Pennsylvania Supreme Court Confirms That Employers Cannot Use Fluctuating Workweek Method of Calculating Overtime

Q: I heard that the Pennsylvania Supreme Court recently issued a major ruling regarding overtime pay. What do I need to know?

A: On November 20, 2019, the Pennsylvania Supreme Court rejected the application of the fluctuating workweek method (“FWW Method”) of calculating overtime under the Pennsylvania Minimum Wage Act (PMWA) and its corresponding regulations. As a result, Pennsylvania employers must pay salaried, non-exempt employees an additional one and a half times the employees’ regular rate of pay for every hour worked over 40 in a workweek. See Chevalier v. Gen. Nutrition Ctrs., Inc., Nos. 22 WAP 2018, 23 WAP 2018 (Pa. Nov. 20, 2019).

Background

In general, non-exempt employees must be paid overtime at one and a half times their regular rate of pay for every hour worked in excess of 40 in a workweek. However, regulations implementing the federal Fair Labor Standards Act (FLSA) specifically permit employers to pay salaried, non-exempt employees using the FWW Method when their number of hours worked fluctuate from week to week. See 29 C.F.R. § 778.114. Under the FWW Method, an employer and employee can agree that the employee will receive a fixed weekly salary as straight time pay, regardless of the number of hours worked in a workweek. In addition to this base straight time salary, the employee is entitled to overtime pay at a rate of one-half the employee’s regular rate of pay. The overtime calculation of one-half the regular rate (rather than one and a half times the regular rate) is based on the principle that the employee’s underlying salary already covers all straight time due for the actual hours worked.

Unlike the regulations implementing the FLSA, however, nothing in the PMWA or its implementing regulations specifically authorizes the use of the FWW Method. In recent years, three different Pennsylvania federal courts rejected the FWW Method under state law, instead holding that employers must pay Pennsylvania employees overtime equal to one and one-half times the employee’s regular rate of pay. Pennsylvania’s highest court had not weighed in on the issue—until now.

The Case

Plaintiff represented a class of non-exempt store managers who were paid a fixed weekly salary plus commissions, regardless of the number of hours they worked in a week. To determine overtime compensation, the defendant utilized the FWW Method. The defendant calculated each manager’s “regular rate” by dividing the manager’s fixed weekly salary by the actual number of hours worked, and then paid overtime at one-half times that regular rate for all hours worked in excess of 40. Plaintiff argued that the FWW Method was not permitted by Pennsylvania law and that she should have been paid one and a half times her regular rate for all hours worked in excess of 40.

The Court held that the FWW Method is not permissible under state law and that salaried non-exempt employees must be paid one and a half times their regular rate for all overtime hours. In coming to its conclusion, the Court cited to the PMWA and its implementing regulations which explicitly provide 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 workweek.” The Court also found that the promulgation of certain FLSA regulations by the Pennsylvania Department of Labor and Industry regarding other methods of overtime calculation, combined with the Department’s failure to adopt the FWW Method regulation, were strong evidence that the FWW Method is not a permissible means of calculating overtime under Pennsylvania law.

Going Forward

The FWW Method of paying overtime in Pennsylvania has been of questionable legality for some time. The latest Supreme Court decision confirms that employers should not be utilizing the FWW Method of compensation in Pennsylvania—despite the fact that it remains permissible under federal law.

Coincidentally, on the same day that the Supreme Court issued its decision, the Pennsylvania Senate passed a bill amending the PMWA that would, among other things, insert a provision into the Act providing that the wage and hour requirements in the PMWA “shall be applied in accordance with the minimum wage and overtime provisions of the” FLSA and its regulations, “except when a higher standard is specified” under state law.

Since the PMWA does not specifically address the FWW Method, this piece of legislation may ultimately have the effect of making the FWW Method a viable option for Pennsylvania employers to use when calculating overtime pay for their non-exempt salaried employees. While we expect the legislation to ultimately pass the Pennsylvania House and be signed by the Governor, until that happens, Pennsylvania employers should heed the Chevalier decision and not utilize the FWW Method of calculating and paying overtime.

Lee Tankle and Jonathan Gilman

 

Agreement Between the Parties Dictates Whether a Third Party Bonus Should be Included in the Calculation of Overtime Pay

Q.  A client of my company asked whether it could offer production bonuses to our employees who deliver their work product prior to the deadline.  Does the FLSA require my company to account for these third-party bonuses when calculating the regular rate of pay for overtime purposes?

