COVID-19 Resource Center

July 29, 2022

Pennsylvania to Adopt New Rule Addressing Tips and Overtime Calculation

On August 5, 2022, the Pennsylvania Department of Labor and Industry will implement a rule pertaining to the payment of tipped employees as well as the calculation of overtime for salaried, non-exempt employees.  The new rule will enhance the threshold for employers to take a “tip credit”.  It will augment notice and record-keeping requirements for employers for “tip pools”.  The rule will enhance notice requirements applicable to processing or service charges.  Finally, the rule will clarify the calculation of overtime for “salaried non-exempt employees”.  Pennsylvania employers with employees in these categories must adopt these significant changes into their payroll practices.

Tipped Employees

A “tipped employee” typically occupies a job in which the employee receives more than $30 per month in tips.  Tip credits allow an employer to credit a portion of an employee's tips toward the employer's obligation to pay minimum wage.  Under current Pennsylvania law, employers are allowed to pay tipped employees as little as $2.83 an hour provided the employees make at least $30 a month in tips.  The new rule, effective August 5, 2022, increases that threshold from $30 to $135.  In addition, employees must work, at least 80 percent of the time, in a capacity that “directly generate tips”.  This modification aligns Pennsylvania law with Federal law.

Regulations pertaining to tip pooling will also change under the new rule.  Tip pooling occurs when some portion of the tips earned are redistributed evenly or by a set percentage to all employees instead of each individual employee keeping the tips they have individually earned.  Under current state law, managers, supervisors, and employers are not permitted to participate in a tip pool.  Under the new rule, tip pools will be limited to only include employees paid below the regular base minimum wage level.  Further, the new rule will restrict managers, supervisors and employers to keep only the tips they directly receive for work they, themselves, performed.

Under the new rule, deductions from employee tips for credit card processing fees or similar transactional fees will no longer be permitted.  According to the Pennsylvania Department of Labor, tips are the property of the employee.

Employers, under the new rule, will be required to clarify that service charges and processing fees are not gratuities for tipped employees.  Beginning August 5, 2022, companies who provide banquets, special functions, or packages, that are subject to services charges and fees or assess automatic gratuities, now must distinguish those fees to the customer.  Specifically, the new rule requires employers to identify, in writing, those fees for administrative or service fees as distinct from gratuities or tips to be kept by employees.  Employers in these types of businesses must review and adjust the language of existing contracts to reflect the changes required by the new rule.

Salaried, Non-Exempt Employee’s Regular Rate and Overtime Calculation

The new rule will eliminate the right of Pennsylvania employers to utilize a “fluctuating workweek” calculation of regular rate/overtime for salaried, non-exempt employees.  The fluctuating workweek method calculates the regular rate of a salaried, non-exempt employee by dividing the employee’s weekly salary by all hours worked that week.  The employer under this method then owes an additional overtime premium equal to 0.5 of that regular rate for all overtime hours worked.

Effective August 5, 2022, Pennsylvania salaried non-exempt employees will receive overtime based upon a 40-hour work week, regardless of how many hours the employee works or how much they are paid.  The new rule calculates the regular rate of a salaried, non-exempt employee by adding up the employee’s weekly renumeration and dividing the total by 40 hours.  The employer then owes 1.5 times that regular rate for all hours worked in excess of 40 during the workweek.  Employers must note that the Department will “count all renumeration paid to salaried non-exempt employees the same as renumeration given to employees who are paid by the hour, monthly, piece rate or other basis.”  In addition, although the new rule is framed to address the calculation of regular rate and corresponding overtime for salaried, non-exempt employees, the Department has indicated that this calculation will also be the same for hourly employees.

Employers must review their payroll and classification policies to ensure compliance with this new rule.  Our employment group is available to answer questions and assist with the drafting and implementation of these new policies and protocol.  Please contact one of the attorneys in our Employment Law Group at EmploymentLaw@c-wlaw.com or 1-888-488-2638.

DISCLAIMER

The information in this article is provided for general informational purposes only and may not reflect the current law in your jurisdiction.  By reading this article, you understand that there is no attorney-client relationship between you and Cipriani & Werner, P.C. or any of our attorneys.  No information contained in this article should be construed as legal advice from Cipriani & Werner, P.C. or the individual authors.