Recent Court Decision Triples Cost of Overtime Calculation For Pennsylvania Non-exempt, Salaried Employees

The cost of overtime for Pennsylvania employers who pay non-exempt employees on a salary basis using the “fluctuating workweek” method set forth in Section 29 CFR 778.114 of the federal Fair Labor Standards Act (FLSA) will triple based on a recent Pennsylvania Supreme Court decision. In Chevalier v. General Nutrition Centers, the Pennsylvania Supreme Court held that all hours a non-exempt employee works in excess of forty hours in Pennsylvania must be paid at 1.5 times the regular rate, regardless of whether the salary took into account the excess hours worked. This method of calculation takes what was $1 of overtime owed under federal law calculations to $3 under the newly required Pennsylvania calculation.

Most employers and employees agree that non-exempt employees must be provided with overtime, 1.5 times the regular rate, for hours worked in excess of forty hours. If an employee is paid on an hourly basis, this is a fairly basic formula: 1.5 x regular rate x number of hours in excess of forty. For instance, if someone made $20/hour and worked 50 hours in a week, they would make 40*$20 = $800 and then be entitled to 1.5 x $20 x 10 =$300 + $800 =$1,100 total for that week. For example, 50/$1000 =$20 as the regular rate, with $20 x .5 x 10 =$100 in overtime. Here the employee would receive $100 in overtime, in addition to the base salary of $1,000, or $1,100 total for the week. The FLSA “fluctuating workweek” method gives “credit” to the salary paid to the employee for the 1st of the 1.5 for hours worked in excess of 40 and only requires the employer to provide additional compensation for the “.5” for the overtime hours worked.

However, the Pennsylvania Supreme Court held that the Pennsylvania Minimum Wage Act (PMWA) language differs from the FLSA, in that employers must pay “for overtime not less than one and a half times the employee’s regular rate of pay for all hours in excess of 40 hours in a workweek” regardless of whether or not the salary was intended to provide payment for all of the hours worked. Under the Court’s holding, the same employee would receive their $1,000 base salary for the 50 hours worked and 50/$1000 = $20 is still the regular rate but $20 x 1.5 x 10= $300, or 3 times the amount in overtime pay due to the differences in the statutory language. The employee would receive $1,300 total for the week, for the same number of hours.

The Court held that the Pennsylvania legislature had purposefully adopted some, but not all, of the federal language utilized in determining fluctuating workweeks and overtime calculations. Therefore, it found that the calculation methods were different. This means that in the example above, the employee would earn the $1,000 base salary for the 50 hours worked and triple the overtime using the Pennsylvania method versus the federal method.

These issues and variations in calculation arise when non-exempt employees are not paid on an hourly basis. One method, that was at issue in the present case, is called the “Fluctuating Work Week.” The method of payment provides an employee wages on a salary basis, meaning the employee makes the same amount regardless of the hours they work. Generally, this method is used when, due to business necessity, the employee’s schedule fluctuates, causing them to work several hours in one week and very few in another. For many reasons, both the employer and the employee may wish to provide a steady wage rather than the fluctuating wages that are caused by a varied schedule. Therefore, the employee receives a base salary regardless of the fluctuating hours. In the above examples, the employee would receive a base salary of $1,000 regardless of whether the employee worked 30, 40 or 50 hours. However, as a non-exempt employee, they are still entitled to overtime in a week in which they work an excess of forty hours.

Moving forward, employers will have to seriously consider how they pay and calculate overtime for employees, particularly those paid on a salary basis. Companies currently paying non-exempt Pennsylvania employees on a salary or other non-hourly method may want to consider limiting those employees hours to 40 or less to control overtime, or move them to an hourly wage basis in order to control costs when calculating overtime. PMWA differs from the FLSA in several respects, and Pennsylvania employers need to apply whatever sections of the federal or Pennsylvania wage law is most beneficial to employees.

If you are looking for advice on developing policies for employee classification or overtime pay, or more complex employment law matters, please contact Leah Sell at lsell@leechtishman.com or 412-261-1600. Leah is an associate at Leech Tishman and is based in the firm’s Pittsburgh, PA office. Leah is a member of the firm’s Employment, Corporate, and Litigation practice groups, as well as the Medical Cannabis and LaunchPad subgroups.

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