A.  The answer to your question depends on the particular circumstances, according to the Third Circuit. In a case of first impression, Secretary U.S. Department of Labor v. Bristol Excavating, the Third Circuit Court of Appeals addressed the question of whether an employer must treat bonuses provided by third parties as “remuneration for employment” when calculating employees’ overtime rate of pay.

The defendant in the case, a small excavation company, contracted with a natural gas company to provide equipment, labor, and other services at a number of drill sites in Pennsylvania. At the drill sites, the defendant’s employees frequently worked twelve-hour shifts, often for two-week periods without a day off.  The natural gas company maintained a bonus program by which its own employees received “Pacesetter” bonuses for completing their work quickly, along with other safety and efficiency-related bonuses.  Following inquiries by the defendant’s employees, the gas company offered to extend the program to the defendant’s employees and the defendant acquiesced.  The defendant agreed to handle the administrative chores necessary for its employees to receive the bonuses, specifically, by rolling the bonuses into its regular payroll process and distributing payment to its employees after making the routine payroll deductions.  However, the defendant did not include the bonus payments from the gas company when calculating the regular rate of pay for overtime purposes.

The U.S. Department of Labor (DOL) audited the defendant’s offices as part of a routine inspection to assure that it was properly calculating overtime compensation. The auditor determined that the bonuses should be added to the calculation of the employees’ regular rate of pay.  When the company refused, the DOL filed suit, alleging that the company violated the FLSA’s overtime provisions.

Under the Fair Labor Standards Act (“FLSA”), employers must pay employees one-and-a-half times their regular rate of pay for all hours worked above 40 in a work week. “Regular rate” includes “all remuneration for employment paid to, or on behalf of, the employee.”  However, “remuneration for employment” is not defined in the overtime provisions or elsewhere in the FLSA.

The DOL asserted that employers must include bonuses from third parties in the regular rate of pay when calculating overtime pay, regardless of what the employer and employee may have agreed. Agreeing with the Department of Labor, the district court concluded that the incentive bonuses should have been included in the regular rate of pay because they were remuneration for employment and did not qualify for any of the statutory exemptions.

On appeal, however, the Third Circuit decided otherwise. The court held that a third-party payment qualifies as a remuneration for employment only when the employer and employee have effectively agreed that it will.  In the absence of an explicit agreement between the parties, the courts should look for an implicit agreement based on a holistic consideration of the particular facts of each case.  Factors for the court to consider include: (i) whether the specific requirements for receiving the payment are known by the employees in advance of their performing the relevant work; (ii) whether the payment itself is for a reasonably specific amount; and (iii) whether the employer’s facilitation of the payment is significantly more than serving as a pass through vehicle.  The more involved an employer becomes in facilitating the bonus or dictating its terms, “the clearer it becomes that the employer is invested in the arrangement in a way that could be called an implicit agreement with the employees.”

With these points in mind, if your company does not wish to include third-party bonuses in the regular rate of pay calculation for overtime purposes, the employer should have the employee agree in writing that such bonuses do not qualify as remuneration for employment. In addition, employers should analyze each payment carefully to ensure that it satisfies the Third Circuit test.  In any event, the less involvement the company has in facilitating bonus payments, the better, given that “an employer’s role in initiating, designing, and managing the incentive bonus program will likely be of high importance.”  We recommend consulting with counsel about how the Third Circuit’s decision in Bristol Excavating applies to your specific situation.

Rogers Stevens

 

New DOL Overtime Rule Takes Effect January 1, 2020

Q.  Has the salary threshold increased for exempt status under the Fair Labor Standards Act?

A.  On September 24 — more than five years after the Obama administration first proposed updating the overtime regulations of the Fair Labor Standards Act (FLSA) — the U.S. Department of Labor (DOL) released the final version of its long-anticipated rule expanding overtime eligibility for certain employees making less than $35,568 per year. The final rule is largely unchanged from the proposed rule released in March 2019, and the dollar amounts for the exemptions are lower than those in the rule published by the Obama administration in May 2016 — a rule that was enjoined shortly before it was scheduled to go into effect.

