State wage and hour laws may include more demanding requirements than those in the federal Fair Labor Standards Act. Kraft Foods Group, Inc. recently learned this lesson the hard way, and the Kraft litigation provides an excellent roadmap for employers to use to preventively re-evaluate their wage payment methods.

Kraft employees sued the company for non-payment of overtime wages under Pennsylvania state law. The company paid these employees by the fluctuating workweek method (FWW), which is permitted under the federal Fair Labor Standards Act (FLSA). The FWW allows employers, under certain circumstances, to pay employees a fixed weekly salary even when the employee’s work hours fluctuate. This method is commonly used in retail, when an employee may work 20 hours in one week and 45 in the next. However, under the FAA, the employee’s hourly wage rate cannot dip below minimum wage. While the employee receives the same salary from week to week (subject to the minimum wage requirement), he or she is still entitled to overtime pay for those hours worked in excess of 40 per week. Employers favor the FWW method because overtime is calculated at only one-half of the employee’s hourly rate, as opposed to the typical time and a half rate.

In the Kraft lawsuit, the employees claimed that the company paid them at the lower FWW overtime rate, in violation of Pennsylvania state law. Pennsylvania’s wage and hour laws contain no express exception to its overtime payment laws for the FWW. The lawsuit further claimed that over two hundred Kraft employees had been short-changed by the Company’s impermissible use of the FWW.

Because it had complied with federal wage and hour laws, Kraft moved for summary judgment. However, the United States District Court found that Pennsylvania state law requires overtime payment in the amount of at least one and one-half times the employee’s hourly rate and if the Pennsylvania legislature had intended for an exception based on the FWW, then it would have expressly permitted one.

Shortly after the District Court issued its decision, Kraft settled the wage action for $1,750,000.

This case illustrates the importance for employers of auditing its payroll practices for compliance with both federal and state wage and hour laws. In many cases, state laws contain provisions that are more protective than federal laws and compliance with one and not the other may result in costly litigation.