On July 21, 2014, a California Court of Appeal held that overtime exempt status is not undermined by requiring employees to use accrued leave for absences of less than half a day. 

In Rhea v. General Atomics, the employer required exempt employees to use accrued leave for any partial day absences, regardless of length.  Plaintiff Lori Rhea argued the practice defeated the California and federal law requirement that exempt employees receive a guaranteed salary without deductions for most partial day absences, known as the “salary basis test.” 

One prior California Court of Appeal opinion, however, had approved of employer policies allowing for the deduction of accrued leave from exempt employees for partial day absences, reasoning that reducing a leave-time bank is not the same as reducing cash salary.  Yet, some employers and commentators had assumed that authorization was limited to absences of at least half a day, and that deducting smaller increments would undermine the assumption that exempt employees’ hours are not closely tracked.

In Rhea, affirming summary judgment for General Atomics, the Court of Appeal held that the policy did not constitute a compensation reduction under the salary basis test because it did not take away or reclaim accrued paid leave.  The policy merely required that employees use the paid leave they have accrued for such absences.  The Court noted that employers are not required to provide paid leave and may set terms and conditions for the use of any paid leave time that is given.  Similarly, the Court rejected Rhea’s arguments that the policy at issue was an improper collection or withholding of wages, a secret payment of a lower wage, or a shifting of wages from one pay period to another.

Because this decision departs somewhat from earlier practices, employers would be best served to delay any changes in their PTO policies until at least August 30, 2014, the last day that the parties may appeal the decision to the California Supreme Court.  If the decision is left in place, employers will have greater flexibility in requiring the use of incremental paid leave for partial day absences.  However, there are a number of factors to consider before changing PTO plans, including the equities involved in requiring exempt employees to use paid leave for absences of a few hours, but not increasing compensation when those employees work late hours or weekends.  Likewise, even if an employee has used all available paid leave, the employee would still be entitled to take many health-related absences, and would do so without any reduction in base pay for partial day absences.  This may provide employees with an incentive to exhaust all accrued vacation or may inadvertently result in the perception that employees who have not used all their accrued time are at a disadvantage.  Thus, any cost-saving considerations must be weighed against the resulting effects on employee morale and the administrative burden of closely monitoring exempt employees’ daily work time.