Pennsylvania Minimum Wage Act: How to Calculate “One and One Half” of Salaried Employees’ “Regular Rate” for Overtime

Chevalier v.  General Nutrition Centers, Inc., 177 A.3d 280 (Pa. Super. 2017)  allocatur granted July 16, 2018, appeal dockets 22 and 23 WAP 2018

Tawny L. Chevalier and Andrew Hiller, on behalf of themselves and all other similarly situated General Nutrition Center (GNC) employees (Employees), sued GNC on the ground that GNC’s method of calculating their overtime pay violated the Pennsylvania Minimum Wage Act (PMWA), 43 P.S. §§ 333.101-333.115. The trial court agreed and granted Employees’ motion for summary judgment, entering judgment in Employees’ favor in the amount of $1,378,494.77 plus interest.  The issue is how to calculate one and one-half of the employee’s “regular rate” for each hour worked in excess of forty hours.

The Superior Court quoted the trial court’s summary of the facts that frame the dispute and the competing methods of calculating overtime pay as follows:

[Employees] worked as store managers, assistant managers, or senior store managers for [GNC] during the period between 2009 and April 2011. [Employees] were salaried employees whose weekly pay was the same no matter the number of hours worked. However, when a salaried employee worked more than forty hours in a workweek, GNC was also required to pay overtime for the hours worked over the forty-hour workweek.

Both parties agree that the PMWA requires a payment of at least one and one-half of the employee’s “regular rate” for each hour worked in excess of forty hours. However, they disagree over how to calculate the employee’s “regular rate.”

The following illustration sets forth the method by which GNC calculates overtime: the salaried employee is paid $1,000 a week regardless of the number of hours worked. In a particular week, the salaried employee worked 50 hours. GNC divides the weekly pay ($1,000) by the number of hours worked (50). This produces a $20 amount which GNC treats as the employee’s “regular rate.” GNC divides the $20 amount by two, which produces a $10 amount. This represents 50% of the employee’s “regular rate.” GNC multiplies the $10 amount by the number of hours of overtime (10). This amount ($100) is paid as overtime. Thus, for this workweek, the salaried employee is paid $1,100. [GNC’s method is called the “fluctuating workweek [(‘FWW’)] method.”]

 [Employees] contend that the “regular rate” should be calculated based on what is earned in a forty-hour workweek. Thus, the “regular rate” should be calculated by dividing the $1,000 weekly payment by forty hours. This produces a $25 per hour amount which [Employees] treat as their “regular rate.”

[Employees] next multiply each hour of overtime by one and one-half of this dollar amount, which, according to [Employees], is consistent with the [Fair Labor Standards Act (“FLSA”), 29 U.S.C. §§ 201 et seq., which uses] a forty- hour workweek. This produces an amount for ten hours of overtime of $375. Thus, for this workweek, the salaried employee is paid $1,375. This will be referred to as the forty-hour method of compensating salaried employees.

These two methods of calculating overtime produce very different results. . . . 

There is a third construction that neither party has proposed. The “regular rate” will be based on a forty-hour week, but for a salaried employee, the salary covers the first 100% of the overtime. [2]

[2] There is also a fourth construction, discussed in more detail later in this [Superior Court] opinion. Under this construction, the “regular rate” fluctuates based on the number of hours worked in a given week, but for every hour over 40 worked in that week, the employee receives additional pay of one and one- half times the regular rate. In other words, the fluctuating “regular rate” component of the FWW method applies, but the one-half pay component does not. Using the trial court’s illustration, the employee’s “regular rate” would be the same as under the FWW method employed by GNC – weekly pay ($1000) divided by hours worked (50) produces a “regular rate” of $20 per hour. Under this fourth construction, however, the multiplier for overtime would be 1.5 rather than 0.5, yielding an overtime rate of $30 per hour. As a result, the employee’s overtime pay would be $300 ($30 times 10 hours of overtime worked), for a total of $1,300 for the week, compared to $1,100 under GNC’s method and $1,375 under Employees’ preferred method.

Slip Op. at 3-4 (some footnotes omitted).

The trial court granted Employees’ motion for summary judgment and adopted the forty-hour method for calculating overtime.

On appeal, the Superior Court reversed in part and affirmed in part and held that: (1) GNC’s method of calculating an employee’s “regular rate” by dividing the employee’s salary in a given week by the number of hours actually worked in that week did not violate the PMWA; and (2) GNC’s payment of an overtime premium of only one-half the “regular rate” violated the PMWA and its accompanying regulations.

Superior Court first recounted the history of the FLSA’s and the PMWA’s treatment of overtime pay for salaried employees.  The similar FLSA provision was interpreted by the U.S. Supreme Court in 1942 consistent with both aspects of GNC’s FWW method. In 1950, the U.S. Department of Labor adopted that interpretation in regulations.   Pennsylvania enacted the PMWA in 1968; it initially covered only employees not covered by the FLSA, but was amended in 1988 to cover all Pennsylvania employees, including those covered by the FLSA, such that FLSA became the “floor” for worker protection in Pennsylvania.  PMWA’s overtime provision, most recently amended in 2012 provides that:

Employe[e]s shall be paid for overtime not less than one and one-half times the employe[e]’s regular rate as prescribed in regulations promulgated by the secretary: Provided, That students employed in seasonal occupations as defined and delimited by regulations promulgated by the secretary may, by such regulations, be excluded from the overtime provisions of this act: And provided further, That the secretary shall promulgate regulations with respect to overtime subject to the limitations that no pay for overtime in addition to the regular rate shall be required except for hours in excess of forty hours in a workweek. An employer shall not be in violation of this subsection if the employer is entitled to utilize, and acts consistently with, section 7(j) of the [FLSA], 29 U.S.C. § 207(j)[] and regulations promulgated under that provision.

