Originally published August 5, 2005
The California Court of Appeal recently held that employers may require exempt employees to use their vacation time or paid leave to account for partial-day absences. The Court's decision in John Conley v. Pacific Gas & Electric Company, Cal. Ct. App., No. A105832, 7/21/05 contradicts prior opinion letters of the Division of Labor Standards Enforcement (also known as the Labor Commissioner). The Court's decision permits employers to hold employees accountable for partial-day absences by deducting accrued vacation time for the time off, which was previously not allowed under the Labor Commissioner's rules.
It is well established that an employee is entitled to overtime compensation unless he or she is specifically exempt from the overtime requirements. An employee can be deemed exempt provided the employee meets both the "duties" and "salary" tests. To pass the duties test, the employee must be performing the type of work that is legally defined as exempt, such as professional, executive, or administrative work. To pass the "salary" test, the employee must be paid on a salary basis. This means, generally, that the employee is paid a flat salary regardless of the amount of hours the employee works. The idea is that an employer pays an exempt employee for the work performed and not the hours worked.
Both state and federal law provide a variety of regulations concerning whether an employee is paid on a salary basis. Both federal and state law provide, among other things, that an employer cannot deduct an employee's wages for personal absences of less than a full work day. In other words, if an employee only works four hours in a day because of personal reasons, the employer must still pay the employee a full day's wages in order to maintain the employee's overtime exemption.
Under federal law, although employers are not permitted to deduct an employee's wages resulting from an employee's partial-day absence for personal reasons, they are entitled to deduct time for partial-day absences from the employee's accrued vacation time. If the employee does not have any accrued vacation time left, however, then the employer must still pay the employee a full-day's wages. In California, however, the Labor Commissioner has taken the position that because in California, accrued vacation time is considered to be vested wages, California employers cannot deduct accrued vacation time (or paid leave) from their employees' accrued vacation time accounts in amounts of less than a full day.
The Court in Conley rejected the Labor Commissioner's analysis and adopted the federal position. In Conley, employees classified as exempt from overtime laws by Pacific Gas & Electric Company (PG&E) brought a class action suit challenging PG&E's policy of automatically deducting earned vacation leave for partial-day absences. The employees correctly pointed out that PG&E's policy violated the Labor Commissioner's stated policy prohibiting deduction of an employee's vacation time for partial-day absences. The Court in Conley rejected the Labor Commissioner's position that because accrued vacation pay constitutes vested wages, that a policy permitting the deduction of accrued vacation time for partial-day absences is tantamount to a deduction of wages. Instead, adopting the federal rule, the Conley court found that PG&E's policy only had the affect of regulating when the employees were required to use their accumulated vacation leave by mandating that employees use their vacation time when they will be absent from work for four or more hours within a single day. Thus, the Court concluded that the employer was not deducting an employee's wages because of an employee's partial-day absences.
Conley breaks new ground. Unless reversed by the California Supreme Court, employers will now be permitted to require employees to utilize their accrued vacation time when they are absent from work for partial days because of personal reasons. However, employers should recognize that the rules regarding whether an employee is being paid upon a salary basis are complex. Thus, employers should consult with counsel before changing their vacation time or paid leave deduction policies.
The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.