The Pennsylvania Supreme Court recently found that a federal standard of calculating overtime is non-complaint with its state wage and hour laws. Specifically, the Court found that the Fluctuating Work Week (FWW) method of calculating overtime wages, adopted under the Fair Labor Standards Act, does not adequately compensate non-exempt employees at a time and half rate for hours worked over the standard 40 hour work week, as required by Pennsylvania Minimum Wage Act (PMWA). The FWW methods is currently used by many companies throughout the U.S., including New Jersey. Because of the similarities between Pennsylvania and New Jersey state wage and hour and wage payment laws, this decision may impact the rate at which some New Jersey’s employees are payed for their over time work.
- The employee works hours that fluctuate from week to week;
- The employee receives a fixed salary that does not vary with the number of hours worked in the workweek, whether few or many;
- The amount of employee’s fixed salary is sufficient to provide compensation to the employee at a rate not less than the applicable minimum wage rate for every hour worked in those workweeks in which the number of hours the employee works is greatest;
- The employee and the employer have a clear and mutual understanding that the fixed salary is compensation (apart from overtime premiums and any bonuses, premium payments, or other additional pay of any kind not excludable from the regular rate under section 7(e)(1) through (8) of the Act) for the total hours worked each workweek regardless of the number of hours; and
- The employee receives overtime compensation, in addition to such fixed salary and any bonuses, premium payments, and additional pay of any kind, for all overtime hours worked at a rate of not less than one-half the employee’s regular rate of pay for that workweek. Since the salary is fixed, the regular rate of the employee will vary from week to week and is determined by dividing the amount of the salary and any non-excludable additional pay received each workweek by the number of hours worked in the workweek. Payment for overtime hours at not less than one-half such rate satisfies the overtime pay requirement because such hours have already been compensated at the straight time rate by payment of the fixed salary and non-excludable additional pay. Payment of any bonuses, premium payments, and additional pay of any kind is not incompatible with the fluctuating workweek method of overtime payment, and such payments must be included in the calculation of the regular rate unless excludable under section 7(e)(1) through (8) of the Act.
In Chevalier v. General Nutrition Centers Inc, the Pennsylvania Supreme Court analyzed whether the “multiplier”, as the Court puts it, outlined in section 5 of the FWW method comports with the state law requirement that non-exempt employees be compensated at a “1 ½ times” rate. The FWW method expressly provides that employers may compensate “all overtime hours worked at a rate of not less than one-half the employee’s regular rate of pay for that workweek.” Under this provision, employers may then use a 0.5x multiplier to determine overtime wages, whereas the “1 ½ time” rate would seemingly require at least a 1.5x multiplier. While the difference between the two may not seem that great, the distinction could be worth hundreds, or more, to an employee.
Take, for example, the scenario of a non-exempt employee that is compensated at a weekly salary of $1000. If the employee works 50 hours in a week, the employee’s hourly rate would be earning $20 per hour ($1000/50 hours). The employee would also be entitled to 10 hours of overtime pay, for working in excess of the standard 40-hour work week. The calculation of the employee’s overtime pay under each method would be as follows:
0.5x Multiplier (FWW Method)
$1000 [weekly salary] + (0.5 x 20 [hourly rate] x 10 [overtime hours]) = $1,100 [total pay]
$1000 [weekly salary] + (1.5x 20 [hourly rate] x 10 [overtime hours]) = $1,300 [total pay]
In this example, the employee compensated under the FWW method would earn $200 less than those employees compensated at a “1 ½ times” rate, for the same hours worked in a week.
The proponents of the FWW method argued that that the 0.5x multiplier was not violative of the time and a half standard because the employee’s hourly rate is already taken into consideration by the employee’s weekly salary. The fixed weekly salary is meant to compensate the employee for all hours worked during the week, so long as the employee’s hourly rate for the week does not fall below minimum wage requirements and “overtime premiums” are paid in addition to the salary. Accordingly, the employee’s 10 hours of owed overtime wages, from the example above, is already compensated at $20 per hour. Therefore, only and additional 0.5x the employee’s hourly rate is needed to reach the “1 ½ times” rate of pay.
Conversely, the proponents of the 1.5x multiplier argued that the employee’s weekly salary should not be considered to have compensated the employee for hours worked over the standard 40-hour work week. The Pennsylvania Supreme Court agreed. First, the Court noted that, unlike the FLSA which promotes the freedom to contract, the PMWA recognizes that employees and employers are not on equal footing when it comes bargaining power. Accordingly, the purpose of the PMWA is to provide greater protection to employees that the federal minimum standards set forth in the FLSA. Furthermore, the Court noted that if the Pennsylvania legislature wished to adopt the FWW method of calculating overtime, it would have done so expressly by amending the statute to incorporate the 0.5x multiplier. The Court came to the conclusion because the Pennsylvania legislature had expressly adopted portions of the FLSA but had not adopted the provision allowing for the FWW method.
It is currently undecided whether the FWW method is permissible in New Jersey. Similar to Pennsylvania, the New Jersey Wage and Hour Law (NJWHL) is a broad remedial statute design to protect both employees and employers from “serious and unfair competition resulting from wage levels” and to “safeguard their health, efficiency, and general well-being”. New Jersey courts recognize that the NJWHL should be construed liberally, broadly in parallel to the FLSA, to effectuate this purpose. While the New Jersey legislature has not expressly rejected the FWW, the NJWHL plainly states that “[a]n employer shall also pay each employee not less than 1 1/2 times such employee’s regular hourly rate for each hour of working time in excess of 40 hours in any week”, barring limited exceptions. If New Jersey were to follow the same “plain-letter” interpretation as the Pennsylvania Supreme Court, couple with the broad remedial nature of the NJWHL, it seems reasonable that New Jersey could follow suit and reject the FWW method, affording higher overtime wages to fixed weekly rate employees.
New Jersey has long been considered a leader in the progressive protection of employee rights. The New Jersey Wage and Hour Law safeguards employees through the implementation of minimum wage and overtime requirements. Our New Jersey Wage and Hour lawyers will continue to monitor national trends to protect the rights of New Jersey workers.