What is comp time, exactly? Compensatory time refers to the practice of compensating employees with paid time off (PTO) rather than overtime pay for hours worked above 40 in a workweek.
Let's take Tim as an example. Tim works in a grocery store, and it was a particularly busy week as people were gearing up for a three-day weekend. Tim worked an extra 10 hours that week. Instead of getting monetary compensation for those overtime hours, Tim would like paid time off to complete some personal errands.
To calculate how much paid time off Tim is owed, you would multiply 10 hours by 1.5, which equals 15 hours. Essentially, Tim will receive nearly two full days off — which he will be paid for — to use as he pleases.
Comp time is calculated by multiplying 1.5 times overtime hours worked.
1.5 x Number of Overtime Hours Worked = Comp Time
But can you do that in all cases and for all types of employees? The answer is no. There are specific situations in which you can use comp time. They depend on the type of business that you’re running, the employee’s status, and the state in which you’re located. Let's take a look at when you can use comp time, and some important considerations you'll need to keep in mind.
Is Comp Time Legal?
The Fair Labor Standards Act (FLSA) establishes the federal rules that employers in the U.S. have to respect in relation to employees. It covers terms like hours worked, minimum wage, and overtime pay, among others. The FLSA also sets the boundaries for using compensatory time off instead of overtime.
The use of comp time is also regulated on the state level, with rules diverging between states.
The legal use of compensatory time depends on the following factors:
- The status of an employee as either exempt or non-exempt according to the FLSA
- The type of organization at which the person is employed - whether it’s a private business or a public body
- The state in which the employment is conducted
Comp Time For Exempt vs Non-Exempt Employees
The FLSA regulates the handling of wages and hours for non-exempt employees. They are entitled to minimum wage and overtime pay. Typically, they are paid by the hour, but may also be salaried employees. Being non-exempt rather depends on the exact duties of the person. Often, workers in construction, maintenance and services are considered non-exempt.
According to the FLSA, compensatory time off is not legal for non-exempt employees working at private companies. They have to receive pay for any hours they have worked above the 40-hour work week. The overtime rate has to be equal to 1.5 times the regular rate of pay.
The other type of employees are called exempt, also known as salaried workers. They typically include executives, managers, and other specific professionals.
The FLSA does not require employers to pay overtime hours for exempt employees. However, employers may choose to voluntarily do so. They also have the freedom to offer comp time instead. If an exempt employee leaves the job before using their accrued compensatory time off, it is not legally required to pay the unused time.
Private vs Public Sector Employees
While using comp time in the private sector is not permitted for non-exempt employees, the practice is legal and more common in the public sector.
Federal, state, and local government agencies are allowed to offer comp time to their employees in lieu of overtime pay. Many positions in public organizations are considered non-exempt and thus fall under the FLSA’s rules about overtime. Nevertheless, such government employees may receive comp time.
In offering compensatory time off, public bodies need to adhere to strict rules. They include:
- The comp time has to be negotiated before the employee works overtime hours
- The rate for comp time has to be calculated as overtime, which means at least 1.5 times the actual worked hours
- The employee has to use the accrued comp time within a fixed number of pay periods
- If possible, there should be a labor union agreement covering comp time
In addition, there are restrictions to the number of comp time hours that different types of public employees can accrue. For most of them, the limit is 240 hours. For law enforcement, fire protection, emergency response and seasonal activities, it is 480 hours.
States Allowing Comp Time In The Private Sector
As states have additional laws regarding wages and overtime pay, some of them permit the use of comp time in the private sector for businesses not covered by the FLSA.
Often there are contradictions between the rules set in the federal laws and the state laws, or between any of the overtime laws and labor union contracts. You are required to opt in for the stipulations that provide greater protection to your employees.
Penalties For Illegal Use Of Comp Time
You can end up in a problematic situation if you fail to respect applicable state and federal laws regarding the use of comp time. Even if your employees push for this practice, you have to make sure that your company is bullet-proof in terms of potential lawsuits.
The U.S. Department of Labor is in charge of overseeing issues with overtime pay and comp time. Among the penalties that it can enforce on you in case you’ve breached the law are:
- Fines of up to $10,000 for comp time violations, as well as additional fines for repeated violations and imprisonment
- If a lawsuit against you is successful, you may have to pay twice the amount of the owed wages, plus the legal fees
- Fines for penalizing employees that file a comp time claim for unpaid wages
Is It Better To Offer Comp Time Or Overtime Pay?
A comp time policy can benefit your bottom line by helping you avoid overtime premiums. It can also give employees the time to attend to personal matters, without hurting their pocketbooks. And as you may know, flexibility bodes well for employee job satisfaction because it encourages the ever-essential work-life balance.
One downside to offering comp time is that it can lead to disputes with employees, particularly around whether they are truly exempt or non-exempt. Another challenge is managing expectations around comp time. Employees may come to expect comp time whenever they work overtime, and could put in extra hours unnecessarily in order to get those days off.
What it comes down to? Having a solid comp time policy is essential, both for your business and for your employees. It ensures fairness and transparency in offering this option for compensating overtime hours, as well as promotes a healthy company culture. Make sure employees and new hires receive this policy in writing.
If your employees are given a choice between comp time and overtime pay, which one will they choose? Employees deciding between the two, might consider:
- Their monetary position: Do they need the money? Or would they benefit more from time to take care of certain tasks or attend to personal matters?
- Employer preference: Do you, the employer, have a preference? Employees may consider how important it is to meet your needs and maintain a positive relationship with you.
- Taxes: How will overtime pay impact your employee's taxes? They may want to meet with a tax professional before making a decision.
Encourage your staff to discuss any questions with you, so they can be confident they're making a fully informed decision, and to seek the help of tax and HR professionals if they have further questions.
How To Use Comp Time In Your Business
Let’s wrap it up: when is it legal to use comp time?
You can offer comp time instead of overtime pay to your employees if:
- They are non-exempt employees
- You are managing a public sector organization
- You are in a state that allows comp time for private sector businesses not covered by the FLSA and you comply with all prerequisites for its use
Even if your employees prefer and ask for comp time instead of overtime pay, you are not legally allowed to provide them with it in situations different than the ones listed above.
If the law permits you to use compensatory time off, it’s important to set rules for applying it in advance.
Get Help With Your Payroll Needs
Handling payroll for your team can be a daunting task, and properly using overtime pay and comp time make it an even more challenging one. Luckily, Hourly, a workers' comp, payroll and time tracking platform, can help.
Besides its time tracking solution, Hourly also provides you with great tools for handling payroll and workers’ comp. You can see a full overview of hours worked by each employee and the salary that is due to them.
Hourly also syncs your payroll data directly to your workers’ comp policy so you only pay exactly what you owe on your premiums, not an estimate. Its goal is lower audit risk, faster payroll runs, and better claims and safety services for small businesses everywhere. Hourly is a licensed insurance agent with products underwritten by various insurance companies.