What Employers Should Know About Compensatory Time Off

By Barrie Gross, Esq.

For AllBusiness.com

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 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. Here we will address one of those more common issues.

If you can try to spot your company's particular concerns now and understand that you will need to consult with legal and other experts for assistance, you've already won half the battle.

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 big issue if the person is properly classified. That’s because 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. Under the FLSA, employees must be paid for all time worked and employers are not permitted to give time off in place of pay. Rather, the FLSA allows an employer to regulate compensation by permitting the employer to control 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. Many states have requirements about such issues as written agreements with employees, limits on CTO accruals, and employee requests for CTO payout (to name just a few). Importantly, you must remember that if CTO is permitted, it must be offered as overtime 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 for pay, i.e., no less than one and one half hours of CTO for each hour of overtime in one day and/or in one week.

If you are considering offering CTO to non-exempt employees, be sure to work closely with your human resources department or with legal counsel to review your specific situation. Compliance is complicated and you’ll be glad for the help.