Pay Attention to Prohibition on Comp Time for Nonexempt Workers in Private Sector

Allen Smith, J.D. By Allen Smith, J.D. July 24, 2023

​Comp time is allowed in the public sector, but private-sector employers are prohibited from offering future paid time off to nonexempt employees in lieu of complying with the overtime requirements of the Fair Labor Standards Act (FLSA).

That said, "offering paid time off in future workweeks to reward an exempt employee for having gone above and beyond the normal work expectations is not prohibited," stated James Coleman, an attorney with Constangy, Brooks, Smith & Prophete in Fairfax, Va.

Rules of the Road

True compensatory time, in the sense of what's permissible for public-sector employers to pay to nonexempt employees, occurs when overtime hours are worked in one workweek, and instead of paying overtime at the rate of 1.5 times the employee's "regular rate of pay," the employer credits 1.5 hours to a comp time bank for every hour worked over 40. Then the employee is allowed to use their banked comp time hours in future workweeks as a form of paid leave, Coleman explained.

"The FLSA has detailed regulations that govern the use of comp time, including that there be an agreement or understanding upfront, strict pay-out rules, limits on how much comp time can be accrued, and payment upon termination of employment," he said. "The biggest limitation is that private-sector employers may not use comp time" for nonexempt employees.

Each time groups representing private-sector employers have sought amendments to the FLSA to allow for the use of comp time for nonexempt employees in lieu of paying overtime, the efforts have failed, Coleman said. "The public-sector comp time regulations were included as a way of easing the burden of overtime compliance on state and local governments when the FLSA was expanded to cover such employers," he explained.

Comp time for nonexempt employees in the private sector "may never overcome perhaps its biggest flaw in the eyes of the government—it cannot be taxed," said John Skousen, an attorney with Fisher Phillips in Irvine, Calif., and Dallas. "Exchanging wages for time off is, among other things, at odds with the payroll and income tax structure that fuels government budget and programs, including unemployment and Social Security benefits."

Comp time for exempt employees in the private sector, by contrast, is allowed because the overtime requirements of the FLSA are part of what the employee is exempted from, Coleman noted. So, with a valid white-collar exempt classification, there is no FLSA requirement to pay overtime in the first place.

If exempt employees get a minimum guaranteed salary of at least the exempt threshold—currently $684 per workweek—employers can provide them extra compensation for working extra shifts or outside their normal schedule. This extra compensation can include paid time off, said Keith Kopplin, an attorney with Ogletree Deakins in Milwaukee.

"It should be noted that most exempt employees do not record hours worked, nor does the FLSA require that," Coleman said. "So, in offering future paid time off to exempt employees as a reward for working more than the normal expectation, there may be no records by which to measure the extra work."

In addition, the salary of an exempt employee is considered to compensate the employee for all hours worked—however few or many. An employer that offers comp time to exempt employees runs some risk of increasing its exposure for back overtime if the exempt classification is successfully challenged, he noted.

If allowing comp time among exempt employees, it's "a good idea to have clear communication with exempt employees about the circumstances under which they can receive comp time, and any rules or limitations that the employer is imposing on the use of such comp time," said Brett Coburn, an attorney with Alston & Bird in Atlanta.

Employers don't want too much of a "this-for-that" arrangement with exempt employees, which might jeopardize their exempt status.

'Comp Time' Loosely Defined

Sometimes employers refer to "comp time" to loosely refer to when a nonexempt employee works extra hours early in the workweek and then the employer lets the worker go home the same number of hours later in the workweek to avoid incurring overtime. That is generally allowed, noted Adriana Kosovych, an attorney with Epstein Becker Green in New York City.

"This is not true comp time as we normally think of it, because allowing the employee to move working hours around within a workweek is not the same as actually working hours beyond the overtime threshold, receiving no premium pay for that time and then taking time off in a different workweek to account for the overtime premium," she said.

However, in a state such as California that also requires overtime if an employee works more than a certain number of hours in a day, such "comp time" might not result in avoiding paying overtime, Coburn noted.

"Employers, especially smaller ones, often think that comp time is an easy way to save money while still recognizing the work of employees," said Steven Suflas, an attorney with Holland & Hart in Salt Lake City. But in the private sector, true comp time "does not exist for nonexempt workers."



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