Recently, two blog readers asked a question about the use of compensatory (comp) time in the private sector during a discussion about tracking exempt employees’ hours worked. One reader’s company tracked exempt employees’ hours worked, and permitted the employees to “flex” any hours worked in excess of a normal workweek, either later that week or in future weeks on an hour-for-hour basis, subject to work loads and scheduling requirements. Another reader wondered if banking “flex” time would be an illegal use of comp time by a private employer. Let’s debunk that myth: Can you offer comp time, flex time, or some other additional compensated time off to your exempt employees? Yes! This is legal and permitted by the Fair Labor Standards Act (FLSA) regulations.

As you know by now if you have been reading this blog, the FLSA requires all employers to pay “non-exempt” employees time-and-one-half their regular rate of pay for all hours over 40 that those employees work in a given week. If an employee is exempt from the FLSA’s overtime requirements pursuant to one of several exemptions, like the “white collar” executive, administrative, or professional exemptions, these so-called “exempt employees” need not be paid overtime for hours that they work in excess of 40 hours in a week. However, the FLSA also includes provisions for comp time for certain public and private employees, though the rules work differently for each sector.

Compensatory Time Under the FLSA for Public Employers

Section 207(o) of the FLSA allows public employers at the federal, state, or local level to compensatenon-exempt employees for hours worked in excess of 40 with comp time in lieu of cash overtime. Because public, non-exempt employees’ comp time is in lieu of overtime, public employers must credit that comp time at the same rate as cash overtime: no less than one and one-half hours of comp time for each hour of overtime work. A public employer that compensates its non-exempt employees overtime with hour-for-hour comp time violates the FLSA regulations.

Public employers who use comp time for non-exempt employees can do so in lieu of all cash overtime, or only some of it. Public employers may restrict non-exempt employee comp time to particular employees, job titles, or even particular assignments (emergencies, weekends, holidays, etc.). The only prerequisite for public employers is that the non-exempt public employee agree beforehand to be compensated with comp time instead of cash overtime, either in a collective bargaining agreement, memorandum of understanding or other agreement, or via some other agreement or understanding arrived at with the employee before the work is performed (while certainly helpful, the understanding need even not be a written one).

The regulations specify that public employers may allow their nonexempt employees to accrue only up to 240 hours of comp time, unless the employees work “in a public safety activity, an emergency response activity, or a seasonal activity,” in which case they may accrue up to 480 hours. Public employers also must allow employees to use their accrued comp time “within a reasonable period after making the request if the use of the compensatory time does not unduly disrupt the operations of the public agency.”

Importantly, the DOL’s regulations do not authorize “use or lose it” comp time policies. Remember that comp time is simply a substitute for cash overtime. You cannot force a non-exempt employee to forfeit or convert cash overtime into something else, and you similarly cannot force a non-exempt employee to forfeit comp time or to convert it to sick time, vacation time, or other PTO.

The FLSA and its regulations require that public employers pay employees for unused comp time when their employment terminates for any reason:

at a rate of compensation not less than—

  1. The average regular rate received by such employee during the last three years of the employee’s employment, or
  2. The final regular rate received by such employee, whichever is higher.”

Compensatory Time Under the FLSA for Private Employers

That’s right: comp time does exist in the private sector! Contrary to popular belief, the FLSA allows both public and private sector employers to offer comp time to their exempt employees, just under a different name. Section 541.604 of the FLSA regulations expressly allow employers, public or private, to pay theirexempt employees “additional compensation” under certain circumstances. However, unlike public sector employers, private sector employers cannot offer comp time to non-exempt employees. Private sector non-exempt employees must be paid for all overtime hours.

The regulations provide that additional compensation paid to exempt employees does not destroy the salary basis (and, consequently, the FLSA exemption from overtime) as long as the “employment arrangement also includes a guarantee of at least the minimum weekly required amount paid on a salary basis.” Section 541.604 unambiguously provides that employers do not lose the exemption by providing

additional compensation based on hours worked for work beyond the normal workweek. Such additional compensation may be paid on any basis (e.g., flat sum, bonus payment, straight-time hourly amount, time and one-half or any other basis), and may include paid time off. (The emphasis is mine).

Accrual, Payout Rules for Exempt Employees’ “Comp Time”

Unlike comp time for public sector non-exempt employees, “comp time” for exempt employees can be granted in any form the employer chooses. You could elect to give exempt employees one hour of “comp time” for every hour over 40. You could grant “comp time” after 50 hours, after 160 hours in a month, or in any other manner you choose. Similarly, you can award “comp time” to exempt employees on an hour-for-hour (or any other) basis you so choose, like our reader’s company did. Unlike comp time for non-exempt public employees, your policy can set whatever accrual cap (or no accrual cap) on “comp time” that you award your exempt employees. Similarly, because employers are under no obligation to provide their exempt employees with a “comp time” benefit, you are under no obligation—at least under the FLSA (thoughstate laws may vary)—to cash out the “comp time” at termination and you can even implement “use it or lose it” policies (again, subject to state and local laws).

Employer Insights

Two last tips, one technical, one substantive: To avoid confusion with the public sector benefit, I would recommend that private employers that want to take advantage of this benefit call the time something other than “comp time,” like flex time or bonus time. Substantively, this strategy works only if you have properly classified your exempt employees. Counting hours and awarding additional compensation for those hours could be damaging to your pro-exemption arguments in close cases as a factor supporting that the employees are actually non-exempt.

The bottom line is that, contrary to what you might have heard, both public and private sector employerscan award their exempt employees “comp time” for working beyond scheduled hours, or for any other reason. In contrast to FLSA-governed comp time for non-exempt public employees, exempt employee “comp time” may be credited at any rate and subject to any conditions that you choose. Because the FLSA does not require private employers to offer it, whatever you do for exempt employees is simply a matter of policy, but beware of state statutes that might impose other requirements on your business (particularly with “use it or lose it” or termination payouts).