Lori Rhea is employed at General Atomics in a salaried position.  She is an exempt employee for purposes of overtime pay under federal and California wage and hour laws.  Exempt employees at General Atomics receive a salary and accrue comprehensive annual leave which can be used to take paid time off for any reason, such as vacation, sickness or family obligations. 

General Atomics requires its exempt employees to use annual leave hours when they are absent for full days or partial days, regardless of the length of the partial-day absence.  When absent for a full or partial day, employees continue to receive their full salary and continue to accrue annual leave during the period of absence. With the exception of a two year period during which employees were only required to use annual leave for absences of four hours or more, General Atomics requires its employees to use annual leave for partial-day absences of any length.  However, employees are not required to use annual leave for an absence in any week in which the employee works more than 40 hours. 

Rhea filed a lawsuit against General Atomics on behalf of a proposed class of General Atomics' exempt employees in California subject to annual leave for partial-day absences of less than four hours.  The complaint alleged various wage and hour violations under California law.  The parties filed cross motions for summary judgment on the issue of the legality of General Atomics' practice of requiring exempt employees to use annual leave for partial-day absences.  The trial court found in favor of General Atomics, and Rhea appealed.  The Court of Appeal affirmed. 

Under both California and federal law, an employee is not considered exempt for purposes of overtime unless they perform certain types of work and are paid on a salary basis.  An employee is considered to be paid on a salary basis if the employee regularly receives a predetermined compensation that is not subject to reduction because of variations in the quality or quantity of the work performed.  Under both California and federal law, a private sector employer is prohibited from deducting monetary pay when an exempt employee is absent from work for a partial day.  Accordingly, the issue raised by this decision is whether an employer may set a policy requiring exempt employees to use their accrued time – rather than monetary pay – when they are absent from work for partial days.   

The Court of Appeal reviewed federal law which states that leave time is not salary and therefore an employer is not prohibited from deducting from an employee's vacation or leave time for partial-day absences.  California law has not addressed the issue in detail, but the Court of Appeal held in Conley v. Pacific Gas & Electric Co.(2005) 131 Cal.App.4th 260, that employers may follow the federal rule that permits them to require use of vacation leave for partial-day absences without causing exempt employees to become nonexempt.  The California Division of Labor Standards Enforcement expressly followed Conley in a 2009 opinion letter.  Although the employer policy at issue in Conley required exempt employees to use their vacation leave only for absences of at least four hours, the DLSE opinion letter concluded that Conley did not intend to establish a limitation that employers may require deductions from exempt employees' leave balances only for partial-day absences of at least four hours. 

Rhea argued that Conley was wrongly decided because California law contains unique antiforfeiture provisions.  Indeed, in California, vacation pay is a type of wages or deferred compensation, and employers may not require forfeiture of the vacation time.  Though the Court of Appeal agreed with these principles, it did not agree that requiring employees to use vested annual leave for partial-day absences resulted in a forfeiture of vested annual leave time because General Atomics did not take away any vested annual leave.  Rather, General Atomics set rules for the exercise of annual leave which it is permitted to do. 

The Court of Appeal also rejected Rhea's argument that, under Conley, an employer may only require use of annual leave for absences of at least four hours.  The Conley decision does not discuss whether the analysis would have differed if the employer had followed a policy requiring use of vacation leave for absences of less than hour hours.  Further, the Court could find no basis in California law for distinguishing between partial-day absences of different lengths.  Therefore, the Court of Appeal affirmed the trial court's grant of summary judgment in favor of General Atomics.   

Note:

This case involved a private sector employer and the California Labor Code.  However, the FLSA generally applies to public sector employers.  Under the FLSA, deductions for partial day absences are allowed where an employee is paid pursuant to a pay system established by statute, ordinance, or regulation, or by a policy or practice established pursuant to principles of public accountability.  In addition to allowing for leave deductions for partial day absences, the FLSA also allows a public employer to deduct pay from an exempt employee who has exhausted his/her accrued leave for absences during the workday.  Private sector employees are not allowed to do this. 

Rhea v. General Atomics (2014) ___ Cal.App.4th ____ [2014 WL 3565429].