The corollary of the above: It generally is illegal to deduct from "exempt" employees' salaries for missing partial days of work, except in very limited circumstances such as partial day, federal FMLA leave. The consequences could be invalidation of the exemption. That statement is true under both federal law (FLSA) and California law.
When employees have vacation or PTO balances, can employers lawfully deduct from them when exempt workers are absent for partial days, and leave the salary intact? Well, it's a definite yes under federal law. Federal law does not consider vacation / PTO to be "vested," and does not care if employers deduct from those balances for any reason.
Under California law, it's a little trickier. That is because vacation / PTO are "vested" balances. The argument against allowing deductions is that the exempt employee can work variable hours and is entitled to the full salary. Deducting from PTO is an end-around, which reduces a vested balance of wages otherwise owed, for an absence that the employee is entitled to take without affecting his or her pay. That's the plaintiffs' bar's argument, but it's not correct.
In 2005, the Court of Appeal decided in Conley v. Pacific Gas & Electric Co. (2005) 131 Cal.App.4th 260, that California law follows federal law in this area. However, the PG&E policy provided that exempt employees' partial day absences were subject to a deduction from PTO, only if the absence was longer than 4 hours. After Conley, the state Division of Labor Standards Enforcement, grudgingly, decided that Conley only authorized deductions from exempt employees' PTO when the absence was more than 4 hours.
Although Conley says nothing about a 4 hour minimum absence, employment lawyers were hesitant to advise employers to go farther than the Conley holding because of the DLSE opinion. And for good reason....
Enter Lori Rhea, who sued her employer, General Atomics. General Atomics had a policy allowing deductions from PTO in any amount of time that exempt employees were absent from their jobs for partial days. Rhea challenged this policy, arguing that Conley was wrongly decided, and that Conley only allowed deductions when her time away from work exceeded 4 hours. The trial court disagreed, granting General's motion for summary judgment.
The Court of Appeal affirmed:
We do not agree with Rhea's contention that by requiring employees to use vested Annual Leave for partial-day absences, General Atomics is requiring a forfeiture of vested Annual Leave as that term is used in California law. In Suastez and Boothby the vacation time was forfeited because the employer took away the employee's vested vacation time. Suastez and Boothby establish that if an employer provides vacation benefits, the employer "is not free to reclaim it after it has been earned." (Henry v. Amrol, Inc. (1990) 222 Cal.App.3d Supp. 1, 5, italics added.) Here, General Atomics does not take away or reclaim vested Annual Leave when an employee is absent for a partial day; it merely requires that the employee use the Annual Leave under the terms and conditions that it has created. "The law permits an employer to offer new employees no vacation time" (Owen v. Macy's, Inc. (2009) 175 Cal.App.4th 462, 464; see Henry, at p. 6), and it correspondingly also affords an employer the right to control the terms under which vacation time may be exercised by employees. (Suastez, supra, 31 Cal.3d at p. 778, fn. 7 [noting "an employer's right to control the scheduling of its employees' vacations"].) General Atomics has set rules for the exercise of Annual Leave, which it is permitted to do. It has not taken away Annual Leave that has already vested.
The court also rejected the plaintiff's premise that partial day deductions was an impermissible "substitution" of vacation wages for salary that was legally required to be paid:
Put another way, Rhea argues that General Atomics is impermissibly "substituting" the employee's Annual Leave hours for the employee's salary earned during the partial-day absence. * * * *
[W]e conclude that Rhea's argument fails because she has not established that General Atomics fails to pay all of the wages that it is obligated to pay during an employee's partial-day absence. It is undisputed that General Atomics continues to pay an employee's full salary during a partial-day absence and that the employee fully continues to accrue Annual Leave during a partial-day absence.13 Thus, there is no shortfall in wages or compensation during a partial-day absence that General Atomics "makes up" by requiring an employee to use Annual Leave for that period. This is simply not a situation like in Armenta where employees worked for a period without receiving compensation. Here, General Atomics' employees continue to receive their full compensation even when they are absent for a partial day.
Finally, the Court held that the "four hour" minimum absence is not required under California law:
we find no basis in California law for concluding that an employer is prohibited from requiring exempt employees to use their vacation or leave time when they are absent from work for a partial day. Rhea has not identified any reason for us to distinguish between partial-day absences of different lengths. Instead, she simply points out that the employer's policy in Conley only covered absences of at least four hours. We conclude that regardless of whether the absence is at least four hours or a shorter duration, a requirement that exempt employees use Annual Leave time for a partial-day absence does not violate California law.
So, it is legal to debit an exempt employee's PTO balance for absences of any length. However, employers must consider the employee relations aspects of doing so. If an employee works six 12-hour days, are you going to nick that employee's PTO balance for working only 4 hours on the seventh day in the week?
Also, as the court of appeal noticed, General Atomic did not deduct negative PTO balances from final pay upon termination of employment. You don't do that either, right? Cuz that would be bad.
The case is Rhea v. General Atomics and the opinion is here.
