that involves a monetary cost to the employer but does not affect the basic wage rate. Examples include health insurance, pension plans, and—crucially—Paid Time Off (PTO).

The court determined that although PTO has monetary value, it is not part of the employee’s salary. It is a benefit separate from the guaranteed pay. Therefore, deducting from a PTO bank does not change the predetermined amount of salary the employee receives each pay period. This reasoning aligned with long-standing guidance from the federal Wage and Hour Division.

What Does This Ruling Mean for Employers Practically?

This decision has immediate implications for HR policies, particularly in Pennsylvania, New Jersey, Delaware, and the U.S. Virgin Islands, where the 3rd Circuit’s ruling is binding.

1. Clarity on Permissible Deductions: Employers can have more confidence in implementing performance-based systems that use PTO as an incentive or corrective measure, as long as the employee’s base salary remains untouched.
2. Reinforced Importance of Protecting Base Salary: The ruling underscores the critical line that must not be crossed. As emphasized by attorney Eric Meyer, a partner at FisherBroyles, employers risk losing the FLSA overtime exemption if they make deductions from the guaranteed salary of exempt employees. The protection of the base salary is non-negotiable.
3. Policy Review is Essential: Based on our assessment experience, it is a prudent time to review your organization's handbook and payroll practices. Ensure your policies clearly differentiate between salary and fringe benefits and explicitly state that base salary will not be reduced for partial-day or performance-related absences.

In summary, the key takeaway for employers is that you may dock exempt employees' PTO for partial-day absences or performance shortfalls without losing the exemption, but you must never make a deduction from their guaranteed base salary. This ruling provides a valuable tool for managing exempt staff while maintaining FLSA compliance.