August 17, 2022

The Pennsylvania Department of Labor’s (“Department”) new regulations under the Pennsylvania Minimum Wage Act (“PMWA”) took effect on Friday, August 5. The main changes include compensation calculation for tipped employees, and applying a regular rate for overtime to non-exempt salaried employees.

The Department’s new amendments concern the following for tipped employees:

• Raising the salary threshold for tipped employees
• Adopting a rule regarding when employers can take a tip credit for employees who perform non-tip producing work
• Adopting a rule regarding tip pools
• Adopting a rule prohibiting employers from deducting credit card and other processing fees from tips
• Adopting a rule requiring employers who charge a service fee for banquets, special functions, or other package deals to notify patrons that these services fees are not tips.

First and foremost, the new regulations clarify that an employer shall pay the difference when the employee’s tips plus minimum hourly wage for tipped employees ($2.83) does not meet the minimum wage required for non-tipped employees ($7.25). Note that Pennsylvania’s minimum tipped wage ($2.83) is higher than the federal minimum tipped wage ($2.13) under the Fair Labor Standards Act. Under the new Pennsylvania regulations, an employer may take advantage of the tip credit if an employee received over $135 in tips in a given month, which is higher than the federal monthly tip threshold of $30. Prior to the rule change, Pennsylvania employees earned just over four times the minimum wage in tips before their employers claimed a tip credit; this threshold update aims to reflect changes to the minimum wage over the years and inflation over time.[1]

Second, the Department adopts the US Department of Labor (“USDOL”) “80/20 Rule” for non-tip producing work. By adopting the USDOL’s regulations, employers can only take a tip credit if the employee spends at least 80% of their workweek performing duties that directly generate tips. If employers exceed the “80/20” ratio, then employers must pay employees non-tipped minimum wage for any time spent performing non-tip generating duties in excess. The PMWA seeks to limit the amount of time an employer can assign a tipped employee non-tip generating work.

However, the Department specifically does not adopt the USDOL’s standard that prohibits employers from taking a tip credit if employees perform more than 30 minutes of consecutive non-tip generating work. The Department does not specify a time limit.

Third, although allowed under the PMWA, the Department had previously not regulated tip pooling.  These amendments created rules to regulate the activity. 34 Pa. Code §231.112 governs tip pooling and incorporates USDOL standards for tipped employees under 29 CFR 531.54. The Department adds to the USDOL standards by establishing that the employer must give the employee notice of tip pooling either at or before an employment offer or at least one pay period prior to the effected payment.

Under USDOL standards, tips can be pooled and distributed among tipped employees; however, tips cannot be shared with the employer, managers, supervisors, or traditionally non-tipped employees. Further, new regulations for tip pooling require employers to keep better records regarding tip pools. “[E]mployers who institute a tip pooling arrangement will have to keep records of the employees who are part of the tip pool and the dates and amounts of tips disbursed to these employees. These employers will have to make these records available to the Department upon request.”

Fourth, consistent with the rule that tips are the property of an employee, the Department adds a regulation prohibiting employers from deducting credit card processing fees from an employee’s tips, even if an employee participates in a tip pool.

Finally, the new regulations for tipped employees address service charges. An employer must provide notice of a service charge to patrons in a statement within a contract or agreement, or on any menu provided to the patron. An employer may distribute a service charge to its employees, however, that charge must count as remuneration in accordance with 34 Pa. Code § 231.43(a) and may not constitute a tip. See 34 Pa. Code. § 231.43(a) all remuneration for employment shall not include the following:

• Sums paid as gifts, payments in the nature of gifts made during any holiday or on other special occasions as a reward for service, the amounts of which are not measured by or dependent on hours worked, production or efficiency.
• Payments made for occasional periods when no work is performed due to vacation, holiday, illness, failure of the employer to provide sufficient work or other similar cause, reasonable payments for traveling expenses or other expenses incurred by an employee in the furtherance of the employer’s interests and properly reimbursable by the employer, and other similar payments to an employee which are not made as compensation for the employee’s hours of employment.
• Sums paid in recognition of services performed during a given period if:
  1. Both the fact that payment is to be made and the amounts of the payment are determined at the sole discretion of the employer at or near the end of the period and not pursuant to any prior contract, agreement or promise causing the employee to expect such payments regularly.
  2. The payments are made pursuant to a bona fide profit-sharing plan or trust or bona fide thrift or savings plan without regard to hours of work, production or efficiency.

