Abusing PTO Policies, Quirky Question # 60

Quirky Question # 60:

We are having trouble managing exempt employees’ paid time off (PTO).  Our current policy allows new employees to begin earning PTO right away, with the potential to earn up to 120 hours of PTO per calendar year.  PTO that is earned but not used is paid out or carried over at the end of each calendar year.

The problem we are having is that certain exempt employees know that they only need to work for fifteen minutes or so to be paid for an entire day.  These employees will spend fifteen minutes or so “working” while out of the office for personal reasons.  As a result, at the end of the year, these employees tend to receive a larger payout / carry over than others even though they are out of the office just as much (if not more) than their fellow exempt employees.  What can we do to curb this problem?

[Quirky Question No. 60 is another one of our West Coast questions, this one posed to the lawyers in our firm’s Anchorage, Alaska office.  Wendy Leukema, who has addressed other Quirky Questions posed to her and her colleagues in Anchorage provides her analysis below.  Note that Wendy’s analysis is not dependent on statutory or common law unique to Alaska; rather, she analyzes this inquiry from the perspective of the federal statute now causing such anguish to employers and such joy to the plaintiffs’ employment bar, the FLSA.]

Wendy’s Analysis:

Once again, as the saying goes, “no good deed goes unpunished.” Your existing PTO policy is very generous – perhaps too generous – and certain employees are taking advantage of the fact that, under federal wage and hour law, their salaries may only be reduced for full-day absences due to personal reasons.  The good news for you is that under the Fair Labor Standards Act (FLSA), employers with bona fide benefits plans may reduce an employee’s PTO for partial day absences due to personal reasons, including illness and injury, so long as the employee’s actual pay is not affected.  This is true even if the employee is able to cash-out his or her earned but unused PTO at the end of the year.  Webster v. Public School Employers of Washington, Inc., 247 F.3d 910, 917 (9th Cir. 2001) (explaining that a reduction in paid leave does not affect an employee’s exempt status under federal law, even if the employee is able to convert unused leave time to cash).  Thus, an employer may reduce an exempt employee’s PTO for tardiness or absences due to personal reasons without jeopardizing the employee’s exempt status.  Barner v. City of Novato, 17 F.3d 1256, 1261 (9th Cir. 1994).

Where an exempt employee has exhausted his or her PTO or has not yet earned enough PTO to cover the absence, employers with bona fide benefit plans have several options.  With respect to full-day absences covered by the policy (e.g., vacation, illness, or injury), employers may reduce an employee’s pay or require the employee to carry a negative leave balance.  29 C.F.R. 541.602(b)(2); DOL Opinion Letter dated September 14, 2006.  With respect to partial day absences, employers may only require the employee to carry a negative leave balance.  Under no circumstance, may an exempt employee’s actual pay be reduced for partial-day absences.  See DOL Opinion Letter dated January 7, 2005.  As explained by the DOL, “payment of the employee’s guaranteed salary must be made, even if an employee has no accrued benefits in the leave plan and the account has a negative balance, where the employee’s absence is for less than a full day.”  Id.

To qualify as a bona fide benefit plan, the plan or policy must provide a reasonable amount of paid sick leave for exempt employees, be communicated to eligible employees, and operate as described in the plan or policy.  DOL Opinion Letter dated September 14, 2006.  In addition, the plan must be administered impartially and its design should not reflect an effort to evade the requirements that exempt employees be paid on a salary basis.  Id. 

Based on the information you provided, it appears as though your plan would more than meet these criteria.  The DOL has approved as “bona fide” leave plans providing for at least five days of sick leave per year.  These days do not have to be designated solely as sick days; the DOL has approved as “bona fide” leave plans which provide for one day of sick leave and five days vacation, where the employees were (1) able to use their vacation days as additional sick days, (2) able to take leave in half-day increments, and (3) not required to use leave if out for only an hour or two due to illness or a doctor’s appointment. The DOL has also approved as “bona fide” leave plans that require one year of service prior to eligibility for paid sick leave.  Accordingly, under such a plan, the employer could reduce an exempt employee’s pay for full- day absences taken for illness or injury prior to the employee’s one year anniversary date.

Before you begin making partial day deductions from exempt employee’s PTO, however, we recommend that you revise your policy to permit such deductions and that you communicate these changes to your exempt employees.  It is far preferable to communicate these types of policy changes in advance, rather than simply making retroactive deductions from a benefit to which your employees believed they were entitled.

Dorsey & Whitney

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