Reprinted with permission from the January 18, 2018 issue of The Legal Intelligencer. (c) 2018 ALM Media Properties. Further duplication without permission is prohibited.

In a recent decision, the Pennsylvania Superior Court complicated the already tricky business of paying nonexempt employees on an hourly basis for Pennsylvania employers.  In Chevalier v. Hiller, the Court found that a “fluctuating workweek” overtime calculation method, approved by federal regulation, violates Pennsylvania’s Minimum Wage Act, 43 P.S. §333.101  et seq. (“PMWA”).  The Superior Court reversed the trial court’s grant of summary judgment in favor of the employees, in a comprehensive opinion that requires Pennsylvania employers to review carefully their overtime calculation methods.

The employees in this case were managers at various levels for GNC.  GNC calculated their overtime pay using the “fluctuating work week method.”  Under this method, in an example provided by the Superior Court, overtime was calculated as follows:  employees were paid $1000 a week regardless of the number of hours worked in a week.  In one week, the example goes, the employee worked 50 hours.  GNC thus calculated the employees “regular rate” at $20 an hour.  GNC then paid the employee an additional $10 an hour for the ten hours over 40, resulting in $1100 in wages for the 50 hour week.

The employees argued that this method was improper under the PMWA, and the trial court agreed.  The trial court opined that the rate instead should have been calculated using the “forty hour” method.   Under this method, the regular rate is determined by dividing the weekly salary of $1000 by forty hours, to produce a rate of $25 an hour.  Then, the additional ten hours over forty worked should have been paid at time and a half for an additional $375, resulting in $1375 in wages for the 50 hour week. Notably, had the Superior Court agreed with the trial court, the cost of paying nonexempt employees on a salary basis would have increased exponentially. 

Instead, the Superior Court disagreed with the trial court and found that the regular rate was properly calculated using the “fluctuating workweek method,” that is, that the employer’s calculation of the regular rate by dividing the employee’s salary in a given week by the number of hours the employee actually worked did not violate the PMWA. 

However, the Superior Court found that GNC’s method of paying for the overtime hours violated the PMWA.  The Superior Court found that PMWA required the payment of an overtime premium of 1 and ½ times the employee’s regular rate for all hours in excess of forty in a work week.  Accordingly, using  the fifty hour example set forth above, that employee should have received $200 in overtime. 

The Superior Court began its analysis by noting the purpose of the PMWA, which mirrors the language of the FLSA, “to protect employees who do not have real bargaining power.”  The Court noted that no Pennsylvania appellate court had evaluated the propriety of the fluctuating workweek method under the PMWA, but that some federal courts had addressed the PMWA’s overtime requirements.  In those cases, the federal courts agreed with the conclusion of the Superior Court regarding the premium due, but did not address the appropriate method for calculating the regular rate. 

The Superior  Court’s holding imposes a different requirement than the federal Fair Labor Standards Act.  Under the FLSA, and cases interpreting it, an employer is free to use the fluctuating work week method, and to pay a premium of one-half the hourly rate for hours over forty in a workweek, on the theory that the regular rate for those hours is captured in the salary.  While the Superior Court found that the PMWA permitted a calculation of the regular rate, consistent with the FLSA, using the fluctuating workweek method, the Superior Court found that Pennsylvania law would not permit a premium of only ½ that regular rate.

Instead, the Superior Court found that the applicable regulations required the payment of one and one-half times the regular rate for hours over forty in a workweek. The applicable regulations require that “each employee shall be paid for overtime not less than 1-1/2 times the employee’s regular rate of pay for all hours in excess of 40 hours in a work week.”  24 Pa. Code § 231.41.    The regulations do permit the payment of half the regular rate only for employees who are paid a flat sum for a day’s work.  34 Pa. Code § 231.43(b).  Finally, another regulation permits employer and employee to come to an agreement as to the “basis rate” for payment of work in excess of the maximum workweek, but only if the employer uses a multiplier of one and one-half.  In other words, the Superior Court found, in all instances where the regulations address the appropriate multiplier, the regulations required the payment of one and one-half times the regular rate.  The Court pointed out that the Department of Labor did not adopt the federal regulation that expressly permits the payment of half the regular rate as the overtime premium, although it could have done so.  The Court found the decision not to adopt that federal regulation was a deliberate reflection of the purpose to protect employees.   

The Superior Court’s decision creates a dilemma for Pennsylvania employers using the fluctuating workweek method.  Pennsylvania employers currently paying an overtime premium of half the hourly rate for hours over forty in a workweek to nonexempt, salaried employees, are complying with federal, but not Pennsylvania law.  Employers will need to evaluate their overtime calculation policies and review whether paying nonexempt employees on a salary basis continues to make economic sense. 

Patricia Collins is a Partner with Antheil Maslow & MacMinn, LLP, based in Doylestown, PA. Her practice focuses primarily on employment, commercial litigation, and health care law. To learn more about the firm or Patricia Collins, visit www.ammlaw.com