Pennsylvania employers with salaried, nonexempt employees working in the commonwealth may need to adjust how they calculate overtime premiums for these employees in light of amendments to the Pennsylvania Minimum Wage Act that will go into effect on August 5. The amendments codify that Pennsylvania employers cannot use the fluctuating workweek method of calculating overtime pay for salaried employees.
Specifically, employers must calculate the regular rate of pay for salaried, nonexempt employees by adding up all remuneration paid to the employee during the workweek and dividing this amount by 40 hours.[1] This change in the Pennsylvania Minimum Wage Act (PMWA) is a significant divergence from the federal Fair Labor Standards Act (FLSA), which permits employers to determine the regular rate of pay for salaried, nonexempt employees by dividing all remuneration the employee earned by the total hours the employee worked that workweek. This change in the PMWA will result in potentially greater overtime pay for salaried, nonexempt employees in Pennsylvania.
In light of this change in the law, Pennsylvania employers with salaried, nonexempt employees should review how they calculate overtime premiums for these employees and make any adjustments to make sure they are in compliance.
Under both the FLSA and PMWA, employers must pay nonexempt employees overtime at 1.5 times the employee’s regular rate of pay for all hours worked over 40 hours in a workweek. Under the FLSA’s fluctuating workweek (FWW) method, overtime premium pay for salaried, nonexempt employees can be calculated by dividing the employee’s salary (and all other compensation that needs to be included in the regular rate) by the total hours worked that week and then multiplying that rate by the number of overtime hours worked and finally multiplying that number by 0.5.[2]
In 2019, the Pennsylvania Supreme Court held that the PMWA prohibited employers from using the FWW method to pay half-time overtime.[3] The recent amendment to the PMWA codifies that use of the FWW is not permissible and states the regular rate is calculated by dividing all remuneration that needs to be included in the regular rate (e.g., the employee’s weekly salary, non-discretionary bonuses, and commissions),[4] by 40 rather than by all hours the employee worked that week. The employee’s regular rate is then multiplied by 1.5 and then multiplied by the number of overtime hours to determine the amount of overtime pay due. Pennsylvania’s method of calculating overtime pay may result in salaried employees receiving overtime pay that is significantly greater than they would receive if overtime pay were calculated under the FWW method.
Pennsylvania’s method of calculating the regular rate for salaried, nonexempt employees is a departure from the method used under the FLSA and in most states. Critically, the revised PMWA states that in calculating the regular rate for salaried nonexempt employees, “all renumeration,” such as non-discretionary bonuses and other incentive payments, paid to the employee should be divided by 40 hours. This is in contrast to the method under the FLSA and in most states, which allows employers to use the total hours worked in the calculation. Notably, even employee-friendly California does not require the overtime premiums due on production bonuses and commissions to be determined by only using non-overtime hours in the calculation.
Given that Pennsylvania is distinct in this regard, all Pennsylvania employers with nonexempt salaried employees should review their payroll practices to ensure compliance with the new rule.[5]
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact the following Morgan Lewis lawyers:
Philadelphia
Anne E. Martinez
Michael J. Puma
Pittsburgh
Christopher K. Ramsey
Washington, DC
Russell R. Bruch
[1] 52 Pa.B. 2701.
[2] 29 C.F.R. § 778.114
[3] See Chevalier v. General Nutrition Ctrs., Inc., 220 A.3d 1038, 1051-59 (Pa. 2019).
[4] 34 Pa. Code § 231.43(a)(1) – (7).
[5] Notably, the Pennsylvania Department of Labor and Industry stated that the new rule only applies to the calculation of overtime for salaried, nonexempt employees and declined to clarify how its rulemaking may apply to calculating overtime pay for hourly employees who receive incentive pay. See 52 Pa.B. 2705. However, employers should be aware that plaintiffs’ counsel may advance arguments that these rules extend to hourly workers as well.