Recently, Judge Mitchell Goldberg of the United States District Court for the Eastern District of Pennsylvania issued a decision in Verderame v. RadioShack Corp., finding that the "fluctuating workweek" method of overtime compensation violates the Pennsylvania Minimum Wage Act ("PMWA"). Under the fluctuating workweek method, an employee receives a guaranteed fixed weekly salary for all straight-time earnings, regardless of the number of hours worked, and an additional one-half of the employee's regular rate for all hours worked over forty in the workweek. The employee's regular rate may change from week to week, because it is based upon the employee's actual hours worked. The fluctuating workweek method is expressly permitted by the Fair Labor Standards Act's regulations and used by employers to compensate non-exempt employees on a fixed salary basis while minimizing overtime costs.

Judge Goldberg's decision in Verderame is the third recent federal District Court decision finding that use of the fluctuating workweek method violates the PMWA. See Foster v. Kraft Foods Global, Inc.(W.D. Pa. 2012); Cerutti v. Frito Lay, Inc. (W.D. Pa. 2011). The Third Circuit has yet to consider the issue.

The Verderame decision highlights the often forgotten facts that the requirements of the FLSA and the PMWA are not identical and that employers must ensure compliance with both laws. In addition, the growing number of decisions finding that the PMWA does not permit use of the fluctuating workweek have a much broader impact than simply for those employers that use this method of overtime compensation. Employers found liable in overtime exemption misclassification cases often seek to use the fluctuating workweek to calculate damages, as this method results in the payment of only an additional one-half of the employer's regular rate for overtime hours. If the fluctuating workweek method is not available under the PMWA, employers will be required to pay an additional one and one-half of the regular rate for purposes of damages.

Unless and until the Third Circuit weighs in, decisions like Verderame make it increasingly risky for Pennsylvania employers to use the fluctuating workweek method. These decisions also have increased the potential value of overtime misclassification cases, providing yet another reason for employers to conduct wage and hour audits and ensure that all employees are properly classified for overtime purposes.