Compensatory time (“comp time”) is paid time off (PTO) that employers give employees for any additional work done. Under specific rules, it can replace overtime pay.

For example, an eligible state or local government employee who works 44 hours in a standard 40-hour workweek earns four hours of overtime pay at time-and-a-half, equivalent to six hours’ pay at their normal rate. With a valid compensatory time agreement, they can receive six hours of PTO instead.

Private employers can’t offer PTO instead of overtime wages to employees, even if they’re salaried. However, some employers do offer extra leave as a benefit to employees who aren’t legally entitled to overtime pay.

Read on to learn what rules apply to you. If you need to offer compensatory time, find out how you can calculate it, and if you don’t need to, see what you can offer employees instead.

Is compensatory time legal?

Yes, but whether you need to offer it depends on what type of employer you are and whether the worker is legally entitled to overtime pay.

The Fair Labor Standards Act (FLSA) is the federal law that sets minimum wage and overtime requirements. Employees covered by its overtime requirements are called nonexempt, while those who aren’t are called exempt.

Here’s how compensatory time applies to different groups:

Employee category	How comp time applies
Nonexempt employee at a private business, whether hourly or salaried	You must pay overtime wages. Any extra paid leave must be offered in addition.
Properly exempt employee at a private business	You can offer extra paid leave for additional work as an optional benefit.
Eligible nonexempt employee at a state or local public agency	You can offer comp time instead of cash overtime under certain conditions.

Can private employers offer comp time instead of overtime pay?

Not if the employee is legally entitled to overtime pay. Even if they ask you for time off instead, you have to pay the overtime wages they’re owed.

Employees can’t sign away their entitlement with a written agreement, as confirmed by the Department of Labor (DOL). Alan Heimlich, President and Attorney at Heimlich Law, backs this up: 

“The FLSA regulations regarding overtime compensation are mandatory and cannot be modified by an agreement between the employer and employee.”

Some employers offer time off for extra work as “flex time,” “banked time,” “bonus time,” or “PTO.” Some offer it informally, as a “thank you” for additional work. Whatever you call it, you must still pay any overtime wages the employee is owed. 

Can salaried employees receive comp time?

Yes, but paying someone a salary doesn’t automatically make them eligible for compensatory time. Salaried employees can be exempt or nonexempt.

Here are the rules for private businesses. The next section has the rules for eligible state and local public agency employees.

To know whether extra work requires overtime pay, first, check if the employee is exempt from overtime rules. The rules can differ depending on the work they do. For example, managers and people doing work that requires advanced specialist knowledge must meet different tests for exemption. 

These tests generally cover job duties, how they’re paid, and how much they earn. Check each employee against the relevant DOL exemption requirements. 

For exempt employees:

• Extra paid leave is an optional benefit. You can offer it for additional work, but the FLSA doesn’t require it. 
• You must keep paying their required salary. Even if you offer leave, it’s an extra benefit and not a replacement of their guaranteed salary (see 29 CFR 541.604 for the rules on offering extra compensation, including paid leave).

For nonexempt employees:

• Pay all required overtime wages even if you pay them a salary.
• Extra paid leave can’t replace overtime wages. Any compensatory time you offer must be on top of all the pay you owe them.

The rules you apply to compensatory time, like whether unused hours expire or get paid out, depend on state laws, employment agreements, and your own policy.

How does comp time work for state and local government employees?

Eligible nonexempt employees of state and local public agencies, including qualifying interstate government agencies, can earn PTO instead of cash overtime. 

This section covers state and local arrangements. The rules for federal employees differ. These are detailed in the Office of Personnel Management’s compensatory time guidance.

Agreeing on comp time before anyone works overtime

You must agree to offer compensatory time before an employee works overtime. Make that agreement either with the employee directly or, if staff have a representative, with that person instead.

It’s best to write it down so both sides know what they’ve agreed to. An agreement can be unwritten, but you must keep a record, like a dated note confirming the arrangement, to comply with 29 CFR 553.23. On employees’ part, they must agree to receive compensatory time instead of overtime pay without being pressured into it.

Earning comp time and reaching the balance cap

Eligible employees earn at least 1.5 hours of compensatory time for each overtime hour worked. Those hours build up until the employee takes the leave or receives a cash payout.

There’s a limit to how much unused compensatory time they can build up, with the cap depending on the type of work:

Type of qualifying work	Maximum unused comp time balance
Most eligible state/local public agency work	240 hours
Public safety, emergency response, or qualifying seasonal work	480 hours

Track each person’s balance as they earn and use leave. Under the DOL’s state and local government guidance, the following rules apply:

• Employees can earn more than these amounts over a year, provided their unused balance stays within the cap.
• Taking leave reduces the balance and makes room to earn more.
• Once an employee reaches the cap, you must pay for extra overtime in cash until their compensatory time balance drops below the limit.

