The Pennsylvania Department of Labor and Industry (DLI) recently issued a final rule updating regulations under the Pennsylvania Minimum Wage Act (PMWA). The changes took effect Aug. 5, and impact three wage-and-hour compliance areas: tipped workers, service charges and the calculation of overtime.
With respect to tipped workers, the rule aligns Pennsylvania law with federal law as to the conditions for implementing a valid “tip pool” (including which employees may participate in such an arrangement) and the so-called “80/20 rule” (which limits how much time a tipped worker can spend in nontip-producing activities). The rule deviates from its federal counterpart in three important ways. First, it increased the threshold to qualify as a “tipped employee” from $30 per month (the current federal standard) to $135 per month. Second, it prohibits employers from deducting credit card processing and other fees from employee tips (a practice permitted under federal law). Finally, it confirms that the minimum cash wage for tipped employees in Pennsylvania is $2.83 per hour, higher than the federal $2.13 per hour minimum cash wage.
With respect to service charges (mandatory fees that an employer charges for banquets or special functions), the rule clarifies that service charges are distinguishable from tips (voluntary contributions for services rendered), and it confirms that employers retain discretion in choosing the manner in which service charges are used. When service charges are distributed to employees, they must be considered wages and included in the regular rate of pay. In addition, since service charges are not tips, they cannot be used to satisfy the “tip credit” (that is, the difference between the hourly cash wage paid to the tipped employee and the minimum wage). The rule also requires employers that levy service charges to notify patrons of the charge (and the fact that it is not a tip) in the contract with the patron and on any menu provided to the patron. Finally, the billing statement must contain a separate line for the patron to add a voluntary tip, to further distinguish gratuities from service charges.
With respect to the overtime calculation, the rule reflects a significant deviation from federal law. The rule provides that the regular rate of a salaried nonexempt employee shall be calculated by adding up the employee’s weekly compensation (including their salary and any other remuneration that must be included in the regular rate) and dividing the total by 40 (instead of by all hours worked that week as under federal law). Then, the employee shall be entitled to overtime at a rate of 1.5 times (instead of 0.5 times as permitted by federal law) that regular rate for all hours worked in excess of 40 during the workweek. The rule applies to all earnings of a salaried nonexempt employee that must be include in the regular rate—including commissions and nondiscretionary bonuses.
To understand the impact of the new overtime rule, let us assume that a nonexempt employee is paid a $1,000 weekly salary and worked 50 hours in a week in which they also earned $100 in commissions. Under federal law, the employee’s regular rate would be $22 per hour [($1,000 + $100) ÷ 50 hours], and the employee would be entitled to an additional overtime premium of $110 [$22 x 0.5 x 10]. Under the new Pennsylvania rule, however, the employee’s regular rate will be $27.50 per hour [($1,000 + $100) ÷ 40 hours], and the employee would be entitled to an additional overtime premium of $412.50 [$27.50 x 1.5 x 10].
By its own terms, the new “divide by 40, multiply by 1.5” rule applies only to salaried nonexempt employees. This raises the question: What is the appropriate rule for calculating overtime owed to hourly nonexempt employees, including those who earn incentive pay? During the rulemaking process, DLI expressed the view that “bonuses and other compensation” should be treated “no differently for overtime-eligible salaried employees than for hourly employees when determining overtime.” According to DLI, “the department intends to count all remuneration paid to salaried employees the same as remuneration given to employees who are paid by the hour, monthly, piece rate or other basis.” DLI has since clarified that its “divide by 40, multiply by 1.5” approach does not apply to an hourly employee’s base hourly wage. For example, if an employee earns $10 per hour and works 50 hours in a workweek, the employee’s regular rate will be $10 per hour [($10 x 50) ÷ 50 hours], and the employee will be entitled to an additional overtime premium of $50 [$10 x 0.5 x 10], for total weekly wages of $550. Stated differently, the employee will earn $10 per hour for the first 40 hours [$10 x 40 = $400] and $15 per hour for the 10 overtime hours [$10 x 1.5 x 10 = $150]. However, DLI has not provided any further clarification on how overtime should be calculated on nondiscretionary incentive pay earned by hourly nonexempt employees.
Robert Pritchard is a shareholder in Littler Mendelson’s Pittsburgh office and co-chair of the firm’s wage and hour practice group. He represents employers in complex wage-and-hour litigation, with an emphasis on class and collective actions, in state and federal courts throughout the United States.
Reprinted with permission from the September 8, 2022 edition of The Legal Intelligencer© 2022 ALM Global Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.
