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