A private sector client recently asked me if the company could permit "comp time" -- allowing nonexempt employees who work overtime to take compensatory time off at a later date rather than receive overtime pay at one and one-half their regular rate of pay.
The short answer is no, the Fair Labor Standards requires nonexempt employees in the private sector to be paid overtime when they work more than 40 hours in a workweek. The FLSA does permit comp time in the public sector, but not in the private sector. In recent years legislation has been proposed that would change that, but none of these bills has been enacted into law.
There is a longer, more nuanced answer to the question of whether a private sector employer can use comp time. The Department of Labor, in its Field Operations Handbook, describes a "time off" plan under which an employer may use a version of comp time within the same pay period. See Field Operations Handbook, §32j16b. In a 1968 opinion letter, DOL explained that "it is permissible for the employer employing one at a fixed salary for a fixed workweek to lay off the employee a sufficient number of hours during some other week or weeks of the pay periods to offset the amount of overtime worked (i.e. at the time and one-half rate) so that the desired wage or salary for the pay period covers the total amount of compensation, including overtime." Wage & Hour Op. Letter, 1968 WL 168369 (Dec. 27, 1968). For example, if the employer has a two-week pay period, and an employee works 10 hours of overtime in week 1, the employer could give the employee 15 hours of time off ("comp time") in week two while paying the employee his or her regular salary for each workweek.
A few courts have opined that "time off" plans are legitimate. See, e.g., Coover v. Summit County, Civ. No. 86–F–12.1986 WL 28915 (March 21, 1986) ("As a general proposition, time off plans are valid under FSLA."). However, if a plaintiff's lawyer were to challenge a "time off" plan, it is possible that a court could reject the DOL's position and determine that "time off" plans are impermissible because they are not specifically authorized by the FLSA. Another problem with such plans is that "comp time" must be used within the same period; it cannot be carried over into a subsequent pay period. Thus, a "time off" plan is of limited utility.
Whatever the reasons, few employers have adopted "time off" plans. The vast majority of employers follow the safe approach and pay non-exempt employees a cash payment of overtime, at one and one-half the employees' regular rate, for each workweek in which the employees work more than 40 hours. Any system in which a private sector employer allows nonexempt employees to "bank" their overtime to be used as comp time in subsequent pay periods is impermissible under the FLSA and may result in liability.