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Employee Benefits Package

Employer's Guide to Special Employee Compensation Issues

Compensation & Benefits

Wage and hour laws are extremely complex and even the best intentioned employers can run afoul of the thousands of regulations that may apply. Federal and state laws dictate almost every aspect of employee compensation, and where federal and state laws differ, an employer must combine the requirements in the way that is most favorable to employees.

In addition to determining which employees are exempt and not exempt from minimum wage and overtime rules, you must be attuned to many other rules, all of which makes paying wages one of the most complicated areas of human capital management.

There are too many wage and hour issues to cover in a single article, but there are a few that tend to arise on a more frequent basis for private employers, and which are good to review. If you can spot the issue now and know that you will need to consult with experts for assistance, you’ve won half the battle.

4 special employee compensation issues

Compensatory Time Off

Compensatory Time Off (CTO) refers to employees being given time off in lieu of extra compensation or overtime pay. (CTO should be distinguished from makeup time, where employees are allowed to make up work time missed because of personal obligations.) With regard to exempt employees, CTO is not usually a problem since the employee is exempt from overtime pay in the first place. But employers should be cautious about using CTO and other wage and hour measures in ways that treat the employee as nonexempt because you do not want to endanger exempt status.

With regard to nonexempt employees in the private sector, the federal Fair Labor Standards Act (FLSA) generally does not allow CTO because an employer is not permitted to give time off in place of pay for overtime work. Rather, the FLSA allows an employer to regulate pay by controlling the hours an employee works. For example, if an employee on a 40 hour per week schedule actually works 41 hours in one week, the employer normally has the option of changing the next week’s schedule to 38.5 hours in order to keep the employee’s pay at the usual level. The 38.5 hour week accounts for the prior week’s premium pay (1 ½ hours pay for one hour of overtime).

CTO under state law can be much more complicated, particularly in states like California where there are very strict rules to be followed. There are only a few employers who can offer CTO and, even then, it can be fraught with problems. If CTO is permitted, it must be offered as overtime employee compensation at the regular rate of pay. That means that for each hour of overtime worked, the employee must receive CTO at the applicable overtime rate (i.e., no less than one and one half hours of CTO for the ninth hour worked in one work day).

Other rules apply, too. For example, some of the other requirements for CTO under California Labor Code Section 204.3 are:

  • The employee requests CTO, in writing, in lieu of overtime.
  • The employee is regularly scheduled to work no less than 40 hours in a workweek.
  • There is a written agreement for CTO before the work is performed.
  • Accrued CTO cannot exceed 240 hours.
  • If employee compensation is paid for CTO, it must be paid at the regular rate applicable at the time it is paid.
  • Accrued CTO must be paid out upon termination of employment.
  • Employees must be permitted to use CTO within a reasonable period after making the request to use it.
  • If requested by the employee, the employer must pay overtime employee compensation in lieu of CTO for any CTO that has accrued for at least two pay periods.

As you can see from this short summary, CTO can be a real challenge. And for government employers and employers who are subject to collective bargaining agreements, it can get even more complex.

Makeup time

Makeup time refers to when employees are allowed to make up work time they missed in order to attend to personal obligations. It is related to, but different than, CTO. Employers are not obligated to allow makeup time in the absence of written agreements (such as collective bargaining agreements, etc.) Also, keep in mind that makeup time is not a payment for overtime work. Instead, it is a very limited exception from daily overtime compensation requirements in states that permit it. And you must be sure to check your state’s laws to be sure makeup time is authorized and that you meet any particular requirements that apply.

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In some states, such as California, makeup time may be permitted in limited circumstances in which an employee wants to avoid a wage loss and not be required to use accrued vacation or sick time. In      summary, under California Labor Code Section 513, an employer can choose to allow makeup time for nonexempt employees when:

  • Work time is lost because of a personal obligation of the employee.
  • The employee makes a written request for makeup time before the makeup work is performed.
  • The makeup work is performed in the same workweek that the time was lost.
  • The makeup work does not result in work in excess of 11 hours in one day or 40 hours in one workweek.
  • A written request is made for each occasion in which makeup time is requested.
  • The employer approves the request.
  • The employer does not encourage or solicit an employee to request makeup time.

Unlike under some states’ rules, an employer is still required to pay overtime under the FLSA for makeup time if the makeup time means the employee worked more than 40 hours in one workweek.

Like CTO, makeup time can be a problem for employers and you can run afoul of overtime rules very quickly. So proceed with extreme caution.

Standby time

Questions regularly arise about whether an employee needs to be paid for standby time. And the answer generally depends on whether the time is controlled by the employer or employee. For example, if an employee is required to be near a work site, or be so close that they cannot effectively do what they want with their own time, the standby hours are likely considered to be compensable time and must be included for calculating overtime.

If an employee’s movements and time are sufficiently unrestricted so they can use the standby time for their own purposes, it likely is considered “uncontrolled” time. Uncontrolled standby time is not usually counted as time worked and therefore would not be compensable. But you are still required to pay for any time the employee does work during uncontrolled standby time. Even if you call the employee for a few minutes to ask a question, or require the employee to check in by phone during uncontrolled standby time, that time is work time and must be included for calculating overtime.

There are differences between how federal and state wage and hour laws define “hours worked,” so it is important that you are aware of potentially conflicting requirements for compensable standby time.

Tipped employees

Nonexempt employees under the FLSA must be paid at least the federal minimum wage. A tipped nonexempt employee (someone who customarily and regularly receives more than $30 a month in tips) also must be paid at least the federal minimum wage. But under the FLSA, an employer is allowed to count the tips actually received toward the minimum wage as long as the employer directly pays not less than $2.13 an hour. And if the combination of tips and the direct wage do not equal the federal minimum wage, the employer must pay the difference.

Under the FLSA, if an employer does elect to apply a portion of tips toward the minimum wage, the employer must:

  • Tell each tipped employee about the tip credit allowance (including amount to be credited) before the credit is used
  • Be able to show that the employee receives at least the minimum wage when direct wages and the tip credit allowance are combined
  • Allow the tipped employee to retain all tips, whether or not the employer elects to take a tip credit for tips received, except to the extent the employee participates in a valid tip-pooling arrangement

Many of the states handle minimum wage for tipped employees differently than the FLSA. There are several states, for example, that do not allow employers to credit any portion of the tips toward the hourly minimum wage. Some of those states are Alaska, California, Minnesota, Montana, Nevada, Oregon, and Washington. And in those states employers must pay the higher minimum wage under federal or state law.

Other states may allow tip credit toward wages but the amount may be lower. It is important that employers check each state’s requirements and are sure to comply with federal and state law, when combined.

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