Using comp time

Employees must be allowed to use their compensatory time within a “reasonable period,” unless their absence would “unduly disrupt” the agency’s work. Inconvenience alone isn’t enough to deny their time off request.

To refuse a request, you must reasonably expect the absence to put excessive strain on the agency’s ability to provide services to the public. 

What counts as a reasonable period depends on:

• Normal work schedules
• Expected busy periods
• Emergency staffing needs
• Whether qualified staff are available to cover the absence

In the 2004 court case of Beck vs. City of Cleveland, the judgment quotes a Senate report’s example of a Maine snowplow operator requesting 40 hours of compensatory time.

The report noted that if the operator took that time off in February, it might badly disrupt the agency’s snow-clearing services even if they requested the leave several months in advance. This gives the agency a valid reason to refuse the request. But if they made the same request in June, the absence wouldn’t normally cause a disruption.

Receiving a payout

If someone leaves their job with unused compensatory time in their balance, the agency must pay them for the remaining hours. 

According to 29 CFR 553.27, the rate must be at least the higher of:

• Their final regular rate of pay.
• Their average regular rate over the last three years of employment. If they worked there for less than three years, the agency must use the average regular rate over the duration of their employment.

Edward Hones, Owner at Hones Law, warns that agencies frequently get both the balance caps and final payouts wrong. 

“I most often see agencies exceed the statutory accrual caps, or fail to pay out accrued comp time correctly upon an employee’s separation, both of which create real liability.”

How do you calculate compensatory time?

To calculate compensatory time, multiply the eligible overtime hours by 1.5:

Let’s say an eligible nonexempt employee of a local government agency works 44 hours in a standard 40-hour workweek. They already have a valid compensatory time agreement and enough room below their cap to receive time off.

Here’s how you would calculate it:

• Overtime worked: 44 − 40 = 4 hours
• Comp time earned: 4 × 1.5 = 6 hours of PTO
• Cash overtime instead of comp time: If their regular rate is $24 an hour, 4 × $24 × 1.5 = $144 in overtime wages, on top of their pay for the first 40 hours

For simplicity, we’ve assumed that the employee receives a straightforward hourly rate, with no bonuses or other additional compensation affecting the regular rate.

A nonexempt employee working the same hours at the same rate for a private business must receive the overtime pay in addition to any compensatory time. Their employer can’t replace that $144 with six hours of leave.

What can private employers offer instead?

You can give employees time to rest after extra work while still paying any overtime wages they’re owed. Here are three ways to do that:

1. Pay overtime and offer additional leave

Pay a nonexempt employee the overtime wages they’re owed plus extra paid leave, then agree on when they can take the leave. 

Keep notes of the leave you offered along with the extra hours worked and wages paid. The records should show that you paid all overtime wages owed and gave the leave as an extra benefit. 

2. Adjust upcoming hours within the same workweek

If someone works two extra hours early in the week, you could shorten a shift later that week by two hours to keep their total within 40. For example, a retail employee who stays late on Monday to finish a stock count could leave two hours early on Friday.

Doing this can help you avoid overtime hours under standard federal guidelines. But note that daily overtime rules, scheduling requirements, and employment agreements may still apply.

Also, you can’t average hours across different weeks. Under 29 CFR 778.104, you must calculate overtime for each workweek on its own. So someone working 45 hours one week and 35 the next is still owed five hours of overtime pay for the first week.

3. Create an extra-leave policy for exempt employees

Give exempt employees extra paid leave after a demanding week or a longer project. Be clear on:

• Eligibility: How they earn that leave
• Approval processes: Who they need to get approval from
• Use: When they can take it
• Expiry: What happens to unused compensatory time when someone leaves the business 

If these conditions aren’t clear, employees may expect time off that you hadn’t intended to offer.

Before putting the policy in place, check the terms against state laws and employment agreements.

What records should employers keep?

Under 29 CFR 553.50, public agencies offering compensatory time must keep details of:

• Compensatory time earned and used each workweek or applicable work period
• Hours exchanged for cash, how much was paid, and when
• The compensatory time agreement, or a record confirming it exists if it wasn’t written down

Updating each person’s balance as they earn, use, or cash out hours lets you see how close they are to their cap. You can then budget for additional overtime that must be paid in cash while their balance is at the limit.

Contributors 

• Alan Heimlich, President and Attorney, Heimlich Law
• Edward Hones, Owner, Hones Law