Chinese Overtime, Bonuses and Incentive Pay: Not a Good Mix?

March 15, 2012
By Brady & Associates on March 15, 2012 12:02 PM |

Most employers are required to pay time and a half to non-exempt employees for any work performed over forty hours in a workweek. One exception is the fluctuating workweek (FWW) method of paying overtime, known to many workers as "Chinese overtime." Under the FWW method, employees are paid a guaranteed straight salary for all work done during the week, no matter how few or how many hours were actually worked, as long as some work was done that week.

FWW employees are paid overtime according to the following method: For each workweek in which the employee works more than 40 hours, the employee's regular rate for that week is calculated by dividing her weekly salary amount by the total number of hours worked in that particular week. The employee is then paid one half of that rate for all time worked over forty hours in that workweek. This amount is then added to the employee's normal weekly salary, the total amount being the employee's gross salary for that week. The way this works out is that, the more hours an FWW employee works over forty in a week, the less she is actually making per hour.

Last year, the Department of Labor (DOL) considered a proposal to allow employers to pay FWW employees non-overtime bonuses and incentive pay, including payment of shift differentials, "without invalidating the guaranteed salary criterion required for the half-time overtime pay computation." Federal Register, Vol. 76, No. 65, at 18848 (Apr. 5, 2011). Many employers were in favor of this proposal, and the DOL was initially leaning towards its adoption.

On April 5, 2011, however, after receiving and reviewing public comments on the proposal, the DOL decided against adopting the proposed rule, finding as follows: "While the Department continues to believe that the payment of bonus and premium payments can be beneficial for employees in many other contexts, we have concluded that unless such payments are overtime premiums, they are incompatible with the fluctuating workweek method of computing overtime under section 778.114." Federal Register, Vol. 76, No. 65, at 18850 (Apr. 5, 2011). According to the DOL,

[T]he proposed regulation could have had the unintended effect of permitting employers to pay a greatly reduced fixed salary and shift a large portion of employees' compensation into bonus and premium payments, potentially resulting in wide disparities in employees' weekly pay depending on the particular hours worked. It is just this type of wide disparity in weekly pay that the fluctuating workweek method was intended to avoid by requiring the payment of a fixed amount as straight time pay for all hours in the workweek, whether few or many.

Federal Register, Vol. 76, No. 65, at 18850 (Apr. 5, 2011).

What does this mean for employees? If an employee is paid under the FWW and also receives bonuses or premium pay, such as shift differentials, from her employer, her employer's use of the FWW method may have been invalidated--meaning that her employer has been illegally paying her Chinese overtime and may well, therefore, owe her unpaid overtime wages. Employees paid under the FWW who suspect those payments may be invalid should seek the advice of an employment attorney.

What does this mean for employers? Employers who use both the FWW and some form of bonus or premium pay should reevaluate their pay policies. They may be exposing themselves to considerable liability.

Source:

Federal Register, Vol. 76, No. 65, at 18850 (Apr. 5, 2011).