An employer did not run afoul of the Fair Labor Standards Act when it deducted paid time off from workers who failed to meet productivity goals, the 3rd U.S. Circuit Court of Appeals ruled Wednesday (Higgins v. Bayada Home Health Care Inc., No. 21-3286 (3d Cir., March 15, 2023)).

Bayada Home Health Care Inc. maintained a productivity system that awarded exempt workers with extra compensation if they hit certain goals; if they failed to hit those goals, it docked their PTO banks. The employer did not dock workers’ base salaries, however, even if they did not have enough PTO available to cover the deduction.

The workers sued, alleging the PTO was part of their salary and the deductions therefore violated the FLSA.

The law forbids employers from reducing the pay of an exempt employee paid on a salary basis; except for a few narrow exceptions, “an exempt employee must receive the full salary for any week in which the employee performs any work, regardless of the number of days or hours worked,” according to a DOL fact sheet. Employers that make improper deductions may risk a worker’s exempt status, entitling them to overtime pay.

A district court, however, disagreed with the workers in Higgins and dismissed their claim. On appeal, the 3rd Circuit affirmed. An employer doesn’t violate the FLSA when it deducts from an employee’s PTO because the predetermined salary doesn’t change, the appeals court explained. 

PTO, for the purposes of the FLSA, is a fringe benefit, the court concluded, “which has no effect on the employee’s salary or wages.”

Third Circuit opinions apply in New Jersey, Pennsylvania and Delaware.