“Chinese Overtime” is allowed under the Fair Labor Standards Act (FLSA). See Overnight Motor Transp. Co. v. Missel, 316 U.S. 572 (1942) and 29 C.F.R. Section 778.114 (2010). It only comes into play for employees paid in accordance with the fluctuating workweek method.
Fluctuating workweek pay is a salary as opposed to being paid by the hour. It is a set weekly sum regardless of hours worked, no matter more or less than 40. Overtime pay is available.
The FLSA provides that employees paid on an hourly basis must be compensated at the rate of one and one-half their regular rate of pay for each hour over 40 worked in a week. For example, an employee paid $10/hr, which is the “regular rate of pay,” must be paid $15 for each overtime hour.
In contrast, employees paid by the fluctuating workweek method receive only 1/2 their regular rate of pay for overtime hours.
Determining the rate of pay under the fluctuating workweek is done by dividing the salary by the number of hours worked. Hence, the rate of pay will fluctuate based on the number of hours worked. For example, the rate of pay for an employee with a weekly salary of $400 who has worked 35 hours is $11.43 ($400 divided by 35). The rate of pay for that same employee who has worked 55 hours is $7.27.
The overtime rate for this week of work is $3.63 (1/2 of $7.27). The overtime rate will vary depending on the number of overtime hours worked. The more hours worked, the lower will be the regular rate of pay and the overtime rate.
In order to compensate an employee under the fluctuating workweek, an employer must meet the following five criteria:
- The employee’s hours must fluctuate from week to week;
- The employee must receive a fixed salary that does not vary with the number of hours worked during the week (excluding overtime premiums);
- The fixed amount must be sufficient to provide compensation every week at a regular rate that is at least equal to the minimum wage;
- The employee must receive at least 50% of his regular hourly pay for all overtime worked; and
- The employer and employee must share a clear mutual understanding that the employer will pay that fixed salary regardless of the number of hours worked.
Each of these criteria provides opportunities to overcome “Chinese Overtime” and thus require overtime to be calculated in accordance with the X-1/2 method. FLSA cases are fact intensive.
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