Third Circuit Rules Docking PTO Under Production Standard Does Not Run Afoul Of FLSA Exemption

Kollman & Saucier
Kollman & Saucier

On March 15, 2023, the Third Circuit Court of Appeals issued its opinion of first impression in Higgins v. Bayada Home Health Care, Inc., Case No.: 21-3286, ___ F.4th ___ (Mar. 15, 2023), affirming the United States District Court for the Middle District of Pennsylvania decision granting summary judgment in favor of Bayada Home Health Care, Inc. (“Bayada”).  The issue in this case was whether Bayada’s practice of docking accrued paid time off (“PTO”) balances of salaried employees who did not meet a productivity standard ran afoul with employees’ classifications as exempt from overtime, and thus convert the employees to non-exempt status.  The Court held it did not.  

Under the Fair Labor Standards Act (“FLSA”), employees who hold certain positions and/or job duties are exempt from overtime and can be paid a straight salary for their work, regardless of the number of hours they worked in that week.  An exempt employee earns their full salary for any week in which the employee performs any work.  However, if the salaried employee does not perform any work during a week, they need not be paid.  Under that general rule, if an employer docks wages from an exempt employee for failing to meet the employer’s standards of employment such as minimum hours worked, productivity, etc. the employer will be viewed as treating an otherwise exempt employee as non-exempt, and as a result the employee is entitled to overtime compensation.

Behind this lawsuit was one of Bayada’s pay practices of its exempt employees.  Bayada, a home healthcare agency, employed healthcare employees whom it referred to as “Clinicians.”  Clinicians were paid a salary for their work, but were required to meet certain productivity requirements where they were assigned points for completing certain tasks.  The Clinician’s salaries were based, at least in part, on that productivity standard, which could be lowered at request but would also result in a corresponding pay decrease.  If, however, a salaried Clinician failed to meet their productivity standard, the employee would be docked PTO hours to make up for the missed productivity points.  If the employee did not have a sufficient PTO balance, Bayada would not deduct from the employee’s weekly salary.

Here, the issue was whether docking PTO balances was akin to docking wages; the argument was one of semantics surrounding the term “salary.” As the court noted, salary is not defined in the FLSA, and as this issue has not been litigated before an Appellate Circuit, the Third Circuit’s decision is the first of its kind. 

The Third Circuit ruled that PTO balances are a fringe benefit, and therefore are not part of the employees’ salary.  The court made this distinction by finding that a salary is a pre-determined amount of money that will be paid to the employee each pay period.  As long as the employer does not dock those monies, the employer is not running afoul with the FLSA’s exemption regulations.

This is an interesting case that reviews the nuance of the FLSA and employee exemptions.  For now, the Third Circuit views PTO deductions as compatible with FLSA exemptions.  This case is only precedent in Delaware, New Jersey and Pennsylvania, but may persuade courts in other circuits if a similar lawsuit is brought against an employer.  One should also take note that certain states, including Maryland and DC, define PTO/vacation balances as wages, and a similar fact pattern may result in a different decision based on state law.

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