What is “Chinese Overtime”?

If an employee is paid a fixed salary each workweek for hours that vary up and down from week to week, the employer may use an overtime calculation method called “fixed salary for fluctuating workweeks”. This is the method that some companies in the past used to refer to informally as “Chinese overtime”.

It is easily the most favorable method for employers of computing overtime, but certain requirements have to be met. To use this method:

• the employee must have a work schedule with fluctuating hours, i.e., not be on a fixed schedule,
• and must be paid a fixed salary that is meant to be straight-time compensation for all hours worked in a workweek, whether the employee works less than or more than 40 hours per week.
• With almost no exceptions, no reduction in the salary may be made for short workweeks.
• In addition, the salary must be large enough to ensure that the regular rate will never drop below minimum wage.

In such a situation, the regular rate is determined by dividing the fixed salary by the number of hours worked that week. 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 up to time and a half. In workweeks in which the overtime is high, the regular rate will be low, and the employer will enjoy a lower per-hour overtime cost.

The drawback for the employer is that if work is slow, and the employee is only working 25 or 30 hours per week, the fixed salary must still be paid.

As of May 2020, the Department of Labor has issued a new rule loosening the restrictions on employers’ use of the fluctuating workweek method to calculate overtime pay for non-exempt salaried employees.  Because this method results in employees getting less overtime pay than under any other overtime calculation, workers’ rights advocates did not want to encourage more employers to use the fluctuating workweek method. The new rule allows employers to pay additional compensation based on the number of hours worked, such as bonuses, premium pay, or differential pay, in addition to paying a fixed salary and still take advantage of the fluctuating workweek method. The Obama DOL did not allow the use of these payments if the employer wanted to use the fluctuating workweek method because it felt it would encourage employers to shift a large portion of employee compensation to bonus and premium payments which are usually only offered for less desirable shifts or working longer hours.  This new rule will likely go into effect around July 2021.