Federal Courts Continue to Dismantle the Validity of the Fluctuating Workweek Under Pennsylvania Law

On July 10, 2014 the U.S. District Court for the Eastern District of Pennsylvania, joined Pennsylvania's Western District Court in holding that the "fluctuating workweek" method of calculating overtime for non-exempt employees is not lawful under Pennsylvania law. Verderame v. RadioShack Corp ., Case 2:13-cv-02539 (E.D. Pa. July 10, 2014).

The fluctuating workweek method, which emanates from the federal Fair Labor Standards Act, 29 U.S.C. § 201-19 ("FLSA"), allows an employer to pay an employee a fixed weekly salary for all hours worked, so long as the employer pays an overtime premium equal to ½ the employee's regular hourly rate for hours worked in excess of 40 in a workweek.  The employee's regular hourly rate is computed by dividing the weekly salary by actual hours worked.  The employer then pays an overtime premium of ½ times the employee's regular hourly rate, in addition to the weekly salary.  This method of calculating overtime is expressly authorized under the FLSA.  29 C.F.R. § 778.114.

The Pennsylvania Minimum Wage Act ("PMWA"), however, does not include language expressly authorizing the fluctuating workweek method.  Rather, employers utilizing the fluctuating workweek method in Pennsylvania have relied on 34 Pa. Code § 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 v. Kraft Foods Global, Inc ., 2012 U.S. Dist. LEXIS 121282 (W.D. Pa. Aug. 27, 2012) and Cerutti v. Frito Lay, Inc ., 777 F. Supp. 2d 920 (W.D. Pa. 2011), the Western District held that § 231.43(d)(3) requires overtime payment at a rate of "1½ times" an employee's regular hourly rate for all overtime calculation methods, and therefore does not authorize the "½ times" computation utilized by the FLSA's fluctuating workweek method.  Therefore, in order for an employer in Pennsylvania to lawfully compute overtime using the fluctuating workweek method, the employer must pay overtime at a rate of 1½ times the employee's regular rate for all hours worked, in addition to the employee's weekly salary.  This effectively results in the employee earning double overtime.

For example, if an employee made $500 per week and worked fifty hours in a workweek, the fluctuating workweek method under both the FLSA and PMWA would produce the same regular hourly rate ("RHR"):

$500 weekly salary ÷ 50 hours worked = $10/hour RHR

The difference between the federal and state fluctuating workweek calculations occurs when computing overtime compensation, as set forth below:

FLSA Fluctuating Workweek Method

10 overtime hours x ($10 RHR x .5) = $50 in overtime compensation

$50 in overtime compensation + $500 weekly salary = $550 total weekly compensation

PMWA Fluctuating Workweek Method (as interpreted by District Courts)

10 overtime hours x ($10 RHR x 1.5) = $150 in overtime compensation

$150 in overtime compensation + $500 weekly salary = $650 total weekly compensation

In Verderame , the Eastern District adopted the Western District's analysis in Foster and Cerutti , holding that "while Radioshack's compensation plan may be permissible under the FLSA, it cannot be reconciled with the plain language of § 231.43(d)(3)."

The District Courts' interpretation of §231.43(d)(3) should put Pennsylvania employers who continue to use the fluctuating workweek method on high alert.  Of course, these three federal district court decisions are not binding on Pennsylvania state courts, which will have the final say on the matter.  However, until this issue is finally laid to rest by Pennsylvania state courts, Pennsylvania employers should take note of the risks associated with continuing to calculate overtime using the FLSA's fluctuating workweek method.

For more information on this matter, please contact Cami L. Davis at (412) 394-2357 or cdavis@clarkhill.com , Kurt A. Miller at (412) 394-2363 or kmiller@clarkhill.com , or Sarah Miley at (412) 394-2561 or smiley@clarkhill.com or another member of Clark Hill's Labor and Employment Practice Group.