The Fair Labor Standards Act of 1938 (FLSA) offers different rules on comp (compensatory time) for private companies, and for the most part comp time is frowned upon. Government workers (federal, state and local) can be offered compensatory time where the employee works extra time and is given unpaid days of leave matching the hours worked.
Overtime compared to comp time does reveal these are indeed two totally different issues—a quick visit to the U.S. Department of Labor’s Wage and Hour Division reveals the differences—if you have time to read these lengthy pages and can decipher them.
Instead of a lengthy browsing session, let’s look at easy explanations here along with the rules for comp time and overtime.
Comp time is where for every one hour worked, the employee receives one hour of unpaid compensatory time off. For example, if Fred works 40 hours Monday through Friday and then an entire eight-hour day on Saturday (48 hours in total), in lieu of wages, he can achieve eight hours of unpaid comp time off.
Overtime is where any hours worked over 40 hours per week must be paid at a rate of time-and-one-half. For example, if Fred who makes $10 an hour works Monday through Friday and then the eight hours on Saturday, making his total hours for the week 48, of those 48 hours, eight hours must be paid at time-and-one-half, or $15 dollars per hour instead of his normal $10 hourly rate.
For the most part, overtime hours are paid when due where comp time hours may be “banked” and used within a 12-month period or lost, meaning use them or lose them. In courts of law, judges have forced employers to pay out both overtime and comp time due if an employee quits or is dismissed.
In addition, you must be able to determine if an employee falls in the exempt or non-exempt category.
Overtime compared to comp time can be hard to understand for most business owners, especially because there are rules to follow according to the FLSA—which has been amended to allow employers to offer compensatory time off—in some instances. I always recommend because I have studied and worked in HR, if you are unsure what to do about offering comp time to call your local department of labor or obtain the advice of a labor law attorney to prevent lawsuits.
For the most part, Section 7 of the FLSA offers a novella of explanations on compensatory time off (links to the FSLA of 1938 and amended in 1986 and again revised in 2004 are provided in the reference section below). It is confusing and hard to determine if you are allowed, as a private employer, to offer comp time instead of overtime. For government or public workers, comp time is easier to offer and is allowed.
Most small business owners are not government or public agencies, so let’s focus on only the private employers looking to compare overtime to compensatory time off.
There are no real laws that prohibit private employers from offering comp time; however, a company must implement a written policy on comp time and it must be available to all employees. A company may not force compensatory time off on employees. Finally, if your business implements comp time, any time an employee asks to utilize any banked time off, the company must ensure there is no break in production flow or requirement of co-workers of the employee to work more hours or perform his or her job duties when the comp time off is taken.
Seems easy enough right? Not always. Because private employers can’t force comp time on their employees, if a business does make it mandatory, they can get in trouble if an employee files a complaint with the Wage and Hour Division because they were forced into taking unpaid leave in exchange for extra hours worked.
Again, if you plan on offering a comp time off program, make sure you’re following the rules across the board and that your employees understand it and agree with it. Even one naysayer can land you in an expensive and lengthy audit by the Wage and Hour Division; and if they can prove all employees did not agree, were aware of the policy or were forced into comp time, you will pay high fines and often double back-pay due.
Why Overtime is Safer
Why is it safer to pay overtime versus comp time? For the most part, most state labor departments also require any hours worked by non-exempt employees (usually hourly workers) over 40 hours must be paid at time-and-one-half. No employer wants to land themselves in trouble for not paying the employee for work performed.
These laws also apply to exempt employees who say work on a commission basis—at the end of the pay period if commissions aren’t accomplished, the employee must be paid at least minimum wage for forty hours worked and time-and-one-half for any overtime. Most salaried administrative or executive employees are exempt from overtime pay.
Although it’s true courts will often look to written company policies on comp time and overtime, judges frown on employers attempting to force employees to work extra for unpaid time off and will take the side of the complaining employee—and that means you’ll be forced to pay the overtime (and even fines or other judgment fees), so why not abide by the overtime laws in the first place?
If you do choose to offer compensatory time off, make sure you discuss the option in a group format with every employee in attendance, ensure that everyone is eligible, how the time can be banked and make sure they understand they must use it or lose it. If the policy is agreeable to all, you will then need a written policy with employee-signed acknowledgment pages to prove the program was agreed to by all; and above all, if an employee leaves the company for any reason, make sure he understands how these extra hours (overtime or comp time) will be paid.
Finally, I personally believe in my experience in human resources, it’s simply not smart to offer comp time—there are too many exceptions to the rule and the Wage and Hour Division’s Part 553 that discusses compensatory time off is full confusing examples that if you don’t fully understand them could end in disaster for your company.