Ask Our Experts: Final pay deductions for negative PTO balances

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.

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.

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.

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.