Compensatory Time and How It Works

Compensatory time is when employees earn paid time off (PTO) instead of overtime pay for extra hours worked. On the surface, exchanging overtime pay for time off sounds like a win-win. But misapplying comp time can lead to legal violations, employee grievances, and expensive back pay claims.

Under federal law, comp time is generally available to public sector employees, but not private sector. Private non-exempt employees cannot receive comp time in lieu of overtime pay. The FLSA mandates that they receive cash at 1.5 times their regular pay rate.

Whether you’re advising a public agency or managing HR compliance, understanding comp time is essential. For legal help, reach out to a wage and hour lawyer.

What Is Compensatory Time?

Comp time is when employers give PTO instead of overtime pay. Under the Fair Labor Standards Act (FLSA), comp time must be earned at no less than a rate of 1.5 hours of paid leave for each overtime hour worked.

The FLSA prohibits private employers from using comp time instead of paying overtime. However, public-sector employers — federal, state, and local governments — can use comp time if certain conditions are met. The government entity must have agency eligibility, and the agency must grant comp time at time-and-a-half for every overtime hour worked.

For a public employer to offer compensatory time off, a prior agreement must be established. This can be in the form of a collective bargaining agreement or an individual agreement with each employee.

Accrued comp time creates the opportunity for a flexible work schedule. Employees who prefer time off over pay can schedule personal time for family, education, or rest. Government employers can manage payroll cash flows, delaying cash payments while meeting legal requirements. It also supports employee well-being by reducing burnout. Despite these advantages, comp time may delay immediate compensation and, if mismanaged, can lead to denied leave or statutory violations.

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How Comp Time Works

As an employee works, human resources or payroll will track their workday hours. Once an employee hits their 40-hour workweek, they will begin to work overtime. These hours are tracked in accordance with FLSA labor laws.

Employees earn 1.5 hours of comp time for one hour of overtime worked. Once the employee hits the cap of earned comp time hours, the overtime worked must be paid in cash. Any comp time not taken must also be paid in cash.

Any comp time policy must be clearly outlined in a written policy and made available to employees. The policy must include accrual rates, usage rules, scheduling, and cash-out procedures. If an employee leaves, the accrued comp time must be paid out at the current pay rate. For federal agencies, accrued comp time must be used or paid within 26 pay periods, or else it’s forfeited if not used — unless delays were due to exigent circumstances.

Benefits and Drawbacks of Comp Time

Compensatory time policies offer several benefits to eligible employees and employers:

• Greater compensation flexibility
• Work-life balance
• Reduces immediate payroll expenses
• Eases staffing challenges by letting employees know how many hours of comp time they have banked

While there are several benefits of implementing comp time policies, there are also some drawbacks:

• Limited availability for private-sector employers
• Employees must wait longer to receive their compensation for time worked.
• Unused comp time must be cashed out before employment ends, creating potential liabilities for employers
• Caps on accrual hours can restrict employees who may be unaware of the limits and stop accruing time without realizing it

Legal Regulations Governing Comp Time

FLSA regulations permit government agencies to offer comp time instead of overtime pay, but only under specific, prearranged conditions. These provisions are enforced by the U.S. Department of Labor (DOL).

Agencies must have a written agreement in place before any comp time is accrued, either through a union contract or an individual employee acknowledgment. Without it, comp time is off the table. There are also hard caps on how much time employees can bank. It’s 240 hours for most public employees and up to 480 hours for law enforcement and emergency personnel. Once those thresholds are exceeded, the law requires immediate payout at the overtime rate.

Employers must maintain precise, audit-ready time tracking records that include how and when comp time is earned, used, and paid out. This includes honoring the employee’s right to use accrued time within a reasonable period unless it would unduly disrupt operations.

Noncompliance can be costly. Agencies may face enforcement actions, back pay, liquidated damages, and legal fees. And where state law imposes stricter standards, such as in California, which prohibits certain comp time arrangements, those rules take precedence.

Seek Legal Assistance

Used correctly, comp time can support work-life balance, improve employee satisfaction, and give public employers more flexibility in workforce management. Between the strict FLSA requirements, accrual caps, mandatory agreements, and potential penalties, even small compliance missteps can carry big consequences. A qualified attorney can help you evaluate your policies, ensure accurate recordkeeping, and stay compliant in an evolving regulatory environment.

Use the Super Lawyers directory to hire an employment lawyer who has experience with wage and time regulations.