Do employers risk violating the FLSA by reducing PTO? Is it part of an employee’s salary?

Those were the critical issues in a precedential decision that the Third Circuit Court of Appeals issued yesterday. So let’s talk about it.

Generally speaking, a federal law called the Fair Labor Standards Act (FLSA) says that people who earn an hourly wage can get overtime (one-and-a-half times their regular hourly wage for every hour they work beyond a traditional forty-hour week). Conversely, folks that earn a salary of at least $684 per week may be exempt from the FLSA overtime requirements. That will depend on their other duties and responsibilities.

The employer in this case paid a group of its healthcare workers, known as Clinicians, a salary and classified them as exempt from overtime pay under the professional exemption. No one in the lawsuit appeared to dispute that the professional exemption would apply.

Instead, the focus was on whether the employer, which had a complex PTO system that often involved subtracting it when Clinicians failed to meet productivity minimums, was consistent with the Clinician’s exempt status as salaried employees. After all, one’s salary is what it is, no matter how many hours one works. But, the general rule is employers can’t dock salary. Otherwise, an employee loses the exemption.

So, does an employee become nonexempt when an employer docks PTO — for whatever reason?

According to the Third Circuit, the answer is no:

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 … [that] requires that “an exempt employee … receive the full salary for any week in which the employee performs any work without regard to the number of days or hours worked.” 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. (cleaned up)

But what if the employee can later convert unused PTO into cash? It doesn’t matter. The Third Circuit emphasized that “so long as the employer does not dock that predetermined part of the employee’s compensation [(i.e., salary)], the employer has satisfied the salary basis test.”

Logically, this makes sense. Unless state law doesn’t allow it, employers usually take away accrued and unused PTO from terminated employees.

But, if you happen to dock PTO mid-employment, you may have ticked-off employees, but you won’t violate federal wage and hour law as long as you don’t touch their salary too.

And in certain instances, employers can safely deduct pay from exempt employees’ salaries without risking having to pay overtime. The Department of Labor has a free resource on that. Just know that sometimes you get what you pay for with “free” — kinda like this crappy blog. So, it’s often best to involve a good employment lawyer before messing with someone’s paycheck.