On November 20, 2019, the Pennsylvania Supreme Court removed any remaining doubt and ruled that the fluctuating workweek (a/k/a “Chinese Overtime“) method of calculating overtime pay for non-exempt salaried workers is prohibited under state law. This decision is consistent with earlier decisions of other courts which have previously rejected the fluctuating workweek method under Pennsylvania state labor law – making clear how overtime should be calculated for salaried employees in Pennsylvania.

The rule: Employers must pay non-exempt salaried employees an additional 150%—as opposed to an additional 50%—of their regular rate for every hour worked over 40 in a given week.

While the fluctuating workweek method is legal under federal overtime law, employers in states with overtime pay laws that differ from federal law must follow whichever law is more favorable to workers.  So, in states such as Pennsylvania, Alaska, California and New Mexico, which do not permit the use of the fluctuating workweek overtime calculation, employers must follow the more favorable state law and pay non-exempt salaried employees time and a-half their regular pay rate, instead of just an extra one-half for all overtime hours worked per week.

The Fair Labor Standard Act permits employers to avoid paying traditional overtime to non-exempt employees who work fluctuating workweeks. Under this federal law, employees are paid a fixed amount each week, regardless of the number of hours worked, plus half-time for their overtime hours. However, some states, such as Pennsylvania, have more employee favorable laws that do not follow the federal overtime laws regarding use of the fluctuating workweek method.

To calculate overtime under the FLSA, you divide the employee’s fixed weekly salary by the total number of hours worked that week. The result is the employee’s “regular rate” for that particular week. Add one-half the regular rate for any hours worked over 40 to the fixed salary to get the employee’s total weekly compensation. For employees who work 40 hours or less under the fluctuating workweek exemption, no calculation is necessary; the employee receives only the guaranteed fixed weekly salary.

For instance, Bob is an employee classified as non-exempt and he works a fluctuating workweek. He works 50 hours this week. Bob’s fixed weekly salary is $500, meaning his “regular rate” for the week is $10/hr (500/50=10). Under the fluctuating workweek method, Bob has been paid his “regular rate” for each hour worked during the week and is then owed only half-time for his overtime. So, in addition to his $500 salary, Bob gets $5/hr in overtime for the 10 hours of overtime worked, for a total of $550.

Pennsylvania federal courts had previously decided that the fluctuating workweek method of overtime compensation is illegal because it does not comply with the Pennsylvania Minimum Wage Act. Whenever state and federal wage laws differ, the employer must use the law that gives the greatest benefit to the employee.

The PMWA provides more benefit to the employee because it follows the traditional time-and-a-half overtime model. Under this system, the salary takes into account only the first 40 hours worked. So returning to Bob’s example, his hourly rate would be $12.50, based on the $500 of fixed salary (500/40=12.50). He would receive time-and-a-half his hourly rate,or $18.75, for the 10 hours of overtime, totaling $687.50.

Obviously, the money saved by employers under the FLSA is significant, especially if an employee was subjected to this practice for an extended period of time. Pennsylvania employees who were paid overtime under the fluctuating workweek method were deprived of adequate overtime pay. They are entitled to recover from their employers all unpaid overtime under the traditional time-and-a-half model.

Any employee classified under the fluctuating workweek exemption who works overtime is therefore at a disadvantage. But not all employees actually meet this exemption. In addition to the overtime requirements:

• The employee’s workweek must fluctuate, meaning he must work more than 40 hours in some weeks and less than 40 hours in others

• The employee must be paid a fixed salary regardless of the number of hours worked each week.

• The salary must be high enough so that the regular rate of pay will never drop below minimum wage.

• There must be an understanding, ideally in writing and signed by the employee, that the employee will be paid under the fluctuating workweek method and how it works.