In an issue of first impression, the U.S. Court of Appeals for the Third Circuit held that paid time off (“PTO”) is not a form of salary under the Fair Labor Standards Act (“FLSA”) and, therefore, deductions from a salaried employee’s PTO balance do not violate the Act. Higgins v. Bayada Home Health Care Inc., 2023 U.S. App. LEXIS 6124 (3d Cir. Mar. 15, 2023).

The Third Circuit has jurisdiction over the federal courts in Pennsylvania, New Jersey, and Delaware.

Background

Plaintiff Stephanie Higgins is a registered nurse who worked for defendant Bayada Home Health Care from 2012 to 2016 as a full-time, salaried employee. Higgins and all other full-time salaried healthcare employees at Bayada were required to meet weekly “productivity minimums.” These minimums are expressed in points, with each point equating to work tasks like patient visits (and thus to hours worked). When a healthcare worker (referred to by the company as Clinicians) exceeds their productivity minimum, they are paid more. Conversely, when a Clinician falls short of the weekly minimum, Bayada reduces their PTO balance based on expected-versus-actual points earned.

An employee may request an increase or decrease in their weekly productivity minimums, with a corresponding increase or decrease in salary, but the company does not deduct from an employee’s guaranteed base salary if they lack sufficient PTO to cover a productivity point deficit. On the contrary, an employee’s salary would only be reduced if they took a voluntary day off without sufficient PTO to cover it.

After her employment ended, Higgins filed a collective action against Bayada, asserting that the reductions in her PTO balance constituted an unlawful salary deduction in violation of the FLSA and the Pennsylvania Minimum Wage Act (PMWA), thereby converting her to an hourly employee entitled to unpaid overtime. The district court granted summary judgment for the company on these claims and certified the matter for immediate appeal to the Third Circuit.

Third Circuit Decision

On appeal, the Third Circuit affirmed the district court’s dismissal. Because the FLSA does not define the terms “salary” or “fringe benefits,” the court of appeals began with a close reading of the Act’s regulations. Those regulations provide that an employee is paid on a “salary basis” when they “regularly receive[] 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.” 29 U.S.C. § 541.602(a). Importantly, the employee “must receive the full salary for any week in which the employee performs any work without regard to the number of days or hours worked,” id. at § 541.602(a)(1), and repeated deductions based on the quality or quantity of an employee’s work may transform the employee’s pay from salary-based to hourly. Id. §§ 541.602(a)(2) & 603(a).

Based on these regulations, as well as dictionary definitions of the terms “salary” and “fringe benefits,” the Third Circuit concluded that PTO deductions do not violate the “salary basis” regulations 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.” Contrary to the plaintiff’s assertion, there was no evidence that Bayada ever reduced the guaranteed salary of her or any other healthcare worker if their PTO was exhausted.

The Takeaway

While the Third Circuit’s holding clarifies the issue under federal law for the courts in its circuit, the plaintiff did not properly preserve on appeal her corresponding claim under the PMWA and therefore the issue remains undecided under Pennsylvania law, as well as under the law in other federal circuits. Thus, while employers now have guidance as to their options for PTO deductions under federal law in the Third Circuit, they should be cautious in assuming that the same guidance will apply under state law or in other circuits.

Daniel Thornton authored this article.