How does Chinese Overtime work?

The Fair Labor and Standards Act (FLSA) provides that employees paid on an hourly basis must be compensated at the rate of one and one-half their regular wage for each hour over 40 worked in a week. It’s fairly simple, if you are paid $10 an hour and you work 50 hours in one week, those extra 10 hours must be paid at a rate of $15 per hour.

What about employees who receive a salary rather than an hourly wage? Chinese overtime may be available to those employees. Chinese overtime, also known as the fluctuating workweek method, allows an employer to pay an overtime rate of half the employee’s regular rate for all hours over 40 worked in a week.

Requirements

Now before all you employers begin to celebrate and putting all your employees on a salary, there are some requirements, and if an employer doesn’t comply, they may be liable for backpay for unpaid overtime wages and penalties.

In order to use the fluctuating workweek method to calculate overtime, employers must meet the following requirements:

  1. The employee’s schedule must not be fixed, their hours must fluctuate from week to week;
  2. The employee’s base salary must be fixed and may not change according to the hours worked in a week;
  3. The base salary must be at least the minimum wage in any given week; and
  4. Both the employer and the employee must clearly and mutually understand that the fixed salary will cover all hours worked in a workweek, regardless of the hours actually worked.

How is it calculated?

A salary is paid for all hours worked, with halftime for all hours worked after 40 hours. The employer establishes a weekly salary that is intended to be the regular base pay for all hours worked. Since the fixed salary is already deemed to compensate the employee at straight time for all hours worked, any overtime hours only need to be paid at “half-time” instead of time and a half. The employee has already been paid straight time by virtue of the salary, and the straight time is only paid once, so the overtime hours will be paid at half the regular rate, thus bringing the employee to time and a half. Accordingly, the more overtime hours worked, the lower the regular rate and the lower the overtime pay.

Example: Assume employer and employee have a clear mutual understanding that the fixed salary is $600 per week. If one week the employee works exactly 40 hours, the worker’s regular rate of pay is $600/40 = $15 per hour. Since the employee did not work overtime in that week, their pay will be $600.

The second week the same employee works 25 hours. The regular rate for that week is $600/25 = $24 per hour. The worker is not entitled to any additional pay since they did not work overtime but still receives the entire $600 as a fixed salary.

The third week the same employee works 60 hours. During this week, the employee’s regular rate is $600/60 = $10 per hour. The employee now worked 20 hours of overtime and is entitled to halftime on those hours. Thus, the employee receives the $600 fixed salary plus half-time ($10/2 = $5) for all hours worked over 40 ($5 x 20 hours = $100). The total pay for the week would be $600 + $100 = $700.

Common pitfalls:

While these requirements may seem simple, they are stringent, and many employers misclassify employees as eligible for Chinese overtime. Some employers use this method for employee’s whose hours do not fluctuate on a weekly basis. By its very name, the “fluctuating” workweek method, can only be used when the nature of the work results in fluctuations in work hours and prevents the employee from working regular hours.

Another violation is not paying the base salary when an employee works less than 40 hours in a week. Shift differentials, such as higher or lower pay for weekends and holidays, may not be given because the employees would not be receiving a fixed salary. Further, employees that receive bonuses, holiday pay, commission, or other additional compensation are not receiving a fixed salary. Docking pay for absences also jeopardizes whether a salary will be considered fixed.

Others violate the law by providing a base salary below the minimum wage. A common pitfall in this regard, is that the more hours an employee works, the lower their hourly rate. So, if there is one week where an employee works a significant amount of overtime, their hourly rate will be lower, and if that rate falls below minimum wage, then the employer cannot use this method of calculating overtime.

Example: Continuing the previous example, in the fourth week the same employee works 80 hours. The regular rate for the week would be $600/80 = $7.5 per hour. The minimum wage in Florida is currently $8.25. Since the salary is below the minimum wage, the employer may not use the fluctuating workweek method.

Thus, employers must consider how many hours their employees might work on a slow week and on an extremely busy week.

Another common mistake that can be easily avoided, is not informing the employee of the company’s use of the fluctuating workweek method. Best practice is to have the policy in the employment contract or another agreement recorded in writing.

Under the FLSA, your employer cannot fire or retaliate against you for taking legal action or filing a formal complaint. If your employer is denying you overtime wages, please do not hesitate to contact one of our knowledgeable attorneys at EPGD Business Law, located in beautiful Coral Gables and historic Washington D.C. Call us at (786) 587-6787 or email us to schedule a consultation.

*Disclaimer: This blog post is not intended to be legal advice. We highly recommend speaking to an attorney if you have any legal concerns. Contacting us through our website does not establish an attorney-client relationship.*