Everything You Need to Know About Chinese Overtime
The Fair Labor and Standards Act (FLSA) contains stipulations regarding overtime wages. Nonexempt employees who are compensated on an hourly basis must receive overtime pay for work exceeding 40 hours per week. The amount should be one and a half of their regular hourly rate. Let’s say you’re paid $13 an hour and in a week, you worked for 45 hours. The extra five hours should be paid at a rate of $19.5 per hour.
Now, what if you’re paying your employee on a salary basis instead of an hourly rate? Well, in that case, the option for you is Chinese overtime. Also known as a variable workweek, Chinese overtime lets employers pay just half the regular hourly rate for the time exceeding 40 hours in a week. Naturally, you might wonder if this is legal. In this post, we will share everything you need to know about this topic. We will also teach you how to calculate overtime pay when the hours are covered by a variable workweek.
What Is Chinese Overtime?
The FLSA permits the Fluctuating Workweek (FWW) method of overtime pay calculation. Most employers use it to cut operational costs. Let’s say you’re paying your employee a fixed salary every week and the work hours vary from week to week. In this case, you can still pay a fixed amount for the fluctuating workweeks.
While this FLSA overtime calculation is favorable to employers, certain conditions must be met. You can only use the Chinese overtime method in the following scenarios:
- The employee is working on a flexible schedule, and their work hours fluctuate from week to week.
- The employee is working on a fixed salary that is not subject to changes depending on the work hours per week.
- The base salary is not lower than the minimum wage of any given week.
- There is a mutual understanding between the employer and employee regarding the conditions of a fixed salary. Both parties should agree that the compensation will cover all the hours in a week, regardless of the actual work hours.
In this case, you can determine the regular rate by dividing the fixed salary by the number of hours worked in a week. The employee’s wages are supposed to compensate for all the hours they worked. The time exceeding 40 hours per week will only be paid at ‘half-time’. By virtue of the salary, the employee has been compensated straight time. Since straight time can only be paid once, the overtime work will be paid at one-half the regular rate.
Essentially, you are still paying them time and a half. Now, if overtime is high in certain weeks, the regular rate will be lower. So, as the employer, you can enjoy a lower per-hour overtime cost. However, there is still a caveat in this method. If work is slow and your employee is working around 30 hours per week, you should still pay the fixed salary.
How to Calculate Overtime Pay (Fluctuating Workweek Method)
In some systems, all the work hours, including those exceeding 40 hours per week, will initially be calculated at the regular rate. Then, the overtime hours will be calculated at .5 the regular rate. Here’s an example:
Fixed Salary Per Week = $700
Total Hours Worked for the Week = 50
In this example, we can conclude that the regular hourly rate is $14 ($700 / 50 = $14). Note that this particular employee is paid on a fixed salary basis and not on an hourly rate.
Now, when you compute the overtime pay, it should look like this:
10 hours x $7 = $70
Total Pay = $700 (Regular Weekly Rate) + $70 (Overtime Wages) = $770
How to Calculate Overtime for Day Rate Employees
Let’s say you’re computing overtime wages for an employee paid on a day-rate basis. The first thing you need to do is calculate the hourly rate. You will multiply the day rate by the number of working days for that week. Once you’ve done that, you will divide the amount by the number of hours the employee worked for the week. As a result, you will get their regular hourly rate for that week. Now, when calculating the overtime pay, the amount will be half the regular rate. Here’s an example:
Day Rate = $140
Work Days for that Week = 5 Days
Work Hours = 45
Now, if we’re computing the regular hourly rate for this week, we need to multiply the day rate by the number of days:
$140 x 5 = $700
To get the regular hourly rate, we’ll divide the amount by the number of hours the employee worked for the week:
$700 / 45 = $15.6 (Regular Hourly Rate)
Now, we’ll calculate the overtime pay for the hours exceeding 40:
$15.6 x .5 = $7.8 (Overtime Rate)
$7.8 x 5 = $39
Total Pay = $700 (Day Rate Earnings) + $39 (Overtime Wages) = $739
Now, if your employees usually work more than 40 hours per week, this can be an advantage for you. Using the day rate system instead of the traditional hourly rate will help you cut down operational costs. In this case, the overtime rate of your employee will not depend on the number of hours that exceed 40 per week. However, as the number of work hours increases, the overtime rate decreases.
How to Calculate Overtime for Non-Exempt Salaried Employees
If you’re managing non-exempt salaried employees, you need to compensate them for overtime work at a rate of 1.5 times their regular hourly rate. Now, computing this can be a bit tricky, which is why a lot of HR managers use a Chinese overtime calculator for this.
As you may have noticed, the regular rate for fixed salaries with fluctuating hours varies from week to week. We get the regular rate by dividing the salary by the number of work hours for that week. Do note that the amount cannot be less than the minimum wage. Since you’ve already paid straight-time compensation, the overtime hours can be paid at one-half the regular rate.
Let’s say an employee is getting a fixed salary of $800 per week on a fluctuating workweek basis. If they work for 48 hours in a particular week, here is how you can calculate overtime pay:
$800 / 48 hours = $16.7 (Regular Hourly Rate)
The fixed salary already covers all 48 hours worked at straight time. As such, you will only pay half the hourly rate for hours exceeding 40:
$16.7 x .5 = $8.35
Overtime Pay = $8.35 x 8 hours = $66.8
Total Pay = $800 (Regular Rate) + $66.8 (Overtime Pay) = $866.8
Should You Include Bonuses When Computing Overtime Pay?
In general, the answer to this question is “yes”. Bonuses must be included when determining an employee’s regular rate per week. The only exception is if bonuses are out of the worker’s contract and you are not compelled to give them. Keep in mind that bonuses are not considered to be discretionary if they are tied to achieving certain requirements, quotas, or pre-set goals.
The Easy Way to Track Overtime Hours
As you can see, computing regular and overtime hours can be complicated. If only some of the admin tasks could be lifted off your shoulders. Thankfully, there is an easy way to monitor your employees’ working hours. You can automate time tracking by using Traqq. This tool works both offline and online, making it convenient for your workers to track their billable hours.
What’s more, Traqq has a feature that lets you create invoices automatically. All you need to do is set up invoicing by inputting the required details (Pay Rate, Currency, etc.). Within a few clicks, you’ll be able to generate invoices with ease.
Calculating regular and overtime rates can be complicated, especially since you need to comply with the stipulations of the FLSA. While this guide provides detailed instructions for computing Chinese overtime, it is still best that you consult with a professional legal team. This way, you won’t get into trouble with the law when compensating your employees.