By Alison Silveira and Kerry Friedrichs

Seyfarth Synopsis: Last week, the United States Court of Appeals for the Third Circuit held that employers can deduct from an employee’s PTO bank for failure to meet clearly defined productivity minimums without violating the salary basis test and jeopardizing the employee’s exempt status.  Higgins v. Bayada Home Health Care Inc. provides some positive news for employers, following the Supreme Court’s recent adverse salary basis decision in Helix Energy Solutions Group v. Helix.  The opinion also sheds some light on how courts are likely to view “salary” for purposes of the salary basis test moving forward.

The definition of “salary” is a recent hot topic in wage and hour litigation and, for many courts, is an issue of first impression.  Earlier this month, in Helix, the Supreme Court looked to several dictionaries for a definition of “salary” in finding that a highly compensated employee who was paid on a day rate did not meet the “paid on a salary basis” requirement of the federal overtime exemptions, even though (1) the day rate for just one day’s work satisfied the salary level required by the exemptions, and (2) the salary basis test does not require that an employee be paid their “salary” if they work no days during a workweek. 

The Third Circuit has now followed in the footsteps of Helix, and looked to not one but three different dictionaries to come up with a definition of “salary”: “a fixed amount of compensation that an employee regularly receives.”  In Higgins, the plaintiff was an exempt health care clinician. She and her other exempt colleagues were paid a salary, and were required to meet certain productivity minimums each week.  If an employee exceeded those minimums in a week, they earned additional compensation.  If, however, they failed to meet those minimums in a week, the employer withdrew from the employee’s available PTO bank to supplement the difference between actual and expected minimum productivity.  Importantly, the employer never withdrew from the employee’s salary to cover this delta.  While the employee believed the employer would reduce her salary if her PTO bank was insufficient to cover the delta, the employer never did and the court clarified that the relevant question is not “whether an employer threatens to dock a salaried employee’s base pay; it is whether an employer made an actual deduction from an employer’s base pay.”  Against this backdrop, the Third Circuit concluded that PTO is a “fringe benefit,” which “has no effect on the employee’s salary or wages,” and that deduction from a PTO bank does not jeopardize an employee’s exempt status under the FLSA.

The Court’s conclusion that PTO is neither wages nor part of an employee’s salary is not novel; the Department of Labor reached the same conclusion in a 2009 opinion letter on the topic, finding that the salary basis test does not apply to nonmonetary compensation like vacation time and sick leave.  But the Higgins court only mentions this interpretation in a footnote, after spending several pages independently examining the FLSA’s enabling regulations and dictionary definitions.  Helix similarly made no reference whatsoever to DOL opinion letters interpreting the “salary basis” test regulations, instead looking exclusively to the regulations themselves and the dictionary.  We expect this is a foreshadowing of opinions to come on the topic, and that courts will continue to look to strict statutory construction and the plain meaning of the text of a regulation, as opposed to affording traditional Auer deference to an agency’s interpretations of its own regulations.