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Compensatory Time Off: A Cost-Effective Alternative to Overtime Pay

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Compensatory time off (also called comp time) is one of the ways you can reimburse staff for their overtime work.

Some companies use compensatory time off as a way of introducing more flexible workplace rules and culture, where people can choose when to work, and when to rest. For others, offering comp time means getting through the budget cuts without letting anyone go, or powering through the overflowing workload, while still getting to compensate the employees fairly.

Either way, compensatory time off needs to comply with applicable labor laws, and be welcomed by the staff. 

In this article, we’ll introduce you to the concept of compensatory time off and the following intricacies regarding its definition, calculations, alternatives, and implementation rules.

What is compensatory time off?

Compensatory time off is a compensation option where you pay the employees for overtime work by awarding them PTO instead of overtime pay. 

So, instead of a cash payment/ money deposited to your bank account, workers can opt for taking paid vacation time corresponding to the amount of time they’ve worked overtime. 

Calculating compensatory time off: FLSA rules

You need to diligently track regular and overtime working hours so you know exactly how much comp time off you should give to the employees. 

Compensatory Time Off: A Cost-Effective Alternative to Overtime Pay

In the United States, The Fair Labor Standards Act regulates compensatory time off (and each country comes with a separate rulebook for labor rights). 

As per FLSA, Section 7, staff members get awarded “time and a half” for overtime work:

“Section 7 of the FLSA requires that covered, nonexempt employees receive not less than one and one-half times their regular rates of pay for hours worked in excess of the applicable maximum hours standards.”

For example, if an employee has accrued 10 hours of overtime work during a month, they will be compensated with 15 hours of compensatory time off. 

Federal law only allows employees to accrue 240 hours of compensatory time off. At that point, the employer either has to pay for the overtime, or allow an employee to take PTO. If an employee quits before using up the comp time, the employer needs to pay them for the overtime.

There is also “…an element of flexibility to State and local government employers and an element of choice to their employees or the representatives of their employees regarding compensation for statutory overtime hours.” 

This means that local institutions may or may not allow different means of compensation and propose different rules regarding compensatory time off and PTO policy.

What to consider

In order to give a correct amount of comp time off, you should use a PTO tracking tool to get the complete picture that includes:

  • The total amount of PTO all of the employees have accrued;
  • PTO that’s already used up;
  • Paid vacation time left;
  • Compensatory time off overtime workers have accrued;
  • Scheduled times and dates of the upcoming vacations.

Take a peek at Vacation Tracker’s free trial and handle everything PTO-tracking-related from one spot!

Can everyone request compensatory time off instead of overtime pay?

Anyone defined as an “employee” by 5 U.S.C. 5541(2) can receive compensatory time off for overtime work.

The U.S. Office of Personnel Management defines different rules that apply regarding employee status (exempt and nonexempt), limits, and whether the rules are mandatory or at specific states’/employers’ discretion.

How to introduce compensatory time off to your workforce?

Learning the rules that apply to your remote and on-site workforce, is the first and foremost step when you intend to introduce comp time off. Consulting legal experts is the best course of action. FLSA violations can cost thousands in penalties, or your company can get sued by a damaged employee if their rights are violated.

Next, gather your managers and HR department to discuss the way you’ll introduce this new option to your employees. The department and company leaders need to be familiar with comp time rules, so they can approve or decline the compensatory time off employees have earned and requested. 

Smaller businesses, startups, and companies with stellar workplace cultures can afford to let managers have less formal verbal agreements about working hours. If the KPIs are in place and all of the tasks completed, an employee with a proven track record can take an hour or two off to run errands, as long as they make up for it later in the day, or another time as arranged. 

Now, all it’s left is to inform and educate the staff about compensatory time off. Create a knowledge base so they can remember how to create the compensatory time off request, what rules apply to them, how to track time off, and how many days or hours they have left.

The alternatives to compensatory time off

If offering comp time off doesn’t work for you, there are two other ways to go:

  1. Reimburse them financially, with the regular overtime pay rate;
  2. Offer a perk they’ll be satisfied with (new tools/equipment, a raise, etc);
  3. Rearrange their working hours so they can sleep in the next day (or a few), or leave earlier when they need to (time off in lieu).

The bottom line

Compensatory time off replaces financial compensation for overtime work with earned time off. There are several things to consider before you decide to introduce comp time to your workplace:

  • Study the relevant chapters of the FLSA, the differences between exempt and non-exempt employees, and other states, company, public, and private sector rules that apply;
  • Before taking any action, consult legal experts and double-check the labor laws of the countries your remote workers reside in and work from;
  • In most states and cases, comp-time off can be requested by non-exempt employees who work 40 hours per week and are paid by the hour; they’re allowed to accrue up to 240 hours of overtime work;
  • Before introducing comp time off as an option, discuss the changes with the managers and HR first, and then let the staff know about the comp time rules that apply to them;
  • In place of compensatory time off, you can choose to pay the employees for the overtime work, or have a verbal agreement and let them work and rest on their terms if their output remains as good. However, the safest option is to have everything on paper;
  • Don’t forget to create a reliable PTO tracking system and record time off!
Anja Milovanovic
Anja Milovanovic

A journalist turned content writer – Anja uses her investigative skills to produce high-quality SaaS, Marketing, and HR content.

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