August Updates to Pennsylvania Overtime and Tipped Wages Regulations
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- Some updates bring Pennsylvania’s wage and overtime regulations more in line with the Federal Fair Labor Standards Act, while others expand the distance between the two.
Several wage and overtime changes will affect Pennsylvania employers starting August 5, 2022. Some updates bring Pennsylvania's wage and overtime regulations more in line with the Federal Fair Labor Standards Act (FLSA), while others expand the distance between the two.
Employers utilizing tipped employees or a fluctuating workweek method to calculate overtime rates should pay special attention to these updates, explained here, and adjust their policies accordingly.
The FLSA permits employers to use a fluctuating workweek method of calculating overtime rates for salaried, nonexempt employees whose work hours vary weekly. Under the FLSA's fluctuating workweek method, overtime pay is determined by dividing the employee's fixed weekly salary by the number of hours actually worked in the week. For every hour worked in excess of 40 hours in that workweek, the employee must receive an additional 0.5 times that calculated rate (meaning, "half time," instead of the typical calculation of time and a half).
Starting August 5, Pennsylvania employers must calculate the overtime rate on a 40-hour workweek, instead of the number of hours actually worked. Furthermore, employers must pay the overtime rate at time and a half, instead of just the half time rate. Consequently, the regulation updates fundamentally eliminate an employer's ability to use the fluctuating workweek method of calculating overtime rates.
In 2019, the Pennsylvania Supreme Court ruled that state law prohibited the fluctuating workweek method because state law requires overtime rates to be paid at time and a half (instead of just half time, as permitted under the FLSA). This regulation update incorporates the Chevalier v. General Nutrition Centers Inc. holding, but goes further by requiring that the overtime rate is always based on 40 hours, instead of the hours actually worked by the employee.
The regulation updates also necessitate several changes for tipped employee practices. To start, Pennsylvania employers may pay tipped employees $2.83/hour while taking a corresponding tip credit to meet the required minimum wage of $7.25/hour. A "tipped employee" is an individual working in an occupation that "customarily and regularly" receives tips. This means, under the FLSA, earning $30/month in tips. The updated regulations, however, raise this rate to $135/month in tips.
The updates also implement an "80/20" rule, which more directly aligns with FLSA guidance. Under this rule, an employer may not take a tip credit for tip-supporting duties that exceed 20% of the employee's weekly work hours. So, if an employee performs tip-supporting duties for 25% of his/her weekly work hours, a tip credit cannot apply to 5% of the employee's weekly work hours. Tip-supporting work includes, for example, a server rolling silverware or sweeping the dining room. To be clear, though, a tip credit is never permitted for duties that are neither tip producing nor tip supporting (e.g., preparing food).
The updated regulations also align with the FLSA by instituting new tip pooling rules. Specifically, employers must exclude from a tip pool, among others, any employee who does not spend at least 80% of his/her time performing tip-producing duties (for example, cooks and dishwashers do not perform tip-producing work). If, however, all tip pool employees are paid at least minimum wage (i.e., the employer does not use a tip credit), non-tip-producing employees may be included in the tip pool.
Finally, there are also two changes related to credit card charges and administration fees. Significantly, an employer may not pass a credit card transaction fee down to a tipped employee (e.g., by deducting the transaction fee from a credit card tip). Additionally, organizations charging an administration or service fee may not utilize this fee to pay an employee's tips, must provide a notice to customers that the administration/service fee does not include a tip to be distributed to employees, and must include a separate line item on the bill for the payment of a tip.
The FLSA is considered the "floor," and state governments may impose stricter requirements through their own laws and regulations. When differences exist between state and federal law or regulations, employers should apply the law/regulation which provides the most protection to workers. Failing to do so results in potential liability under state law.
If utilizing tipped employees or a fluctuating workweek arrangement in Pennsylvania, employers are encouraged to determine what policy changes are necessary and seek legal guidance where appropriate.
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