Ask Our Experts: Final Pay Deductions for Negative PTO Balances
Author: Rena Pirsos, Brightmine Legal Editor
A recurring question received by Ask Our Experts is whether an employer is allowed to make pay deductions from an employee's final pay to recoup a negative paid time off (PTO) balance.
A negative PTO balance at the end of employment usually occurs when an employee takes more time off than they have accrued. For example:
- An employee gets an advance on PTO and uses it before they have earned it. The employer has essentially loaned the employee salary to cover the PTO. If the employee quits or is fired before earning the advanced time, they owe the employer the difference.
- An employee's vacation balance goes negative if they are paid out more vacation dollars than they have earned, perhaps simply due to payroll error.
Chances are good that you have questions about this too so let's iron it out.
Exempt vs Nonexempt Employees
Q: Are negative PTO deductions from final pay allowed for both exempt and nonexempt employees?
A: Federal law allows a deduction from a nonexempt employee's final pay to recover a negative PTO balance, but it is generally not recommended from an exempt employee's final pay.
Specifically, the US Department of Labor's (DOL) Field Operations Handbook (FOH), Chapter 30, section 30c10(c), states that employers may make deductions for negative PTO balances upon termination of employment (the FOH specifically mentions vacation pay).
However, a DOL opinion letter says that advanced paid leave may be deducted from a nonexempt employee's final pay only if:
- The employer informs the employee about that policy before even advancing the leave; and
- The amount deducted reflects the rate of pay the employee earned when they took the advanced leave.
The FOH and the DOL opinion letter also say that leave advanced to a nonexempt employee is a loan or cash advance that the employer may recoup even if it causes the employee's final pay to fall below minimum wage.
While DOL opinion letters can only be relied upon as a legal defense by the employer that requested it, they still give a good indication of the agency's position on the matter discussed. The FOH, on the other hand, is a more authoritative source for employers as it provides DOL Wage and Hour Division investigators and staff with interpretations of statutory provisions, procedures for conducting investigations and general administrative guidance.
Although neither Chapter 30 of the FOH nor the DOL opinion letter address exempt employees, federal regulations generally say that an exempt employee's weekly salary can only be reduced in limited circumstances. And FOH Chapter 22, section 22h05(b), essentially provides that hourly or proportional pay would be permitted for exempt employees during their final week of employment.
Importance of a Legally Compliant Policy
Q: Should we have a negative PTO policy?
A: Yes!
Employers can decide whether negative PTO is acceptable for their business, but if they do allow it, they should protect themselves by providing the terms of deduction or collection of negative PTO from final pay in a company policy and/or handbook statement, and in job candidate offer letters and/or employment contracts. Employees should be required to acknowledge the terms of these documents and sign them once they are hired.
However, an employer's policies must comply with state and/or local laws that provide more protection to employees than federal law. Note that an employer that has employees in more than one state and/or locality may have to tailor its policies to comply by location, rather than rely on one blanket policy for all employees in all states and localities.
In addition, an employer's policy must be consistently enforced for all similarly situated employees to prevent claims of unlawful retaliation or discrimination.
State Pay Deduction Laws Vary
Q: Are there any states that prohibit negative PTO deductions?
A: There are considerable variations and nuances among the state pay deduction laws.
State law may or may not allow a pay deduction that federal law allows and/or may require prior signed, written authorization from an employee before a pay deduction may be made, among other requirements. That means you must check whether negative PTO balance deductions are even permitted under the relevant state law, along with any other requirements unique to the state.
Consider State Final Pay Laws Too
Q: Does whether an employee quit or was fired affect our ability to make a negative PTO deduction?
A: No.
State pay deductions laws do not base the ability to make a negative PTO deduction on whether an employee voluntarily quit or was involuntarily terminated. But under most state final pay laws, the nature of a termination directly affects the required timing of the final payment and sometimes also what must be included in the final payment. Therefore, be sure to comply with these requirements too when making a negative PTO deduction from final pay.
Ask Our Experts Is Here to Help
Dealing with negative PTO deductions can be very tricky depending on the applicable state law and the unique facts of any given situation, especially for multistate employers. If you have specific questions about negative PTO balance deductions, final pay in general or other workplace related challenges, Ask Our Experts is happy to help.