Negative PTO Balance: Can You Dock Worker’s Final Paycheck?

Question: If a departing employee leaves your company with a negative PTO balance, can you deduct funds from the final paycheck to cover it?

A court ruling from Massachusetts provides valuable insight.

Exempt Employee Gives Notice

Ian O’Donnell was classified as an exempt employee. When he gave his notice to his employer, he had a negative PTO balance – meaning he had taken PTO time that he had not yet earned.

The company deducted funds from O’Donnell’s final paycheck to cover the balance.

O’Donnell sued, alleging the company illegally deducted money from his salary to reimburse a PTO advance.

The lawsuit asserted claims under the Fair Labor Standards Act (FLSA) and an analogous state law.

What’s in the Negative PTO Balance Policy?

Under the company’s policy, PTO benefits included vacation days, sick days and personal days for both exempt and non-exempt employees. The company tracked employees’ earned days in PTO banks.

Time was deducted from PTO banks in full-day increments. The employee handbook stated that employees who took more than two hours off during the day should deduct eight hours (a full day) from their PTO bank. Managers, however, could “look at the individual circumstances and apply judgment as to how they record the time.”

The employee handbook also said that, with supervisor approval, employees could borrow up to five PTO days. According to the handbook and other payroll documents, if an employee left the company with a negative PTO balance, then the company would deduct the PTO amount owed from the employee’s final paycheck.

Company Offers ‘Salary Continuation’

Also relevant here, the company offered “salary continuation,” which was a payment the company typically made to employees when they provided advance notice of resignation.

Generally, the company paid departing employees through the notice period but asked them to leave the day the resignation was tendered.

Negative PTO Balance at Termination

When O’Donnell gave his notice, he had a negative PTO balance – he’d taken more PTO than he had accrued in his PTO bank.

The company provided the typical “salary continuation” payment in O’Donnell’s final paycheck. But it deducted the amount due to cover the negative PTO balance.

O’Donnell sued, alleging the deduction was impermissible under the Fair Labor Standards Act (FLSA) and an analogous state law.

The company filed a motion for summary judgment, saying that the “salary continuation” payment more than covered O’Donnell’s negative PTO balance, so there was no improper deduction from his final paycheck.

Do Employees Have to Pay Back Negative PTO?

Under the FLSA and the Massachusetts Wage Act, certain employees are exempt from overtime pay provisions. To qualify as exempt, the employees must be paid on a “salary basis,” the court explained.

According to the DOL, being paid on a “salary basis” means an employee “regularly receives a predetermined amount of compensation each pay period on a weekly, or less frequent, basis.” And that predetermined pay rate “cannot be reduced because of variations in the quality or quantity of the employee’s work.”

But there are exceptions. The DOL lists circumstances where employers can make deductions from pay.

Here, the court said the company handbook alone didn’t prove O’Donnell was subject to improper salary deductions because “managers exercise discretion” when deciding whether:

• An employee is required to use PTO for a partial-day absence, and
• To allow PTO to be used before it is accrued.

Regarding the use of PTO for partial day absences, the court received conflicting testimony. Some employees testified that they took a full day of PTO for partial day absences while supervisors testified that they were flexible with PTO time, with one saying he didn’t count “the days and the hours” that employees took off.

As a result, the court said there were genuine issues about how managers implemented the company’s PTO policy concerning partial-day absences.

Conflicting Evidence Requires Trial

Turning to the matter of borrowed PTO, the court said the parties also gave conflicting testimony on this issue.

In the company’s view, if an individual’s employment was terminated before they earned back borrowed PTO, then it could deduct that amount from the “salary continuation” because it was a gratuitous payment rather than a part of the employee’s salary.

It submitted an affidavit stating that it was the “custom and practice” to take deductions to cover negative PTO balances from gratuitous benefits such as salary continuation rather than an employee’s salary.

But O’Donnell produced evidence that stated the opposite. Specifically, he provided “Exempt Employee Absence Records,” which showed PTO taken by exempt workers.

Each record was signed by an employee and a supervisor and contained a statement addressing the borrowed time and the consequences of leaving the company with a negative PTO balance. The form specifically said “…the amount you owe the company will be deducted from your final paycheck or any other amounts payable to you.” (Emphasis in original.)

In the court’s view, this form suggested that deductions to cover borrowed PTO could be deducted from an employee’s salary – and not just salary continuation or other non-salary benefits.

And because O’Donnell’s evidence contradicted the company’s affidavit, a genuine issue remained, the court said.

The court denied the company’s motion for summary judgment. The case had to proceed because there were questions about how the company’s supervisors exercised their discretion in accounting for time off and treating borrowed PTO time.

O’Donnell v. Robert Half Int’l, Inc., No. 04-12719-NMG, 2009 U.S. Dist. LEXIS 143229 (D. Mass. 7/23/09).