• The payments are talent fees paid to performers, including announcers on radio and television programs.

• Contributions irrevocably made by an employer to a trustee or third person under a bona fide plan for providing old-age, retirement, life, accident or health insurance or similar benefits for employees.
• Extra compensation provided by a premium rate for certain hours worked by the employee in any day or workweek because such hours are hours worked in excess of 8 in a day or in excess of the maximum workweek applicable to the employee under § 231.41 (relating to rate) or in excess of the normal working hours or regular working hours of the employee, as the case may be.
• Extra compensation provided by a premium rate paid for work by the employee on Saturdays, Sundays, holidays or regular days of rest, or on the sixth or seventh day of the workweek, where such premium rate is not less than 1 1/2 times the rate established in good faith for like work performed in non-overtime hours on other days.
• Extra compensation provided by a premium rate paid to the employee in pursuance of an applicable employment contract or collective bargaining agreement for work outside of the hours established in good faith by the contract or agreement as the basic, normal or regular workday not exceeding 8 hours or workweek not exceeding the maximum workweek applicable to the employee under § 231.41 (relating to rate), where the premium rate is not less than 1 1/2 times the rate established in good faith by the contract or agreement for like work performed during the workday or workweek.

In addition to new regulations which increase protection for tipped employees, the Department enacted a “regular rate” for non-exempt salaried employees.  Salaried employees are paid a flat weekly salary for a fluctuating workweek. If a salaried employee works more than 40 hours, they are entitled to overtime pay. The USDOL allows for a “regular rate” for overtime to be calculated either on a 40-hour workweek or total hours worked, including overtime. Calculating a “regular rate” based on total hours worked benefits the employer and disadvantages the employee. The Pennsylvania Supreme Court addressed the issue of the overtime for salaried employees and decided that the Act requires that a 1.5 multiplier to be applied to determine an employee’s overtime rate when the employee works a fluctuating workweek. Chevalier v. General Nutrition Ctrs., Inc., 220 A.3d. 1038 (Pa. 2019).[2] However, prior to the new regulations, the Department had not prescribed the proper way to calculate a “regular rate” for employees in Pennsylvania.

Therefore, in the new regulations, the Department established greater protection for salaried employees who work overtime by requiring employers to divide salaried earnings by 40-hour work weeks. See 34 Pa. Code § 231.43(g) “The regular rate for salaried employees who are not exempt from overtime is the amount of remuneration determined under subsection (a) divided by 40 hours.” The Department amended the regulation to clarify that the law intended for all remuneration paid to salaried employees to be the same as remuneration given to hourly, monthly, piece rate, or other basis employees.

Wage and hour law is complicated, and particularly in the area of tipped employees. Differences between overlapping state and federal laws can make this field even more challenging.  McQuaide Blasko is committed to keeping you informed of best practices and your rights as an employer. If you have questions, please contact us to schedule a time to discuss your issues.

[1] The updated regulation ensures that the monetary threshold found in the definition of tipped workers accounts for 44 years of inflation and that tipped employee’s wages reflect current market values.

[2] For further explanation on the impact of this case, see https://www.lawfficespace.com/2019/12/scopa-fluctuating-work-week-method-of.html.

took effect on Friday, August 5. The main changes include compensation calculation for tipped employees, and applying a regular rate for overtime to non-exempt salaried employees.