On August 5, 2022, the Pennsylvania Department of Labor and Industry (the “Department”) rules regarding payment of tipped and non-exempt salary employees will change. Major updates include new requirements for classifying workers as “tipped employees,” modifications regarding who can participate in a tip pool, and a prohibition on employer deductions of credit card fees. Rules for how to calculate non-exempt salaried employees’ regular rate of pay will also change.
Tipped Employees
Under the updated rules, to be considered a “tipped employee,” employers will need to ensure that workers (i) earn at least $135 in tips per month and (ii) are employed at least 80% of their time each week doing tipped work.
These conditions for classification as a tipped employee are in addition to existing regulations. Being classified as a tipped employee is important for employers who take a “tip credit.” The tip credit allows an employer to pay a tipped employee a base rate that is less than regular minimum wage, so long as that employee makes the difference in tips. The tip credit is currently capped at $4.42 against the regular $7.25 minimum wage.
Tip pooling, which combines or distributes employee tips, will also change. Tip pools which include any employee against whom a tip credit is taken will now be limited to only include other employees also paid below the regular base minimum wage level. Tip pools which do not include employees against whom a tip credit is taken may include both tipped and non-tipped employees, so long as existing regulations are met.
Managers and employers are never permitted to participate in a tip pool or keep their employees’ tips. Under the new rules, managers are further restricted in what tips they are permitted to keep. As of August 5, 2022, Pennsylvanians working in a supervisor capacity will only be able to keep tips they directly receive and for which they performed all the work.
Also, beginning on August 5, 2022, employers in Pennsylvania will no longer be able to deduct credit card or similar transaction fees from employee tips. The Department cites language in existing regulations requiring that all tips are the property of an employee.
Employers whose workers earn tips will need to carefully evaluate and appropriately update existing policies. Any changes will also likely require updated notices to affected employees.
Salaried Non-Exempt Employee’s Regular Rate
As of August 5, 2022, the regular rate for a salary non-exempt employee in Pennsylvania will be based upon a 40-hour work week, regardless of how many hours the employee works or how much of a salary a non-exempt employee is paid.
As an example, consider a non-exempt employee who is paid a salary of $1,000 per week. In a particular week, that employee works 45 hours. Under Pennsylvania law, the employer must divide the $1,000 salary by 40 hours to find the employee’s regular rate, $25.00/hour. The employer then uses this regular rate and multiples it by 1.5 to calculate the overtime rate ($25.00*1.5 or $37.50). The employee is then entitled to that overtime rate for all hours worked over 40. Here, this would mean the employee is entitled to an additional $187.50 for that week ($37.50*5).
Multi-jurisdictional employers should take special note, as this computation of the regular rate differs from federal law. Under Pennsylvania law, there will be no “credit” for any hours worked over 40 for a non-exempt employee, regardless of how much of a salary the employee is paid.
Employers should review their pay and classification policies to ensure they are complying with this updated rule and utilizing the most efficient compensation practices for their business.
Service Fee Notifications
A new requirement for companies who provide banquets, special functions, or packages, and charge services fees or automatic gratuities, will also go into effect on August 5, 2022. In all contracts or bills there now must be separate identification for administrative or service fees which are kept by an employer versus those charges which are gratuities or tips kept by the employees. Additionally, companies must explain to customers, in writing, that administrative or service fees cover operational costs and are not kept by employees.
Companies affected by this change will need to update their contracts or bills to make the necessary clarifications and explanations by August 5, 2022.
If you have employees who receive tips or employ salaried non-exempt employees that work more than 40 hours per week and have questions about these upcoming changes, please contact Leah K. Sell, leader of Leech Tishman’s Employment & Labor Advice and Counsel Practice Area in the firm’s Pittsburgh office. Leah can be reached at 412.261.1600 or lsell@leechtishman.com
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Leech Tishman Fuscaldo & Lampl is a full-service law firm dedicated to assisting individuals, businesses, and institutions. Leech Tishman offers legal services in business restructuring & insolvency, construction, corporate matters, employment & labor, estates & trusts, intellectual property, litigation & alternative dispute resolution, and real estate. In addition, the firm offers a wide range of legal services to clients in the aviation & aerospace, cannabis, emerging cyber technologies, energy & natural resources, healthcare, and hospitality industries. Headquartered in Pittsburgh, PA, Leech Tishman also has offices in Chicago, Los Angeles, New York, Philadelphia, Sarasota, and Washington, D.C.