Lori Rhea is a salaried employee who is classified as exempt from overtime pay under federal and California wage and hour laws.  Like the other exempt employees at General Atomics, she was paid a salary and accrued comprehensive annual leave to be used for any reason, such as vacation, illness, doctor's appointments or family obligations.  Employees who accrue more than the maximum are cashed out at the end of the year for any leave over the maximum.

General Atomics required exempt employees to use their Annual Leave hours if they were absent from work for partial or full days.  Prior to February 2011, employees only had to use Annual Leave if their absence was four hours or longer.  After that date, deductions were made from Annual Leave for any length of absence during the work day.  Employees did not have to use Annual Leave during any week in which they worked more than 40 hours.

The court found it was undisputed that Rhea qualified as an exempt employee under the duties test portion of the analysis.  The true question was whether she was properly being paid on a salary basis if she was being required to use Annual Leave for partial day absences.  Federal regulations require exempt employees to be paid their normal compensation without reduction due to variations in quality or quantity or work.  Deductions can be made if the employee is absent from work for one or more full days for reasons other than sickness or disability.  California statutes do not contain such a provision.  But, under both federal and California law, if an employee is absent from work for a partial day, the employer is prohibited from deducting monetary pay.

Federal law allows an employer to deduct from an employee's vacation or leave bank for partial-day absences.  California has only one case addressing this topic ("Conley"), which concluded that, like under the federal analysis, personal leave time is not considered salary, so it can be used for partial day absences.  That case, however, pertained to absences of four hours or more.  Rhea argued that the case would not apply to absences of fewer than four hours.  The court disagreed.

The court noted that California's Department of Labor Standards Enforcement published an opinion letter in 2009 concluding that the Conley case did not intend to establish a limitation that absences must be at least four hours in length in order for employers to be able to deduct from leave balances.  Rhea argued that her annual leave was a form of wages, that California prohibits an employer from requiring the forfeiture of wages, and General Atomics' practice was tantamount to a forfeiture of wages and therefore impermissible.

While it is correct that annual leave, such as vacation time, is considered wages under California law, Rhea's argument still fails because deducting from the leave bank is not taking away or forcing a forfeiture of wages.  It is simply a requirement to use the leave in a particular manner.   The employee is still receiving all of the paid leave to which she is entitled.  There is no overall shortfall in wages or compensation because the employee is still receiving full pay for the day in which she was partially absent.

Although the Conley case related to a policy wherein the deductions only happened for absences of four hours or more, the court found there is nothing in Conley's analysis to indicate the same principles would not apply where deductions were taken for partial day absences of any length.  General Atomics' policy is therefore lawful. 

Note: This is an important case confirming an employer's right, under California law, to require exempt employees to use paid leave to account for partial day absences.  Schools should make sure their policies are clear in this respect, and that exempt employees know that if they are absent for part of a day, they must account for that time.

Rhea v. General Atomics, --Cal.Rptr.3d--, 2014 WL 3565429