It sounds like it was handled correctly by the payer -- the lost OT is paid on the W-2 with tax withheld, and the amount paid on the 1099-MISC is non-wage settlement money (penalties, interest). In that case it is taxable but not earned income and does not require a schedule C. Don't check the "wages" box, and answer the test questions as no -- not like your regular job, no intent to earn a profit, no plan to do the same work in the future.
In other words, no part of the 1099 is wages.
