Curious about comp time? Many managers are because this unique reimbursement option isn’t all that common and only applies to a select few employees.
In fact, if applied the wrong way, comp time can even be illegal and get your business in hot water with the IRS and the federal government.
But, if administered the right way — and to the right employees — there’s nothing to worry about. Comp time can even be a nice benefit you offer your team members for their hard work.
In this article, we discuss the ins and outs of this reimbursement method so you can decide for yourself whether comp time is right for your team and your business.
Table Of Contents:
What Is Comp Time?
Compensatory time off (or just comp time for short) is the practice of reimbursing employees for overtime hours by providing time off instead of the typical overtime pay required by the Fair Labor Standards Act (FLSA).
How exactly does comp time work? Let’s say, for example, that Sam works 50 hours in one week.
Instead of paying Sam the federally mandated time-and-a-half (or 1.5 times their regular wage rate) for the 10 hours over 40 they worked that week, you give them 10 hours off in another week as compensation for the overtime.
From your business’s point of view, that may sound extremely appealing for a variety of different reasons.
But, as we mentioned earlier in this article, comp time may be illegal in some cases, and, should you choose to use it, you may be setting your business up for hefty penalties and expensive lawsuits.
Take the time to research comp time laws — or consult with a labor attorney — before offering this type of compensation to your employees.
And, when doing your research, pay attention to these two important variables:
- Business type (e.g., whether you run a private, public, or government operation)
- Employee classification (e.g., non-exempt vs. exempt)
We’ll discuss the second variable — employee classification — and how it applies to your business in the next section.
Who Qualifies For Comp Time?
As we’ve stated several times already in this article, offering comp time to the wrong type (or classification) of employees is illegal.
So, who does qualify for comp time?
It all comes down to non-exempt versus exempt classification.
Comp Time And Non-Exempt Employees
According to the FLSA, a non-exempt employee in a private business is one who meets the following criteria:
- Paid hourly or (rarely) on salary
- Makes at least the federal minimum wage
- Has less responsibility than others (e.g., pressure washer, cleaner, lawn mower, etc.)
When you classify an employee as non-exempt, two things happen:
- They become eligible for overtime
- They become ineligible for comp time
Why are non-exempt employees ineligible for comp time?
Because you most often pay non-exempt employees on an hourly basis, the federal government views comp time as a way to get around paying them the overtime rate mandated by law.
In essence, the federal government views comp time as a way for businesses to avoid paying higher overtime rates. They’ve, therefore, made it illegal to give non-exempt employees comp time.
This fact highlights the importance of consulting an attorney about whether or not comp time applies to your business.
Comp Time And Exempt Employees
According to the FLSA, an exempt employee in a private business is one who meets the following criteria:
- Paid on a salary basis (not hourly)
- Makes at least $35,568 annually
- Has more responsibility than others (e.g., manager, assistant manager, etc.)
When you classify an employee as exempt, two things happen:
- They become ineligible for overtime
- They become eligible for comp time
Why are exempt employees eligible for comp time and not overtime?
Because, when you pay exempt employees on a salary basis, their annual compensation is set and doesn’t depend on how many hours they work.
So, instead of receiving overtime, your business can offer its exempt employees comp time as a “payment” of sorts for any hours they work over the regular full-time schedule.
That said, your business is not required to offer comp time to exempt employees if it chooses not to. Whether or not to offer comp time is solely up to the employer.
Those who do incorporate it into their pay structure often view it as a benefit (like health insurance or a 401k) that they can use to attract and retain employees.
If you choose to offer comp time to exempt employees, it’s essential to create policies to govern the process so that everything is managed properly.
It’s also a good idea to talk to an attorney familiar with your industry and the area in which it’s located before deciding to offer this type of reimbursement in your business.
Comp Time Versus Overtime
We mentioned in the Comp Time And Non-Exempt Employees section that the federal government views comp time as a way for businesses to avoid paying higher overtime rates.
How does comp time versus overtime affect your business? Here are two examples.
Remember Sam from earlier in this article? They worked 50 hours in one week, and, because you classified them as non-exempt, they’re due 10 hours of overtime.
For 40 of those hours, you would pay Sam their regular wage (e.g., $20/hour). But, for the other 10 hours, you would pay them at an increased rate.
That increased rate is typically time-and-a-half or, in this case, $30/hour ($20 x 1.5 = $30). So Sam’s total paycheck for the week would be 40 hours at $20/hour ($800) plus 10 hours at $30 ($300) for a total of $700.
That might not seem like much at first, but if Sam consistently works 10 hours of overtime every week, you would have to pay them an extra $14,400 annually ($300 overtime x 48 weeks).
Now, multiply that by the number of employees on your team, and you can see how the cost of overtime can quickly add up and affect your bottom line.
What makes comp time so appealing is that businesses can avoid those extra costs by giving employees time off instead of paying them.
So, if Sam worked 50 hours one week, with comp time, you could give them the following Wednesday and part of Thursday off and only pay them for the 40 regular hours they worked that week.
Doing so would have a significant impact on your labor costs — in Sam’s case, to the tune of $14,400 annually.
But remember, giving comp time to non-exempt employees is illegal and can open your business up to all manner of financial and legal penalties.
Comp Time Laws
The penalties for violating comp time laws can be extremely harsh. And it doesn’t matter if you did so knowingly or unknowingly — the federal government will still hold your business responsible.
- Fines up to $10,000
- Payment of back wages and liquidated damages (twice the amount of back wages owed)
- Payment of legal fees for employees if a lawsuit is successfully prosecuted
- Repeat offenders face jail time and civil money penalties up to $1,000 per infraction
- Additional fines for retaliating or discriminating against employees who file complaints or blow a whistle on wage and hour violations
It’s also illegal to ship goods your business produced while violating comp time laws, so it’s easy to see how complicated — and potentially disastrous — the situation can become when you fail to abide by comp time laws.
To prevent any issues, and keep your business compliant, be sure to talk to an attorney before considering comp time in your business.
Control Comp Time And Overtime With Inch
The best way to control comp time and overtime — and the potential penalties and expenses that come with them — is to incorporate a workforce management tool, like Inch, into your workflow.
We designed the Inch app with teams of all sizes in mind and included advanced features to make every manager’s job easier, including:
Our software even allows you to export timesheets for streamlined wage payment every time — comp time, overtime, or just regular work hours.
For more free resources to help you manage your business better, organize and schedule your team, and track and calculate labor costs, visit TryInch.com today.