Slip Op. at 28, citing Section 4(c) of the PMWA.

Federal district courts have addressed the relationship between the FLSA and the PMWA.  Each of these cases involved the interpretation and application of 34 Pa. Code § 231.43(d)(3), the PMWA regulation that addresses situations in which the employer and the employee have reached an agreement as to overtime pay before performance of the work in question. Subsection (d)(3) states that such agreements are permissible under the PMWA as long as, among other things, the overtime rate “[i]s computed at a rate not less than 1 1/2 times the rate established by the agreement or understanding as the basic rate to be used in computing overtime compensation thereunder.”  The Superior Court observed that, although no agreement as to overtime pay is present in this case, the courts’ rationale remains persuasive:

The most recent of these [federal district court] cases, Verderame [v. RadioShack Corp., 31 F.Supp.3d 702, 709-10 (E.D.Pa. 2014)], is illustrative. There, RadioShack applied the same FWW method as did GNC, using the employees’ weekly salary divided by hours actually worked (rather than 40) to arrive at the regular rate, and then paying an overtime rate of one-half that regular rate. 31 F.Supp.3d at 703. RadioShack argued that this method not only complied with the FLSA but also was consistent with the PMWA. Id. at 705. While recognizing that subsection (d)(3) of 31 Pa. Code § 231.43 states that employees must be paid for overtime “at a rate not less than 1 1/2 times the . . . basic rate,” RadioShack contended that because its employees’ weekly salaries already covered the straight time for overtime hours, paying them an additional one-half the basic rate for those hours was consistent with both subsection (d)(3) and the PMWA. Id. at 706-07. Judge Mitchell S. Goldberg, … held that subsection (d)(3) does not permit an overtime payment of only one-half the regular rate:

While RadioShack’s compensation plan may be permissible under the FLSA, it cannot be reconciled with the plain language of § 231.43(d)(3). Indeed, while an overtime rate of “one half” is clearly stated in other regulatory language, it is conspicuously absent from section 231.43(d). As the court in Foster noted, “[h]ad the Pennsylvania regulatory body wished to authorize one-half time payment under section 231.43(d), it certainly knew how to do so.” Foster, 285 F.R.D. at 345 (commenting on the identical language of 34 Pa.Code § 231.43(b) and 29 C.F.R. § 778.112). Although section 231.43(b) pertains to a flat sum for a day’s work, and not as here, a fluctuating workweek, the language used in each certainly illustrates the regulatory bodies’ willingness to set out “one half” overtime standards. These two sections provide, in relevant part:

If the employee is paid a flat sum for a day’s work or for doing a particular job, without regard to the number of hours worked in the day or at the job … his 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. He is then entitled to extra half-time pay at this rate for hours worked in excess of 40 in the workweek. 29 C.F.R. § 778.112 (emphasis added); 34 Pa.Code § 231.43(b). I thus conclude that the absence of the “halftime” language in section 231.43(d)(3) and the inclusion of “not less than 1 1/2 times” is indicative of Industrial Board of the [Department’s] intent in drafting the regulations at issue.

Id. at 707.  

Slip Op. at 30-31.

Superior Court went on to resolve the question as to the competing methods.  As to the “regular rate” issue, it adopted GNC’s position, arguing that when the PMWA was enacted, it was clearly understood that similar FLSA language “permitted employers to calculate the “regular rate” of salaried employees each week by reference to the total hours worked in that particular week,” Slip Op. at 35, that the legislature knew how to deviate from FLSA but did not, and that the PMWA’s generalized intent to provide broader protections could not overcome these factors.

As to the second part of GNC’s FWW method, the Superior Court rejected GNC’s argument that “because federal law at the time the PMWA was enacted permitted the payment of an overtime premium of only one-half the ‘regular rate,’ and because the Secretary never adopted a contrary regulation, we should presume that the General Assembly intended to import the federal standard into the FLSA.” It reasoned:

The central flaw in this argument is that, unlike with the term “regular rate,” the Secretary did adopt regulations addressing the appropriate multiplier for calculating overtime payments…. The PMWA regulations adopted in 1977 contain three references… to the number by which the regular rate should be multiplied to determine compensation for overtime. In addition, the Secretary chose not to adopt the federal regulation, 29 C.F.R. § 778.114(a), that expressly authorizes the one-half multiplier used by GNC. Taken together, these regulatory choices compel the conclusion that GNC’s payment of an overtime premium of only one-half the “regular rate” violates Pennsylvania law.

Slip Op. at 38-39 (emphasis in original).

The Superior Court split on the issues, with a lead opinion and concurring and dissenting opinions.  The resulting holding is summarized in the lead opinion as follows:

In light of the two concurring and dissenting opinions filed in this matter, we summarize our disposition as follows. First, based on the agreement of Judges Moulton and Solano, we hold that GNC’s method of calculating an employee’s “regular rate” by dividing the employee’s salary in a given week by the number of hours actually worked in that week did not violate the PMWA. Second, based on the agreement of Judges Moulton and Musmanno, we hold that GNC’s payment of an overtime premium of only one-half the “regular rate” violated the PMWA and its accompanying regulations.

Slip Op. at 43-44.

GNC sought allocatur, which the Supreme Court has granted as to the following issue, as stated by petitioners:

When an employee’s weekly salary is paid as compensation for all hours worked in a week, and the employee ‘s “regular rate” is determined by dividing the employee’s salary by all hours worked in the week, does an employer satisfy its obligation under Section 4(c) of the Pennsylvania Minimum Wage Act of 1968 by paying the employee an additional one-half times the employee’s regular rate for all hours worked in excess of 40, in addition to the employee’s salary?