At Work: Solutions for Employers & Employees

A recent decision from the Western District of Pennsylvania, Foster v. Kraft Foods Global, Inc., Civ. No. 09-453 (W.D. Pa. August 27, 2012) highlights the challenges employers face in simultaneously complying with both local and federal wage and hour laws. In Foster, the Court held that the “fluctuating workweek” method of overtime compensation, which is expressly permitted by the Federal Fair Labor Standards Act (herein “FLSA”), is not permitted under the Pennsylvania Minimum Wage Act (herein “PMWA”).

Under the fluctuating workweek method (FLSA) of calculating overtime, an employer pays a non-exempt employee a fixed weekly salary, which is derived from the employee’s “regular rate of pay,” regardless of the number of non-overtime hours worked. The regular rate of pay is determined by dividing the fixed salary by the total number of hours worked in a work week. Overtime is then paid out at one-half times (1/2) the regular rate of pay for all hours worked in excess of 40 per week, rather than one and one-half times (1 ½) the regular rate as required under the PMWA. This method of paying overtime clearly benefits the employer if the employee generally works more than 40 hours, because the effective hourly rate is driven down.

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, however, the employee would be owed an overtime premium of $120 ($8/hour x 1½ x 10 hours), for a total of $520.

The fluctuating work-week method is commonly utilized by employers in industries where an employee’s hours vary from week to week based on factors such as customer demand or seasonal variation. For example, fluctuating work-week overtime pay is often used by lawn maintenance companies, the golf industry and manufacturers with varying production schedules. As stated above, in using this method, the employer benefits from a significant cost savings over traditional methods of overtime calculation, while the employee benefits from the stability of a fixed weekly salary.

There are five (5) requirements for using the fluctuating workweek method: 1) the employee’s hours must fluctuate from week to week; 2) the employee must receive a fixed salary that does not change with the number of hours worked; 3) the salary must be high enough that the employee’s regular rate of pay is at least the minimum wage; 4) the employees must have a clear mutual understanding that he/she will receive a fixed salary regardless of the number of hours worked; and, 5) in addition to the fixed salary, the employee must receive overtime compensation equal to at least one-half the regular rate for all hours worked over forty (since all hours have been compensated at the regular rate under the terms of the salary arrangement).

In Foster, the Court held that payment of overtime under the fluctuating work-week method at any rate less that one and one-half times the “regular” or “basic” rate is impermissible under the Pennsylvania Minimum Wage Law. Accordingly, if the interpretation of the Minimum Wage Act is upheld, it may no longer result in cost savings to Pennsylvania employers who use this method to compensate nonexempt employees. We will monitor this and subsequent case-law that may develop regarding the local and national wage and hour laws.

In the meantime, this case should serve as a reminder that while most states follow federal wage and hour laws, that employers need to consider applicable state laws when dealing with wage and hour issues because compliance with the FLSA does not guarantee compliance with local statutes.