Federal Court: Employer’s Method of Calculating Overtime Violated Pa. Statute

by Ballard Spahr LLP
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A federal district judge in Pennsylvania recently found that RadioShack’s method of computing overtime violates the Pennsylvania Minimum Wage Act (PMWA). In Verderame v. RadioShack Corp., the plaintiff brought a putative class action against RadioShack, alleging that the company’s fluctuating workweek method of calculating overtime did not satisfy the PMWA’s requirement that employees be paid for overtime not less than one and one-half times the employee’s regular rate. This ruling is consistent with two similar Pennsylvania cases decided in recent years and should serve as a reminder to companies doing business in Pennsylvania of the risks of using this method of calculating overtime.

Plaintiff David Verderame, a former store manager classified as non-exempt and paid overtime based on what is commonly referred to as the “fluctuating workweek” method, brought an action arguing that RadioShack had shorted employees on overtime since April 2010. RadioShack’s “Non-Exempt Store Manager Compensation Plan” states that “[o]vertime on the weekly base salary amount will be paid at one-half the calculated regular rate (obtained by dividing the total number of hours worked in the workweek into the weekly base salary amount for all hours worked over forty (40) in any workweek).”

U.S. District Judge Mitchell S. Goldberg’s memorandum opinion began with a discussion of the fluctuating workweek method emanating from the Fair Labor Standards Act (FLSA). He noted that the FLSA prohibits an employer from requiring or allowing an employee to work more than 40 hours per week, unless the employee “receives compensation for his employment in excess of [40 hours] at a rate not less than one and one-half times the regular rate at which he is employed.” Judge Goldberg noted that the U.S. Supreme Court first addressed the overtime calculation when an employee is paid a fixed salary for a job whose hours vary from week-to-week in Overnight Motor Transp. Co. v. Missel.

Judge Goldberg explained that the Supreme Court’s method in Overnight Motor was incorporated in the regulations interpreting the FLSA in 1968. The regulations provide the following example of how to calculate overtime for employees with a fluctuating workweek: An employee who earns a salary of $600 per week and works 50 hours has a “regular rate” of 600/50 or $12 per hour. Overtime is calculated by adding an extra half-time ($6) for each of the 10 hours worked over 40. The total salary would be $660, with the employee being paid at $12 per hour for 40 hours and $18 per hour for 10 hours. Under this method of calculating overtime, an employee’s hourly rate decreases as he or she works more hours.

Judge Goldberg noted that the PMWA is stricter than the FLSA in its overtime requirements. Although the PMWA provides that “[e]mployees shall be paid for overtime not less than one and one-half times the employee’s regular rate as prescribed in regulations promulgated by the secretary,” it does not contain any express language authorizing the use of the fluctuating workweek method of overtime calculation.

In holding that the fluctuating workweek method of overtime calculation is impermissible under the PMWA, Judge Goldberg explained that RadioShack’s compensation plan could not be reconciled with the plain language of 34 Pa. Code § 231.43(d)(3). This section, in relevant part, states that no employer may be found to violate the PMWA’s overtime provisions if, under an agreement between the employer and the employee before performance of work, the amount paid for overtime “[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 computer overtime compensation thereunder.”

Additionally, Judge Goldberg distinguished RadioShack’s argument that Section § 231.43(d)(3) allows employers to change the overtime provisions if done so “under an agreement or understanding.” He explained that while this section does allow for an “agreement or understanding” as to the “basic rate,” it does not permit an employer and employee to contract around the requirement that overtime be paid at “1½ times” that rate.

Finally, Judge Goldberg noted that his holding is consistent with the objectives of both the FLSA and the PMWA because the FLSA was designed to “establish a national floor under which wage protections cannot drop, not to establish absolute uniformity in minimum wage and overtime standards nationwide at levels established in the FLSA.”

This decision is consistent with two other federal decisions in Pennsylvania in the last three years, Foster v. Kraft Foods Global, Inc. and Cerutti v. Frito Lay, Inc., which likewise held that the fluctuating workweek method of calculating overtime is unlawful under Pennsylvania law. Although a state court has not yet decided the issue, employers of workers in Pennsylvania should note the risks associated with using a fluctuating workweek method for calculating overtime and should therefore consider revising their policies accordingly.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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