Why Compensatory Time Off Is Illegal (and 1 Exception)

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Compensatory time off, also known as compensatory time or comp time, is an alternative form of pay for working overtime. Some companies choose to pay compensatory time, a form of paid time off, rather than pay the typical extra wage associated with overtime pay.

If you’re thinking of providing comp time rather than overtime pay, think again. Not all companies are allowed to offer it. And, even if you are legally allowed to pay comp time, there are limits and restrictions you need to know.

Why Can’t Private Sector Companies Offer Comp Time

Private companies absolutely can’t offer compensatory time off. 

The law says so. More specifically, the Fair Labor Standards Act (FLSA) says so. 

According to Section 7(o) of the FLSA, private sector companies cannot provide non-exempt employees—those with an hourly wage rather than a salary—with compensatory time off. Instead, they must be paid overtime pay according to the law for any hours worked over 40 hours in a week.

The reason? FLSA governs overtime pay, and the law requires non-exempt employees in the public sector to receive the overtime pay to which they’re entitled. 

Specifically, non-exempt employees must receive overtime pay worth one and a half times their regular wage for any hours over 40 that they work in one week. The FLSA doesn’t provide any cap as to the number of hours an employee can work in a week and earn overtime pay for their extra hours. 

As an example, if Sam works 52 hours in one week and makes $30 an hour, she’s entitled to 12 hours of overtime paid at $45 per hour or $540 in overtime pay. Under FLSA law, Sam’s private sector employer is not allowed to substitute this overtime pay with compensatory time off.

The FLSA is very clear on compensatory time and pay for non-exempt private sector employees, so most HR departments steer clear of offering any benefit that remotely resembles comp time to prevent potential legal problems.

The Public Sector Exception for Compensatory Time Off

While private sector companies can’t offer compensatory time off for non-exempt employees under FLSA, public sector companies can. 

In addition to unpaid time off or paid or flexible time off, public sector companies can choose to offer compensatory time in lieu of overtime pay. 

Within Section 7(o) of the FLSA, the FLSA calls out an exception for public sector companies, stating that any employee working at a “public agency which is a State, a political subdivision of a State, or an interstate governmental agency” is eligible for compensatory time off.

The company must pay compensatory time at one and a half hours for every hour worked as overtime. Using the previous example of Sam working 52 hours, 12 of which are overtime hours, Sam would earn 12 x 1.5, or 18, hours of compensatory time off. 

For a company to be allowed to provide compensatory time off under FLSA, the company and employee must have an agreement in place, like a written policy or a collective bargaining agreement.

The FLSA also places some restrictions on compensatory time off for public sector employees.

For instance, similar to PTO accrual caps, only a certain number of comp time hours are allowed under the FLSA. Employees cannot accrue more than 240 or 480 hours of compensatory time off, depending on the type of work performed. For instance, seasonal work is eligible for higher accruals up to 480 hours.

Also, once an employee hits their accrual cap, they become eligible for overtime pay for their extra hours worked. If an employee becomes terminated and has comp time accrued, they can get paid for their unused time.

Benefits of Comp Time for Employers

Employees deserve to get compensated for the time they work above and beyond what they’re required to do. However, that compensation falls on the shoulders of employers, and paying time-and-a-half for overtime can get pricey.

This is especially true in the public sector, where many jobs may require inconsistent periods of long hours. 

For example, personnel working a disaster cleanup project might work well beyond their usual hours for two weeks. In this case, rewarding the employee with compensatory time off can encourage the employee to take a break while reducing the financial impact of that extra time worked on the company.  

Compensatory time also gives employees a level of flexibility. They can use their comp time to take some time off to tend to personal matters or recharge, which may boost productivity in the workplace. 

Disadvantages of Comp Time for Employers

Comp time can be a mutually beneficial arrangement for employers and employees, but it also comes with some drawbacks for employers, specifically.

Primarily, the administrative side of comp time can be complex between managing and tracking earned time, ensuring that accruals are capped properly, and overages are paid out as overtime. Failure to comply with federal laws surrounding comp time can lead to legal issues, so keeping up on admin is crucial.

Additionally, employees may not prefer comp time to overtime pay. Employers continuing to offer it despite their employees’ wishes could risk reduced employee satisfaction. 

Finally, employers must find ways to keep everything running when employees use their compensatory time. Challenges may arise in scheduling and productivity if the cashing in of comp time isn’t managed well to ensure that multiple workers aren’t using their earned time simultaneously.

Private Sector Solution: Don’t Call It Comp Time

Private sector companies must consider how to best manage overtime and PTO and other benefits. Because the law states that private sector companies can’t use compensatory time for their non-exempt employees, these businesses need to use other solutions for overtime, specifically.

But that doesn’t mean your company must completely count out comp time. Instead, you just have to get creative.

Think about it: Comp time is essentially a reward for employees working above and beyond their required time for the week. There are other ways to reward employees by giving them much-needed time off rather than offering actual compensatory time off.

Basically, flexible time off (FTO) and paid time off (PTO) reward employees in the same way. Although they’re not explicitly used as a reward for overtime hours worked, they can be. They just can’t be offered in the same way as comp time.

As mentioned, comp time is offered at 1.5 times the rate of the number of overtime hours worked. So, you’ll want to avoid giving employees FTO or PTO in a similar structure, as in “Here’s 7.5 hours for your 5 hours of overtime.” Avoid that, as it’s much too similar to actual comp time.

As a private sector company, you’ll need to pay overtime, even if you offer FTO or PTO. There’s no way around that.

However, offering FTO or PTO as an additional benefit for overtime hours worked isn’t wrong. It just needs not to resemble comp time. Doing so can encourage workers who frequently work overtime to take some much-deserved time off. 

To do this, have a FTO or PTO system in place already. Then, you can offer additional time off as a reward.

For example, let’s say you provide all employees with three weeks of PTO each year. To reward workers who work overtime, you might give an additional day off for each month that an employee works at least one week with overtime. 

Following the Law Is Key with Compensatory Time Off

Public sector companies using compensatory time off should be careful to follow the law, and private sector companies should avoid using comp time as instructed by the law. 

Any willful violators of the FLSA regarding comp time can be subject to legal repercussions and fines of up to $10,000 per violation. Companies may also owe back wages and liquidated damages to employees if the company fails to reimburse employees for comp time according to the law. 

Ensure that your HR team is well-versed in comp time law as it writes company policies and manages comp time accruals and payments.

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