The Pennsylvania Supreme Court recently rejected the use of the fluctuating workweek method (FWW method) of overtime compensation under the Pennsylvania law. In doing so, the court distinguished the federal regulations that have explicitly adopted the FWW method. As explained by the court, this case addresses an ambiguity in the law that resulted from the inaction of the Pennsylvania legislature and the Department of Labor and Industry. Thus, until further regulations are promulgated, Pennsylvania employers should review and, if necessary, revise their pay practices for their nonexempt workforce.

In Chevalier. v. General Nutrition Centers, Nos. 22 WAP 2018, 23 WAP 2018, 2019 Pa. LEXIS 6521 (Pa. 2019), plaintiff Tawny Chevalier, a former salaried, nonexempt store manager, brought suit on behalf of all current and former store managers, assistant managers, senior store managers and other salaried, nonexempt employees of her former employer, General Nutrition Centers, Inc. and General Nutrition Corp. (collectively GNC). Chevalier argued that the FWW method used by GNC did not comport with the Pennsylvania Minimum Wage Act of 1968, 43 P.S. Sections 333.101-115 (PMWA), and the related regulations, which require that "each employee shall be paid for overtime not less than one and a half times the employee's regular rate of pay for all hours in excess of 40 hours in a workweek."

Specifically, it is commonly understood that overtime pay for nonexempt employees under the Fair Labor Standards Act, 29 U.S.C. Section 201, (FLSA), and numerous states, including Pennsylvania, requires covered employers to pay employees one and one-half times their "regular rate" for each hour worked over 40 hours per workweek. This seems easy enough for nonexempt employees who are paid an hourly rate. Yet there are alternative compensation methodologies that may be potentially available to certain employers. The FWW method of overtime payment is one such alternative method, which under the FLSA, may be used for nonexempt salaried employees whose hours worked fluctuate from week to week. Under the FLSA, the employee's salary serves as compensation for "straight time pay" for all hours worked in that workweek, "whether few or many." The employer must then pay an additional one-half the regular rate for all hours worked over 40 hours that workweek. Given that the regular rate, which is used to calculate the additional overtime premium, is determined by dividing the total applicable compensation received by the total hours worked in the workweek, generally the more hours the employee works, the lower his regular rate becomes.

Yet, unlike the FLSA, the PMWA and its related regulations do not specifically address the calculation of overtime for employees, such as Chevalier, "who are paid a set weekly salary regardless of the hours worked each week." Thus, according to the court, "this payment arrangement creates ambiguities regarding how to calculate the regular rate, and whether to multiply that rate by 0.5 or 1.5 to achieve the one and one-half times the regular rate …" Although the calculation of the "regular rate" can, on its own, often be a matter of significant dispute, the parties ultimately agreed to a calculation of the regular rate that divided the total weekly wages, including salary and commissions, by the actual hours worked in the workweek.  Accordingly, this case focused on the question of which is the correct multiplier to be used for overtime compensation.

According to Chevalier, the PMWA requires that a multiplier of 1.5 be used to determine overtime pay, rather than using the 0.5 multiplier as used in the FWW method. GNC, however, argued that their application of the FWW method did not run afoul of the PMWA's plain language. According to GNC, if it were to follow Chevalier's proposed pay scheme, employees would be paid two and one-half times the regular rate for overtime hours. The salary itself, GNC argued, provides payment for each hour worked, or "straight time," such that employees have already received "one times" the "regular rate" for those hours worked and it only needs to pay for the premium at "one-half time the regular rate" for each overtime hour, which is the calculation under the FLSA.

The court ultimately sided with Chevalier and held that, although the PMWA is silent as to whether the FWW method is permissible, the Pennsylvania legislature did not intend to incorporate it when drafting the PMWA. Although the Pennsylvania legislature did adopt large portions of the FLSA, including other overtime payment methodologies, it did not explicitly adopt the FWW method, suggesting that it was a deliberate omission. The court's analysis was buoyed by the legislature's intent behind the PMWA, which was to support workers and combat low wages. As such, the court found that providing one and one-half times the regular rate for overtime hours worked, rather than one-half times the regular rate, furthers such a goal.

The court's holding in Chevalier should serve as a reminder to employers of the complex and ever-changing legal landscape involved in ensuring proper employee compensation. Although some Pennsylvania employers may find the Chevalier decision disheartening, the court noted one alternative method of overtime compensation that has been adopted by the Pennsylvania legislature, and which "provides a permissible overtime compensation scheme for salaried employees working fluctuating hours" that differs from the FWW method, including essentially capping "the potential spreading of the agreed-upon salary at 60 hours." See Chevalier, 2019 Pa. LEXIS 6521, at *44, n. 32; see also 34 Pa. Code Section 231.43(c). As such, a variety of compensation methodologies continue to exist and may be available to certain employers. Thus, Pennsylvania employers, particularly any employer that has been using the FWW method, should review and evaluate their pay practices with the advice of counsel.

Christina Tellado is a partner and co-head of Holland & Knight's national wage-and-hour group. Deisy Castro and Dana Feinstein are associates at the firm.