Pennsylvania Agency Adopts New Rule on Tipped Workers and Calculating Overtime for Nonexempt Salaried Workers

UPDATE: The Attorney General approved the regulation and it was published in the Pennsylvania Bulletin on May 7, 2022. The effective date of the regulation will be August 5, 2022.

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Last fall, the Pennsylvania Department of Labor and Industry (DLI) issued a proposed rule to update regulations regarding two distinct issues under the Pennsylvania Minimum Wage Act (PMWA): payment of wages to tipped workers and calculating overtime for salaried nonexempt employees. DLI received 273 comments to its proposed rule, including comments from Littler Mendelson’s Workplace Policy Institute (WPI). On February 17, 2022, DLI submitted its final rule to the state’s Independent Regulatory Review Commission (IRRC) and legislative oversight committees. We are pleased to report that DLI took many of WPI’s comments into account when preparing the final rule. Nonetheless, the final rule would impose significant new obligations on employers.

Tipped Workers

The final rule makes seven significant changes to the regulations for tipped workers. The final rule more closely aligns with the federal rules on tipped workers, although differences remain.1

First, the final rule increases the threshold to qualify as a “tipped employee” from $30 per month (the current federal standard) to $135 per month. Thus, an employee must be engaged in an occupation in which they customarily and regularly receive more than $135 per month in tips.2

Second, the final rule incorporates by reference the “tip pooling” provisions of the federal regulations found at 29 C.F.R. § 531.54. Thus, Pennsylvania law regarding tip pooling will now “completely align” with federal law. Notably, this means that: (a) when an employer takes a tip credit, the tip pool must be limited to employees who customarily and regularly receive tips; and (b) when an employer does not take a tip credit, the pool may include dishwashers, cooks, and other employees who do not customarily and regularly receive tips.3 This also means that employers may not receive tips from a tip pool and may not allow supervisors and managers to receive tips from the tip pool.4

Third, the final rule largely incorporates by reference the federal regulations regarding the so-called 80/20 rule, found at 29 C.F.R. § 531.56, that addresses scenarios when tipped employees devote more than 20% of their time to non-tip-producing activities.5 You can read more about the FLSA’s 80/20 rule here.6

Fourth, the final rule prohibits employers from deducting credit card processing and other fees from employee tips. DLI insists that this rule is consistent with the PMWA, which it claims already states that gratuities are the property of the employee.7

Fifth, the final rule requires that employers that implement tip pools maintain a record of the names and position of each participant in the tip pool and the amount distributed to each participant in the tip pool.

Sixth, the final rule clarifies that service charges (mandatory fees that the employer charges for services rendered) 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, however, 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 wage paid by the employer to the tipped employee and the minimum wage). This is generally consistent with federal guidance.

Finally, the final rule imposes additional notice requirements on employers that levy a service charge for a banquet, special function, or package deal. The employer must notify patrons of the charge in the contract or agreement with the patron and on any menu provided to the patron. The notice must state that the charge is for administration of the banquet, special function, or package deal and does not include a tip to be distributed to the employees who provide service to the guests. The billing statement must contain separate lines for service charges and tips.

Regular Rate and Overtime

The final rule formally abolishes the right of Pennsylvania employers to utilize the “fluctuating workweek” for salaried nonexempt employees. Under the fluctuating workweek approach permitted under federal law, the regular rate of a salaried nonexempt employee is determined by dividing the employee’s weekly salary by all hours worked that week. Then, the employer owes an additional overtime premium equal to one-half of that regular rate for all overtime hours worked.

The final 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). Then, the employee shall be entitled to overtime at a rate of 1.5 times (instead of 0.5 times) that regular rate for all hours worked in excess of 40 during the workweek.

While the final rule is directed to the calculation of overtime for salaried nonexempt employees (and was expressly targeted at eradicating the fluctuating workweek in Pennsylvania), DLI expressed the view that the foregoing overtime calculation would be the same for hourly employees, and 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.”8 DLI expressed a willingness to consider this issue in further detail: “If the regulated community believes there is a need to clarify the regular rate for day workers or for nonexempt employees who are paid bonuses and commissions, the Department is open to conducting further stakeholder engagement specific to this group of employees and identifying potential future regulations as necessary.”

What’s Next?

IRRC will hold a public meeting on March 21, 2022 to decide whether to approve the final rule. Interested members of the public are invited to appear at the public meeting and make comments. If IRRC approves the final rule, its effective date will be 90 days following its publication in the Pennsylvania Bulletin.

See Footnotes

1 One difference between Pennsylvania and federal law regarding tipped workers that was not impacted by the final rule is that the minimum cash wage in Pennsylvania is $2.83 per hour, higher than the federal $2.13 minimum cash wage.

2 Mirroring language found the federal rules, the final rule defines “customarily and regularly” as “a frequency which must be greater than occasional, but which may be less than constant.”

3 This is a significant improvement over the proposed rule, which would have prohibited employers from including such employees in a tip pool even if they do not take the tip credit. As WPI noted in its comments, the proposed rule materially deviated from the federal rule and would have created numerous compliance traps for employers obligated to comply with both sets of rules.

4 The final rule aligns the terms “supervisors” and “managers” with federal law; employees qualify if their duties match those of an executive employee as described in the federal regulations (even if they are not paid on a salary basis or classified as exempt). This is a significant improvement over the proposed rule, which included an overbroad and unworkable definition of supervisors and managers.

5 While the federal 80/20 rule certainly presents significant compliance challenges for employers, DLI’s final rule largely adopting the federal rule is still a significant improvement over the proposed rule. As WPI noted in its comments to the proposed rule on non-tipped duties, the proposed rule did not clearly mirror the federal rule and would have created significant uncertainty for employers.

6 The final rule did not incorporate the federal regulation found at 29 C.F.R. § 531.56(f)(4)(ii), which states that if a tipped employee performs work that is not tip-producing, but directly supports tip-producing work, for a continuous period that exceeds 30 minutes, the employer cannot take a tip credit for any time that exceeds 30 minutes. Of course, an employer subject to the FLSA would still be required to comply with that provision.

7 43 P.S. § 333.103. As WPI noted in its comments to the proposed rule, the PMWA’s rule that gratuities are the property of the employee applies only when an employer is taking the tip credit. Employers that do not rely on the tip credit may have an argument that DLI exceeded its authority with respect to this regulation.

8 DLI acknowledged one “outlier” in the regulations that was not impacted by the final rule: 34 Pa. Code § 231.43(b) still provides that if an employee is paid a flat sum for a day’s work or for doing a particular job, and if the employee receives no other form of compensation for services, the employee’s regular rate is determined by totaling all the sums received at the day rates or job rates in the workweek and dividing by the total hours actually worked. The employee is then entitled to extra half-time pay at this rate for hours worked in excess of 40 in the workweek.

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.