For more information, click here.

Christopher J. Moran and Lee E. Tankle

UberBLACK Drivers Are Properly Classified as Independent Contractors

Q.  Have there been any new legal developments on whether gig economy workers can be classified as independent contractors?

A.  On April 11, Judge Michael Baylson of the U.S. District Court for the Eastern District of Pennsylvania became the first judge to grant summary judgment on the issue of whether UberBLACK drivers are employees or independent contractors under the Fair Labor Standards Act (FLSA). Judge Baylson concluded that Uber correctly classified the plaintiffs — drivers who provided “black car” limousine services for Uber — as independent contractors. Razak v. Uber Techs., Inc., No. 16-573 (E.D. Pa. 2018). The plaintiffs intend to appeal. Although the analysis of independent contractor classification is fact-intensive and varies depending on the type of claim asserted by the plaintiffs, gig economy employers will find the Razak opinion helpful in structuring their independent contractor relationships.

For the full article, click here.

Susan K. Lessack

United States Supreme Court Revises Standard for Review of Exempt Classification

Q.  I heard that the U.S. Supreme Court just issued a ruling finding that auto service workers are exempt from overtime pay. My company is not in the automobile industry. Will this opinion apply to us?

A.  The U.S. Supreme Court issued an opinion this week in Encino Motorcars, LLC v. Navarro, finding that auto service workers – those employees who interact with customers and sell them services for their vehicles – are exempt from overtime pay under the Fair Labor Standards Act (FLSA). While the decision directly impacts this small category of jobs, the opinion will have a much more far-reaching impact, since the Court rejected long-standing precedent that exemptions must be construed narrowly against the employer.

In a 5-4 opinion overturning the Ninth Circuit’s decision finding that auto service advisors were non-exempt, the Court expressly rejected the principle invoked by the Ninth Circuit and many courts before it that exemptions to the FLSA should be construed narrowly.  Instead, the Court observed that “[b]ecause the FLSA gives no textual indication that its exemptions should be construed narrowly, there is no reason to give them anything other than a fair (rather than a narrow) interpretation.” (internal quotations omitted).  The Court concluded that “exemptions are as much a part of the FLSA’s purpose as the overtime-pay requirement.  We thus have no license to give the exemption anything but a fair reading.”  Finally, the Court remarked, “even if Congress did not foresee all of the applications of the statute, that is no reason not to give the statutory text a fair reading.”

The dissent criticized the Court for rejecting the narrow construction principle for FLSA exemptions “[i]n a single paragraph . . . without even acknowledging that it unsettles more than half a century of our precedent.”

This is the second time that the Supreme Court ruled in this case. In 2016, the Court rejected a 2011 Department of Labor (DOL) regulation relied on by the Ninth Circuit in finding that service advisors were not exempt.  The Court noted in that opinion that the DOL had flip-flopped on the issue several times over the years.  In 1970, the DOL interpreted an exemption in the FLSA for automobile salesmen to exclude service workers.  The federal courts rejected this interpretation, however, and in 1978, the DOL issued an opinion letter agreeing with the courts that service advisors indeed were exempt.  In 2011, the DOL changed course again, issuing the regulation relied on by the Ninth Circuit that service advisors were not included in the exemption for salesmen.

In its 2016 opinion, the Supreme Court found that the 2011 regulation was not entitled to any deference because the DOL had issued it without a sufficiently reasoned explanation. The Court remanded the matter to the Ninth Circuit to consider the meaning of the statutory language without the regulation.  On remand, the Ninth Circuit again held that the service advisors were not exempt, and the case went back up to the Supreme Court, where it was overturned in last week’s opinion.

What This Means for Employers

This new standard – that exemptions should be given a “fair reading” – is a win for employers, as it should now be easier for companies to persuade courts that an employee’s job duties fall within one of the categories for exempt status under federal law. Prior to this ruling, an employer was unable to overturn the presumption of non-exempt status unless it could demonstrate that an exemption “plainly and unmistakably” applied.  Now, it is more likely that employers will be able to convince a federal court that the exemption applies if it is supported by a fair reading of the text.

Employers must continue to be mindful of state court interpretations of their overtime laws, however, which may construe their corresponding overtime exemption more narrowly than the SCOTUS interpretation.

–Tracey E. Diamond