The Pennsylvania Department of Labor and Industry’s proposal to amend Part XII, Chapter 231 of 34 Pa. Code was published in the Pennsylvania Bulletin on November 20, 2021. This proposed regulation updates and add various rules regarding tipped employees, and provides an important clarification on the method of calculating the “regular [hourly] rate” of salaried employees.
Defining “Tipped Employees”
An employer can pay a “tipped employee” as little as $2.83/hour, as long as that worker earns enough tips to bring them up to the minimum hourly wage of $7.25/hour. The employer is still obligated to pay minimum wage, but is allowed to count these tips that make up this difference as a “credit” toward fulfilling that obligation. Certain criteria must be met in order for an employer to take advantage of this “tip credit” and to pay an hourly rate that is below the regular minimum wage.
First, to qualify as a “tipped employee” under the proposed regulation, a worker must make more than $135/month in tips. This update to the monthly-threshold will be the first in 44 years, when it was set to $30/month.
Second, a worker must also spend at least 80% of their workweek performing “tipped” duties (known as the “80/20 rule”). According to the Department, this “proposed regulation will ensure that employees who receive the lower tipped minimum wage are actually performing duties that generate tips.”
There is currently no Pennsylvania regulation addressing the amount of time a tipped employee can spend on non-tipped duties while still being paid the tipped minimum wage, but USDOL has long enforced the “80/20 rule.” This rule was initially outlined in a 1988 WHD Field Operations Handbook, and in October 2021, USDOL published a final rule that would make the “80/20” standard a federal regulation for the first time.
The PMWA already allows “tip pools,” but the proposed regulation would clarify who may participate: employees who spend 80% of their workweek performing “tipped” duties.
The proposed regulation would also explicitly exclude employees with ownership or partnership interest in the business, and those who meet any part of the executive employee duties test of the FLSA regulations. Finally, this regulation would also require the employer to notify employees of the tip pool, and to keep records of the name and position of each employee participating, as well as the amount distributed to them.
Credit Card Deductions
As with any credit card transaction, tips charged to credit cards incur a fee to the business. Currently, there are no Pennsylvania or federal regulations addressing whether an employer may deduct the percentage applicable to these fees from tips charged to a credit card, and this proposed regulation would prohibit that practice. This proposal would allow tipped employees to keep all the tips intended for them, and keep the “operational costs” of running a business the responsibility of the employer. It is worth noting that Philadelphia already banned this practice in 2011.
Under the proposed regulation, an employer would be required to clearly identify that service charges (for example, fees for banquets or special functions) are not tips. This is not currently addressed in Pennsylvania or federal regulations, but is more stringent than federal sub regulatory guidance (which states in a fact sheet that service charges cannot be distributed to employees as tips, but can be used by an employer to satisfy their minimum wage and overtime obligations under the FLSA).
Calculating the Regular Rate for Salaried Employees
The final part of this proposed regulation would clarify that to calculate the base “regular [hourly] rate” for salaried employees who are not exempt from the overtime requirements, employers must divide the employee’s weekly earnings by 40 (as opposed to dividing by all hours worked, as is permissible under federal law). The regulations do not currently address this, and will have a big impact on salaried employees who are owed an overtime premium. Consider a salaried employee making $865/week and working 50 hours/week. The proposed regulation clarifies that this employee’s hourly rate is $21.63 ($865 divided by 40 hours), instead of $17.30 ($865 divided by 50 hours). And as was already held by our Supreme Court in Chevalier v. General Nutrition Ctrs., Inc., 220 A.3d. 1038 (Pa. 2019), Pennsylvania law mandates these overtime hours be compensated at 1.5 times the regular rate. So, our salaried worker would be owed $32.44 for each hour worked over 40 in a week ($21.63 multiplied by 1.5). Under federal law, which allows overtime hours to be compensated at .5 times the regular hourly rate, that same worker would be owed only $8.65/hour for those same overtime hours worked ($17.30 multiplied by .5).
Read the proposed regulation with IRRC* comments here.
The public are invited to submit comments, due by December 20, 2021, to Bryan M. Smolock, Director, Department of Labor and Industry, Bureau of Labor Law Compliance, 651 Boas Street, Harrisburg, PA 17121 or by e-mail to firstname.lastname@example.org.
*The Independent Regulatory Review Commission (IRRC) was created by the Regulatory Review Act, passed in 1982, to review Commonwealth agency regulations. Among other things, the IRRC assesses statutory authority for enacting the regulation, and the regulation’s anticipated economic impacts.