In a case of first impression, the U.S. Court of Appeals for the Third Circuit has ruled that an employer’s policy of docking employees’ paid time off (“PTO”) for failing to meet their productivity goals is not an impermissible reduction of the employee’s salary under the FLSA. Higgins v. Bayada Home Health Care, No. 21-3286, 2023 WL 2518345 (3d Cir. Mar. 15, 2023).

Bayada Home Health Care (“Bayada”) paid its clinicians a salary and set certain productivity goals. When the clinicians met their productivity goals, they received additional compensation. When they did not, Bayada docked their PTO to supplement the shortfall between their actual productivity and their goals. Importantly, however, Bayada did not reduce the clinicians’ base salary for failure to meet their productivity goals.

A Bayada clinician brought a collective class action under the Fair Labor Standards Act (“FLSA”), arguing that Bayada’s policy violates the salaried basis test for overtime pay exemption under the FLSA and entitles her and similarly situated employees to time-and-a-half overtime pay and liquidated damages. On appeal, the Third Circuit Court of Appeals affirmed the district court’s grant of summary judgment, holding that PTO is a “fringe benefit,” as opposed to a facet of an employee’s salary, and Bayada’s reduction of employee’s PTO did not result in an improper deduction from the employee’s salary. As such, Bayada did not lose the FLSA exemption and was not required to pay time-and-a-half overtime to its clinicians.

Case Background

Named Plaintiff Stephanie Higgins was employed by Bayada Home Care, Inc. as a registered nurse. Bayada had a policy of requiring its full-time, salaried employees to meet a weekly “productivity minimum.” Certain work tasks were assigned “productivity points,” which correlated approximately to the amount of time that Bayada estimated each task should take to perform. An employee received additional incentive compensation for weeks when they exceeded their productivity minimums.  If an employee failed to meet a weekly productivity minimum, on the other hand, the PTO in their “leave bank” would be reduced in an amount commensurate with the missed productivity points.  Crucially, Bayada did not make any deductions from an employee’s base pay if they did not have sufficient accrued PTO to cover the missed productivity points.

Higgins filed a collective action against Bayada under the FLSA and the Pennsylvania Minimum Wage Act (“PMWA”), alleging that deductions in PTO were equivalent to a reduction in salary, thereby causing Bayada to lose any exemption otherwise applicable, and entitling her and those similarly situated to time-and-a-half overtime pay for all hours worked in excess of 40 in any week. 

The Third Circuit’s Decision

The Third Circuit affirmed the district court’s grant of summary judgment on Higgins’ FLSA claim and held that Higgins had waived her PMWA claim by failing to brief that issue. The court determined that, based on the plain language of the FLSA, the term “salary” does not include PTO. The court reiterated that in order to maintain overtime exemption status under the FLSA, an employer must pay its employees their full predetermined “base” salary every week regardless of the number of hours performed. The court reasoned that a PTO deduction does not equate to a reduction in the employee’s salary, because when an employer deducts PTO, the employee still receives the full amount of a predetermined “base” salary for that week, regardless of the number of hours that she works. In summary, the court stated: “So long as the employer does not dock that pre-determined part of the employee’s compensation, the employer has satisfied the salary-basis test.” An employer can deduct fringe benefits for an employee’s failure to meet an expectation as long as the employee’s base salary payment remains the same. Therefore, reducing an employee’s PTO allocation will not remove that employee from the purview of the FLSA’s salary-basis overtime exemption. 

Takeaways

The Third Circuit’s opinion in Higgins v. Bayada Home Health Care, Inc.  provides several key takeaways:

• The executive, administrative, and professional exemptions from the FLSA’s overtime pay requirements require, in most circumstances, that the employee be paid on a salaried basis – meaning a guaranteed minimum amount each week that is not subject to reduction based on the quantity or quality of work performed by the employee.
• Deductions from an exempt employee’s base salary (outside of very limited circumstances authorized under the regulations implementing the FLSA) will result in a loss of the overtime pay exemption and a requirement that the employer pay the employee time and one-half for all hours worked over 40 in a workweek.
• A well-crafted and properly implemented incentive compensation policy for exempt employees tied to an employee’s productivity will not run afoul of the FLSA’s overtime pay requirements so long as it does not result in a deduction from the employee’s guaranteed minimum base salary.
• Employers should review their pay policies to make sure they do not result in improper deductions from an exempt employee’s base salary.
• Employers need to remember that state wage and hour laws may differ from the FLSA, and therefore, they should always check to make sure their pay practices comply with both the FLSA and the state wage and hour laws of the states where they have employees.