Employer May Deduct from Exempt Employees’ Vacation/PTO for Partial Day Absences of Less Than Four Hours
With its July 21, 2014 decision in Rhea v. General Atomics, the Court of Appeals aligns California law with Federal law regarding employee deductions from Paid Time Off (PTO)/Vacation for Partial Day Absences. Employers may now deduct partial-day absences in increments, including increments of less than four hours, from exempt employees’ accrued leave time without violating California law or losing the employee’s exempt classification.
To provide some background, the California Supreme Court held more than 30 years ago in Suastez v. Plastic Dress-Up Co. (1982) 31 Cal.3d 774 that an exempt employee’s accrued vacation qualifies as earned wages. As such, an employer could not require an exempt employee to forfeit unused vacation/PTO and the employer had to pay out at termination any and all accrued and unused vacation/PTO.
If an exempt employee took a full day off from work, the employer was permitted to deduct a day from the employee’s vacation/PTO bank. However, if an exempt employee took a half day of vacation or worked only a partial day, employers were advised (and as was held by the California Division of Labor Standards and Enforcement – DLSE) that deducting from the employee’s vacation/PTO bank would violate California law’s salary basis test because the employer would effectively be reducing the amount that the employer paid the employee for that day.
In Conley v. Pacific Gas & Electric Co. (2005) 131 Cal.App.4th 260, the Court of Appeal held that an employer’s policy of allowing the employer to deduct hours from an exempt employee’s accrued vacation/PTO bank to cover partial day absences did not violate California law. The Conley ruling followed federal law, under which a deduction of this type is allowed because vacation/PTO is not considered “vested.” However, the DLSE subsequently interpreted Conley to mean that employers could only deduct from an employee’s vacation/PTO bank if the absence was for four hours or more. Until now, employers complied with the DLSE’s interpretation of Conley by only allowing or requiring exempt employees to use vacation/PTO in increments of less than four hours.
Recently, the Court of Appeal finally clarified the ruling in Conley with its decision in Rhea v. General Atomics. Under this decision, the “four hour” minimum absence rule is no longer required under California law. An employee’s vacation/PTO may be deducted for partial day absences, including absences of less than four hours, without jeopardizing an employee’s exempt status.
In Rhea, the employer, General Atomics, had a policy that required exempt employees to use their annual leave hours when they were absent from work for portions of any single day. A salaried, exempt employee sued the employer on the ground that the employer’s policy violated the “four hour” minimum absence rule.
The Court of Appeal agreed that under California law, vacation or annual leave is treated as a type of “wages” or “deferred compensation” that is earned by an employee. However, the Court did not agree with the employee that an employer’s deduction of annual leave for an employee’s partial-day absences constitutes a forfeiture of wages. The Court stated that the employer is not taking away vested annual leave when an employee takes a partial-day absence; it only requires the employee to use the annual leave under the terms and conditions the employer has created.
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