While the labor laws on overtime pay at the federal level (and for most states) permit non-exempt salaried workers’ overtime pay to be calculated using the fluctuating-workweek method (aka Chinese Overtime), there are currently 7 states that prohibit or limit such pay schemes: Alaska, California, New Mexico, Pennsylvania, Connecticut, Montana, and New Jersey.
Rulings in these states have rejected employer’s arguments that employee’s overtime pay should be limited to a mere half-time rate for the overtime hours, resulting in overtime pay being calculated at 150% (“time-and-one-half”) the regular hourly rate.
The difference between using the “fixed salary for fluctuating workweeks” method to calculate an employee’s overtime pay versus paying time-and-a-half for each hour over 40 per week can be substantial (3 times as much overtime pay). The fluctuating workweek / Chinese overtime calculation is much more favorable for employers and far less favorable for workers – workers earn less for each overtime hour worked and employers save on overtime wage costs.
If you worked in Alaska, California, New Mexico, Pennsylvania, Connecticut, Montana, or New Jersey and were paid half-time for overtime under a fixed salary for fluctuating hours (Chinese Overtime) pay scheme, you may be owed back overtime pay.
What is the Fluctuating-Workweek Method of Calculating Overtime Pay?
This is the method that some used to refer to informally as “Chinese Overtime”. This scheme results in an employee’s regular hourly rate of pay varying from week to week. The regular rate for each week is obtained by dividing the salary by the number of hours worked in the week and cannot be less than the applicable minimum wage in any week. Since straight-time compensation has already been paid, the employee must receive additional overtime pay for each overtime hour worked in the week at not less than one-half this regular rate.
How Much of a Difference Does the Method of Calculating Overtime Pay Make?
FLUCTUATING-WORKWEEK OVERTIME CALCULATION METHOD
If an employee is paid a salary of $500.00 per week on a fluctuating workweek basis and works 45 hours one week, their overtime pay is calculated as follows:
$500/45 hours = $11.11 regular rate. Since their salary covers all hours worked at straight time, they are due half-time pay for hours worked over 40: $11.11 / 2 = $5.56 x 5 hours = $27.78.
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 May 2020, the Department of Labor has issued a new rule loosening the restrictions on employers’ use of the fluctuating workweek method (a/k/a “Chinese Overtime”) 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.
NON-FLUCTUATING-WORKWEEK OVERTIME CALCULATION METHOD
If the same employee is paid a salary of $500.00 per week in a state that does not allow fluctuating workweek overtime calculation and works 45 hours one week, their overtime pay is calculated as follows:
$500/40 hours = $12.50 regular rate. Since their salary covers only 40 hours of work, they are due time-and-a-half pay for hours worked over 40: $12.50 x 1.5 = $18.75 x 5 hours = $93.75
The Big Difference — 3 Times the Overtime Pay
So, the difference between the two overtime pay calculations is $65.97 ($93.75 – $27.78), and the worker not subject to fluctuating workweek overtime calculation earns over 2.3 times more in overtime pay for working the exact same hours.
Over a typical 50 weeks of work per year, the difference in overtime pay is almost $3,300, for an employee with a salary of $26,000.
If you have worked in Alaska, California, New Mexico, Pennsylvania, Connecticut, Montana, or New Jersey and were paid half-time for overtime under a fixed salary for fluctuating hours (Chinese Overtime) pay scheme, contact us for a free and confidential review of your specific situation, and to see how much you may be owed in back overtime pay.