The Pennsylvania Department of Labor and Industry has adopted a final rule addressing tipped employees and the calculation of overtime pay for salaried nonexempt employees. The final rule takes effect on August 5, 2022.
Background:
Fair Labor Standards Act (FLSA) Tipped Employees:
Under the FLSA, a tipped employee is an employee engaged in an operation in which they customarily and regularly receive more than $30 a month in tips. Tip pooling is allowed among employees that customarily and regularly receive tips; and tips are the property of the employee.
FLSA Non- Exempt Salaried Employees:
The U.S. Department of Labor (DOL) allows employers to use the fluctuating workweek (FWW) method to determine a non-exempt salaried employee’s regular rate of pay. This method pays an employee a flat weekly salary regardless of the regular hours they work in a week (which can vary by week). Under the FWW, overtime pay is based on the average hourly rate produced by dividing the employee’s fixed salary and any non-excludable additional pay (e.g., commissions, bonuses, or hazard pay) by the number of hours actually worked in a specific workweek. For each hour worked that exceeds 40 in a week, the employee receives at least an additional 0.5 times (or additional “half time”) that rate for each hour worked beyond 40 in the workweek.
Note: The fluctuating workweek method cannot be used if the employee’s salary is understood to be compensation for a specific, fixed number of hours per workweek.
Pennsylvania Tipped Employees:
Pennsylvania employers generally must pay employees a minimum wage of at least $7.25 per hour, but special provisions exist for tipped employees:
- An employer must pay a minimum cash wage of $2.83 to tipped employees.
- Employers may take a tip credit of $4.42 as long as the tips received by the employee and cash wage of $2.83 equal at least $7.25 per hour.
Details:
Pennsylvania Final Rule for Tipped Employees:
Definition of Tipped Employee:
The final rule increases the tipped employee threshold to $135 per month from the FLSA threshold of $30 per month. Consequently, as of August 5, 2022, a Pennsylvania employer may only take the tip credit of $4.42 per hour if an employee receives over $135 in tips in a month.
Service Charges:
Under the final rule, an employer may distribute a collected service charge to its employees, but the amounts distributed to employees must count as remuneration relating to the employees’ regular rates of pay; it may not count as a tip.
Tip Pooling:
The final rule aligns with the DOL’s tip pooling rules in that:
- An employer that requires a tipped employee to perform work that is not part of the worker’s tipped occupation may not take a tip credit for that time; and
- Work that is performed is not part of a tipped occupation if it does not:
The final rule also restricts tip pools to those who perform tipped work. A tip pool that includes non-managerial workers who perform non-tipped work must pay $7.25 per hour.
Notice Requirements:
An employer must provide written notice to affected employees in a tip pooling arrangement:
- At or before the time they make an employment offer, or
- At least one pay period before the tip pooling arrangement takes effect.
Recordkeeping:
Employers with tip pooling arrangements must keep records of the employees who partake in the tip pool and the dates and amounts of tips disbursed to employees.
Note: Employers should prepare to make these records available to the DOLI upon request.
Credit Card and Processing Fee Deductions:
The final rule also prohibits an employer that permits patrons to pay tips by credit card (and other non-cash payments) from deducting credit card payments or fees that are charged to the employer from an employee’s tips or from a tipping pool.
Non-Tipped Duties:
Under the final rule, an employer may take a tip credit for the time a tipped employee performs work that directly supports but is not tip-producing work, so long as the time does not exceed:
- 30 continuous minutes; or
- 20% of the hours in the workweek that an employer has taken a tip credit.
The first 30 minutes of such continuous work may be compensated at a tip credit rate ($2.83 per hour), but employers must pay at least $7.25 per hour for any time over the 30 minutes.
Note: The 20% limitation refers only to hours for which the employer has taken a tip credit.
Final Rule Pay Requirements for Non-Exempt Salaried Employees:
The final rule formally prohibits an employer from using the FWW method to calculate a salaried, non-exempt employee’s overtime pay. The PA Supreme Court previously held that the FLSA’s fluctuating workweek pay method does not apply under Pennsylvania law.
Consequently, when determining the regular rate of pay for non-exempt salaried employees, an employer will divide the total non-excludable compensation for the week and divide by 40 rather than divide by the total number of hours worked in the week.
Next Steps:
Pennsylvania employers that are subject to the FLSA and the final rule with tipped employees and non-exempt, salaried employees should:
- Update their pay policies and procedures and train employees to ensure compliance by August 5, 2022;
- Provide written notice of tip pool arrangements to tipped employees; and
- Keep records of employees that participate in tip pools.