The Ins and Outs of Vacation for Exempt Employees

Summer is here and that means employees are making vacation plans. While your hourly employees,  non-exempt from the Fair Labor Standards Act (FLSA), don’t get paid for hours they don’t work, it’s a little more complicated for exempt employees. What happens if they don’t have enough paid time off banked to cover their vacation? What if someone wants to take a half day off the last day before they leave for a trip? Do you have to pay your salaried employees even though your office will be closed on July 4? It’s enough to tempt you to extend your own vacation indefinitely!

Who gets vacation time?

Paid time off (PTO) is not legally required for any employee for vacation, illness or federal holidays. Because of this, you may determine how much, if any, paid time off your employees get. You may also provide it for full-time employees only. According to Nolo.com, “the Bureau of Labor Statistics reports that, while 91% of full-time employees in private industry receive some paid vacation, only 34% of part-time employees do.”  Employers may not selectively provide or deny PTO based on race, gender, pregnancy, national origin, religion, disability, citizenship status, genetic information or age.

You have leeway in setting your policy, but it’s always a good idea to stay competitive by offering amounts of vacation and sick leave that are comparable to your industry as a whole. It’s also crucial to develop a solid policy that includes how time is accrued (i.e. per month or per hours worked), how it may be used and procedures for requesting time off.

PTO in action

It sounds simple: request a day of vacation, don’t come to work. But it gets complicated when your office closes for a holiday, a worker takes a partial day off, or they’ve exhausted their leave bank.

Remember that exempt employees must be paid their salary “for any week in which the employee performs any work. An employee's salary may not be reduced in any workweek because of variations in the number of hours worked or the quality or quantity of the work performed,” according to Littler.com.

What’s more, according to the so-called “touch the wall” rule, ”if your employee shows up for work, even if it's just for 15 minutes, you must pay for the entire day. (In the case of remote workers, if they so much as log onto their computers, call on one customer, or do any anything work related, that counts as touching the wall.),” says Suzanne Lucas in Inc.

Note that this applies to closings due to inclement weather or other unforeseen circumstances too. “In many cases exempt employees must be paid for such closures, according to Angela Stone of the [Society for Human Resource Management], ‘If an exempt employee works any portion of a workweek, he or she must be paid for days in which they are ready, willing and able to work.’ Stone adds that a deduction cannot be made for time when no work is available,” says Labor Law Center.com.

Holidays, when you choose to close and work is unavailable, are not required by law to be paid days off. In these cases you can choose to count them as normal work days and reduce the amount of PTO employees receive, or you can require them to use a vacation day from their bank. Either way, spell it out in your policy and communicate it in advance.

May I dock vacation time?

There are very few cases where you may dock pay from an exempt employee. If you have a “bona fide” benefits program, “deductions from salary may be made … when the employee is absent from work for one or more full days for personal reasons, other than sickness or disability.” Or, you may allow your employee to carry a negative PTO balance (if they’ve exhausted their bank). However, you may not dock pay for a partial day. For partial days, employees must be paid in full, although you may choose to dock PTO (or carry a negative balance of PTO).  See the Department of Labor’s 2005 Opinion Letter for details.

What is a bona fide benefits plan? The Department of Labor provides this guidance in a 2006 Opinion Letter: 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. 

Docking pay, even when permitted, carries risk. As Suzanne Lucas explains in Inc.,  if you dock pay it’s very possible that “you've just made that person non-exempt [by lowering their pay below the exempt threshhold]. Which means you not only owe overtime going forward, you owe it going backward. So your attempt to save $50 by docking two hours pay could mean you'll be out thousands in back overtime pay.”

“There is the additional risk that the loss of such status for any employee may result in loss of exempt status for all employees in the same or similar jobs, with the same potential liabilities for back pay and penalties,” according to Littler.com

What about unused vacation time?

Not everyone uses all their PTO each year. According to The Balance, “recent surveys indicate that employees are struggling to use their allotted vacation time. Given the demands of their jobs, almost half of workers reported that they didn't take the time to which they were entitled.”

If your employees don’t always use their allotted PTO, start by checking your state’s laws regarding paid leave time. Companies generally get to decide what happens to unused paid leave. One option is the “use it or lose it” system in which unused time expires at a predetermined date or after a certain time period. Another option is to allow some or all unused time to carry over into the next year. What’s more, some states consider paid leave time to be compensation and therefore some or all must be paid out to employees upon termination of their employment. Be sure your policies are within applicable laws and documented in writing.

Don’t spend your own vacation worrying about exempt employees’ PTO. Contact the experts at Horizon Payroll Solutions with questions about vacation, timekeeping or any of your HR needs!