On March 15, 2023, the Third Circuit Court of Appeals handed down a decision in Higgins v Bayada Home Health Care, Inc., No. 21-3286, a case of first impression in the circuit. The court held that paid time off (“PTO”) is not considered part of an employee’s salary under the Fair Labor Standards Act (“FLSA”), and as such, deductions from PTO do not defeat employees’ classification as salaried exempt employees under the FLSA.

The case concerned a class of registered nurses who worked for Bayada Home Health Care, Inc. (“Bayada”), a company that provides home health care services to patients. The plaintiffs alleged that Bayada had misclassified them as exempt employees and failed to pay them overtime wages in violation of the FLSA. Bayada countered that the plaintiffs were properly classified as exempt employees and that deductions from their PTO did not defeat their exemption status.

Under the FLSA, employees are entitled to overtime pay at a rate of one and one-half times their regular rate of pay for all hours worked over 40 hours in a workweek unless they are exempt from the overtime provisions of the Act. One of the exemptions applies to employees who are classified as salaried exempt employees, which requires that the employee be paid a predetermined salary that is not subject to reduction based on the quality or quantity of work performed.

The plaintiffs argued that Bayada had improperly deducted PTO from their salaries, which defeated their status as salaried exempt employees. However, the Third Circuit rejected this argument, holding that PTO is not considered part of an employee’s salary under the FLSA. The court noted that the FLSA does not define “salary” and that the Department of Labor’s regulations provide only a general definition of salary as a predetermined amount of compensation paid for each pay period, regardless of the number of hours worked. The court further noted that the regulations do not include PTO in their definition of salary and that PTO is not directly tied to an employee’s work.

The court reasoned that PTO is a benefit provided to employees which allows them to take time off without losing pay. While the value of PTO may be reflected in an employee’s overall compensation package, it is not considered part of an employee’s salary for purposes of the FLSA. Therefore, deductions from PTO do not defeat an employee’s status as a salaried exempt employee.

The court’s decision in Higgins is significant because it clarifies an issue of first impression in the Third Circuit and provides guidance to employers on the proper classification of employees under the FLSA. Employers should take note that deductions from PTO do not defeat an employee’s status as a salaried exempt employee, but they must ensure that their employees meet all of the requirements for the exemption, including receiving a predetermined salary that is not subject to reduction based on the quality or quantity of work performed.

The Third Circuit’s decision in Higgins v Bayada Home Health Care, Inc. is a significant development in FLSA law and has provided guidance on the proper classification of employees under the Act. While PTO may be a valuable benefit for employees, it is not considered part of an employee’s salary for purposes of the FLSA, and deductions from PTO do not defeat an employee’s status as a salaried exempt employee. Employers should review their compensation policies and practices to ensure compliance with the FLSA and seek legal counsel when necessary.