In a pair of recent decisions, the United States District Court for the Western District of Pennsylvania held that the “fluctuating workweek” method of calculating overtime is not lawful under Pennsylvania law when the employer pays an overtime premium of one-half of the employee’s regular hourly rate, in addition to the employee’s salary. Foster v. Kraft Foods Global, Inc., 2012 U.S. Dist. LEXIS 121282 (W.D. Pa. Aug. 27, 2012); Cerutti v. Frito Lay, Inc., 777 F. Supp. 2d 920 (W.D. Pa. 2011). While these cases do not necessarily represent the last word on the subject (indeed, the Foster case is still pending in district court), employers who utilize the fluctuating workweek method in Pennsylvania should take note of these developments.

Under federal law, the fluctuating workweek method allows an employer to pay an employee a fixed weekly salary for all hours worked, so long as the employer also pays an overtime premium equal to one-half of the employee’s regular hourly rate for hours worked in excess of 40 per week. In order to determine the employee’s regular hourly rate, the employee’s salary is divided by all hours worked during the week. Because the employee has already been paid (by the salary) at that regular rate for all hours worked (including the overtime hours), the employee is only owed an additional “one-half” the regular rate for the overtime hours. This method of calculating overtime is expressly authorized under the federal Fair Labor Standards Act (FLSA). 29 C.F.R. § 778.114.

The Pennsylvania Minimum Wage Act (PMWA) does not include language tracking the FLSA’s fluctuating workweek provision. Rather, employers utilizing the fluctuating workweek method in Pennsylvania have relied on 34 Pa. Code section 231.43(d)(3), which provides:

No employer may be deemed to have violated [the PMWA] by employing an employee for a workweek in excess of [40 hours] if, under an agreement or understanding arrived at between the employer and the employee before performance of the work, the amount paid to the employee for the number of hours worked by him in the workweek in excess of [40 hours] . . . [i]s computed at a rate not less than 1½ times the rate established by the agreement or understanding as the basic rate to be used in computing overtime compensation thereunder. . . .

In Foster and Cerutti, the court held that section 231.43(d)(3) requires overtime payment at a rate of “1½ times” the regular rate, and does not authorize the “½ time” calculation used under the FLSA’s version of the fluctuating workweek.

In Foster, the court did not dispute that section 231.43(d)(3) may authorize the employer to use the fluctuating workweek method to calculate an employee’s regular hourly rate. However, the court concluded that the employer must then pay overtime at a rate of one-and-one-half times that hourly rate for all overtime hours worked – in addition to the employee’s full salary. This effectively results in employees earning “double time and a half” for overtime hours.

To better understand how this might work in Pennsylvania, consider the following example. An employee is paid a salary of $400 per week and works 50 hours in a week. Under both the FLSA and the PMWA, the employee’s regular hourly rate would be $8 per hour ($400 / 50 hours). Under the FLSA fluctuating workweek method, the employee would be owed an additional $40 as an overtime premium ($8/hour x ½ x 10 hours), or $440 total. Under Pennsylvania law as described in Foster and Cerutti, however, the employee would be owed an overtime premium of $120 ($8/hour x 1½ x 10 hours), for a total of $520.

In Foster, the employer argued that the fluctuating workweek method complies with the “1½ times” requirement because the employee’s salary is compensation for all hours worked, and thus the employee receives the “1 times” component of the “1½ times” overtime obligation via the salary payment, leaving only the “½ times” component as the overtime premium. In our view, this is the correct interpretation of the applicable provision of the Pennsylvania Code. The Foster court rejected this interpretation, however, calling it a “textbook example of trying to force a square peg into a round hole.”

In our view, by focusing solely on the “1½ times” language of section 231.43(d), the Foster and Cerutti decisions overlooked that section 231.43(d) does not require payment of the employee’s entire salary in addition to the “1½ times” the amount determined to be the employee’s hourly rate. In fact, section 231.43(d) does not even mention the concept of “salary” as a necessary prerequisite for compliance with that section. It would seem, therefore, that an employer and employee should be permitted to agree that for purposes of Pennsylvania law the employee’s “salary” is simply a tool that is used to determine the employee’s “basic rate to be used in computing overtime” (which would be determined by dividing the salary by all hours worked). Then, the employee would be paid that “basic rate” for the first 40 hours, and “1½ times” that “basic rate” for all overtime hours. Following the above example, the employee’s “basic rate” would be $8 per hour ($400 / 50 hours), and the employee would be paid $8 per hour for the first 40 hours (or $320), and $12 per hour for the 10 overtime hours (or $120), for a total of $440. The end result would be payment of the same amount authorized under the FLSA, while still complying with the “1½ times” requirement of Pennsylvania law. While this approach may enable employers to continue using the fluctuating workweek method in Pennsylvania, we note that the Pennsylvania Code requires that there be an “agreement or understanding” about the approach before the work is performed. Thus, employers should carefully consider whether their existing fluctuating workweek policies provide employees with sufficient information to understand how their overtime will be calculated for purposes of the FLSA and also for purposes of Pennsylvania law. Also, we emphasize that Foster and Cerutti did not endorse (or even consider) this potential approach, and we anticipate further challenges. Employers who continue to utilize the fluctuating workweek method in Pennsylvania should take note of Foster and Cerutti and should recognize the risks associated with continuing to utilize this practice in Pennsylvania.