Deducting Fringe Benefits for Underperformance Does Not Entitle Employees to Overtime Pay

Per a recent Third Circuit ruling, employers do not destroy the salary basis test for exempt employees by making fringe benefit deductions. The Third Circuit held that the term “salary” does not include fringe benefits such as paid time off (“PTO”) under the Fair Labor Standards Act (“FLSA”).

In Higgins et. al. v. Bayada Home Health Care, Inc., several employees challenged their classification as exempt, salaried employees due to their employer’s practice of deducting PTO if they did not accumulate a set number of productivity points per week. Under the FLSA, employers are generally required to pay employees overtime for all hours worked in excess of 40 hours per week. That requirement does not apply to exempt, salaried employees. In determining that the employees were not entitled to overtime, the court reasoned that because no actual deductions were made from their base pay, and thus their salary remained intact, the employees remained exempt.

Importantly, this ruling gives employers the green light to deduct fringe benefits such as PTO for failure to meet productivity quotas. Making deductions from fringe benefits does not convert exempt employees to non-exempt employees entitled to overtime.

We will continue to monitor this and other related employment and labor law developments. For questions regarding how this will affect your severance agreements, please contact Lisa M. Scidurlo, Michael G. Tierce or the Stevens & Lee attorney with whom you regularly work.