In my mind, it's equivalent to subtracting a coarse estimate of how much extra muscle by mass I have compared to the median adult male they're using to construct BMI charts.

My actual methodology is pretty crude though -- when I was 15lbs lighter I had borderline visible abs and other visual indicators of being around the 15-20% body fat mark, and aside from gaining weight I don't have any reason to believe I've had any notable muscular atrophy since then, so I'm estimating the actual excess fat in that ballpark. It's be easy for numbers to be off 10lb or more, but even then it'd still indicate the overfat surplus being much less than the overweight surplus.

A better methodology uses calipers and various skin measurements to estimate true body fat percentage.