Rhea v. General Atomics

Posted in Employee Rights, Employer Rights, Employment Law, News, Wage and Hour on July 25, 2014

In Rhea v. General Atomics, 14 C.D.O.S. 8201, the California Court of Appeal on Tuesday reaffirmed an earlier decision holding that an employer can require (or allow) an exempt employee to use vacation/paid time off (PTO) for partial day absences without compromising the employee’s exempt status.  The Rhea Court further held that an employer can require exempt employees to do so for absences of less than four hours.  This decision provides much needed clarification for employers trying to administer their vacation/PTO policies for exempt employees in California.

Exempt Status and Vacation Wages

To understand the Court’s decision, it helps to have a bit of background regarding exempt status and the law regarding vacation wages in California.  The “salary basis” test requires that for an employee to qualify as exempt, the employee must earn a salary.  Earning a salary means that the employee receives the same rate of pay regardless of the quantity or quality of work performed.  So just as an exempt employee does not earn overtime when working hours beyond the employee’s normal schedule, the employer cannot reduce the employee’s pay when the employee works less than the normal hours.  Exempt status also requires that the employee satisfy a “duties” test which focuses on the duties and responsibilities of the position to determine whether they qualify for any of the available exemptions, but Rhea involved only the salary basis part of the two-pronged test.

Accrued Vacation = Accrued Wages

With respect to vacation or PTO, the California Supreme Court held more than 30 years ago in Suastez v. Plastic Dress-Up Co., 31 Cal.3d 774 (1982), that accrued vacation qualifies as earned wages.  An employer cannot, therefore, have a policy in which an employee forfeits unused vacation – through the application of a use-it-or-lose-it policy, for example – and must pay out at termination all accrued and unused vacation/PTO.

Partial Days Off

Where an exempt employee takes a full day off from work, the employer can deduct a day from the employee’s vacation/PTO bank.  But what if an exempt employee wants to take a half day of vacation or works only a partial day for some personal reason?  The employer cannot reduce the person’s pay to reflect the reduced number of hours worked as this would violate the salary basis test.  But can the employer allow the employee to use only a partial day of vacation/PTO?  Can the employer require that the employee do so?

The Old Rule

Before the Court of Appeal issued its decision in Conley v. Pacific Gas & Electric Co., 131 Cal.App.4th 260 (2005), many practitioners argued that deducting a partial day of vacation/PTO would violate the salary basis test because even though the employee would receive a full day of pay despite the partial absence, part of the pay came from the employer and the other part – the amount deducted from the employee’s vacation/PTO bank — in effect, came from the employee.  The California Division of Labor Standards Enforcement (DLSE) had also adopted this position in several of its opinion letters.  By requiring the employee to kick in some of the employee’s accrued vacation, the argument went, the employer effectively reduced the amount that the employer paid the employee for that day.  And any such reduction in the employer’s pay obligation violated the salary basis test.

The New Rule

The Conley court rejected this argument.  It held that a policy under which an employer deducted hours from an exempt employee’s accrued vacation bank to cover partial day absences of four or more hours did not violate the salary basis test.

Following Conley, many California employers modified their vacation/PTO policies to allow exempt employees to use accrued time off in less than full-day increments.  But, because Conley involved a policy in which the employer made the deduction only for partial day absences of four or more hours, many employers took a cautious approach by structuring their policies to include that limitation.  They did not require or allow exempt employees to use vacation/PTO in increments of less than four hours.

The Rhea Court first affirmed the decision in Conley, and rejected the plaintiff’s argument that any vacation/PTO deduction for partial day absences destroys an employee’s exempt status.  The Court then held that the rule in Conley was not limited to partial day absences of only four or more hours, and held that employers may make partial day deductions for absences of less than four hours without jeopardizing an employee’s exempt status.  In doing so, the Rhea Court resolved the issue that Conley left open and that has caused uncertainty for California employers in drafting and administering their vacation/PTO policies.