Federal court permits employer docking from an exempt employee’s PTO bank without violating the FLSA

I think it was Otis Redding who once famously sang, "I'm sittin' on the dock of the pay." 🤔

Whether or not I have that lyric correct, docking an exempt employee's pay is fraught with legal risk that, if done unproperly, could not only jeopardize the exempt status of the employee under the FLSA, but also all employees in the same job classification working for the same managers responsible for the actual deduction.

What about deductions from PTO or other paid leave banks? Do they carry with them the same legal risk. According to the recent opinion of the 3rd Circuit Court of Appeals in Higgins v. Bayada Home Health Care, taking deductions from banks of PTO or other paid leave raises no issues whatsoever the FLSA and therefore does not jeopardize any of the statute's exemptions.

Bayada, a home healthcare agency, would dock salaried employees' PTO hours as a consequence for poor productivity. It would never, however, deduct from an employee's salary, even if an employee lacked a sufficient PTO balance for the intended deduction.

According to the Court, the key to the legality of this policy under the FLSA lies in the statute's definition of "salary." 

An employee will be considered to be paid on a "salary basis" … if the employee regularly receives each pay period on a weekly, or less frequent basis, a predetermined amount constituting all or part of the employee's compensation, which amount is not subject to reduction because of variations in the quality or quantity of the work performed. 

An employee is not paid on a salary basis if deductions from the employee's predetermined compensation are made for absences occasioned by the employer or by the operating requirements of the business. 

"The two concepts being distinct," the 3rd Circuit concludes, "the term 'salary' as used in the FLSA is best understood as not including fringe benefits like PTO." Thus, because PTO or other paid leave is not "compensation" for services rendered, but instead a fringe benefit of employment that has no effect on an employee's salary or wages, an employer can take it away without violating the FLSA.

Before you go running off and taking disciplinary deductions from your exempt (or other) employees' paid leave banks, check your state law and your policies. Just because PTO isn't "compensation" under the FLSA doesn't mean that state law doesn't otherwise treat it as "earned wages." If that's the case, you still might to able to take deductions, but you should have a policy or other agreement with your employee to permit you to do so.