Greater Wage and Overtime Protections for Pennsylvania Employees Effective August 5

In wake of recent legislation aimed at increasing employee rights and safeguards, the Pennsylvania legislature has promulgated new wage and hour regulations restricting employers and providing greater protections for employees. The new wage and hour regulations are effective on August 5, 2022. The new regulations impact two categories of employees: (1) tipped employees; and (2) salaried employees with a fluctuating workweek schedule.

Tipped Employees

Under the new regulations, an employee is now considered “tipped” if he or she performs work that customarily and regularly receives more than $135 per month in tips. Pennsylvania law now diverges here from federal law as an employee is considered “tipped” under the federal standard if he or she receives at least $30 per month in tips. Employers of “tipped employees” are permitted to take a “tip credit” and pay their employees a reduced minimum wage, $2.83 per hour, so long as each employee’s base hourly wage plus tips equals at least $7.25 per hour, the required minimum wage. Accordingly, under the new regulations, Pennsylvania employers can only take a “tip credit” and pay a reduced minimum wage to their employees who receive more than $135 per month in tips.  

The new regulations also update the “tip pooling” rules to align with federal law. Tip pools involving tip credit employees may only include those employees. However, tip pools that do not involve tip credit employees may include tipped and non-tipped employees. Supervisors, owners and managers are prohibited from participating in a tip pool and may only receive tips if they provide the entire service to a customer without help.

Moreover, the federal “80/20 rule” — a rule which mandates that a “tipped employee” can spend no more than 20% of the workweek performing non-tipped duties — is now enshrined in Pennsylvania law. Under this rule, an employer must pay the full minimum wage for all time that a tip credit employee spends performing non-tipped activities beyond the 20% threshold. For example, if a server spends 30% of his or her time performing non-tipped activities (i.e., preparing foods, cleaning the kitchen or bathroom), his or her employer must not take a tip credit and instead pay the full minimum wage for the 10% of time spent performing non-tipped activities beyond the acceptable threshold.

The new regulations also forbid employers from deducting credit card transaction fees or other payment processing fees from employee tips and mandate that all gratuities paid by credit card are the employee’s property. Further, the regulations provide that “service charges” are not tips to pay employees or use in determining employee eligibility for the tip credit. Employers charging administrative or service fees must provide a notice to customers that the fee does not include an employee tip and must provide a place for customers to add a tip.

Salaried Workers with a Fluctuating Workweek Schedule

Another new change in Pennsylvania law involves the way Pennsylvania employers calculate overtime pay for employees with fluctuating schedules. Pennsylvania and federal law allow employers and employees to utilize a “fluctuating workweek” arrangement — an arrangement where an employee earns a flat salary each week regardless of the actual hours worked in any particular week. Under federal law, employees are paid .5 of their “regulate rate” for any overtime hours over forty hours per week. This “regular rate” is determined by dividing the employee’s fixed weekly salary by the number of hours actually worked in that particular week. 

Now, Pennsylvania law diverges from federal law and provides greater protections for workers. Under the new Pennsylvania regulations, the “regular rate” is determined by dividing the employee’s fixed weekly salary by forty, regardless of the number of hours an employee worked that week. Further, employers must pay employees overtime wages at a rate of time and a half. This change codifies the Pennsylvania Supreme Court’s ruling in Chevalier v. Gen. Nutrition Ctrs., Inc., 220 A.3d 1038 (Pa. 2019).

Implications for Employers

The regulations are imminently effective. Accordingly, at a minimum, all Pennsylvania employers with tipped employees or fluctuating workweek schedules should revise their policies and procedures to comply with these new regulations and avoid potential violations of the Pennsylvania Wage Payment and Collection Law. These regulations may require employers to review their point-of-sale systems and make appropriate adjustments. Moreover, if employers now find themselves out of compliance with the law, employers are encouraged to contact the authors of this alert or their Faegre Drinker employment counsel for guidance concerning compliance and next steps.