In fiscal year 2024, the US Department of Labor’s Wage and Hour Division recovered more than $273 million in back wages and damages for nearly 152,000 workers nationwide. Wage and hour violations can often stem from information overload around complex federal rules, including compensatory time-off policies.
What you’ll learn
What you’ll learn
Updated: September 2, 2025
Key takeaways
- Under federal law, private employers generally cannot offer comp time to nonexempt employees
- Public sector employers can offer comp time, but must follow strict guidelines
- Clear written policies help avoid costly violations that can result in penalties and back-wage claims
- Research your local regulations as state laws may impose stricter requirements than federal rules
Comp time sounds appealing. Employees get flexible time off instead of overtime pay, and you save money on labor costs. But federal law can make this arrangement tricky for some private employers.
This guide explains when comp time is allowed, what alternatives exist for private businesses, and how to create a compliant comp time policy that works for everyone.
What comp time is and who it applies to
Comp time lets eligible employees earn paid time off instead of receiving overtime pay for extra hours worked. For every overtime hour worked, employees typically earn 1.5 hours of compensatory time.
Public-sector employees
Government workers can participate in comp time arrangements under specific conditions. As long as they follow strict federal guidelines, public employers can offer comp time instead of time-and-a-half pay.
Private-sector employees
The Wages and Fair Labor Standards Act (FLSA) generally prohibits private employers from offering comp time instead of overtime pay to nonexempt employees. Your hourly workers must receive overtime compensation in their next paycheck.
Private employers can offer flexible time arrangements to salaried employees who are exempt from overtime requirements. But this isn’t technically “comp time” under federal law.
When comp time is allowed under the FLSA
The FLSA allows comp time for public-sector employers, but with tight restrictions. Government agencies can offer compensatory time off if they have a collective bargaining agreement or written agreement with employees.
These compensatory time off guidelines must be followed for public-sector comp time programs:
- Employees can’t exceed comp time accrual limits of 240 hours (480 hours for public safety workers). Once they hit the maximum, they must receive overtime pay for additional overtime hours
- Employers must pay out unused compensatory time balances when employees leave. The pay rate for payout is either the employee’s current hourly rate or the regular rate when they earn the time, whichever is higher
- Employees can request the use of accrued comp time whenever they want. Employers can only deny requests if granting the time off would “unduly disrupt” operations
Private employers face entirely different rules. The FLSA requires overtime pay for nonexempt employees who work more than 40 hours per week.
Legal alternatives for private employers
A 2025 Gallup study found that 41% of US employees have little or no control over their work schedules. Smart business owners are finding legal ways to offer more flexibility.
Flexible scheduling for exempt employees
Salaried employees who meet FLSA exemption requirements don’t earn overtime. You can offer these workers flexible time arrangements without violating federal law.
Create policies that let exempt employees adjust their schedules after busy periods. For example, if your marketing manager works extra hours during a product launch, they can take equivalent time off later. It can make good business sense to start with a trial period to test how these arrangements work in practice.
Paid time off banks
Combine vacation, sick, holiday time, and personal time into one PTO bank. An Employee Benefit Research Institute survey found that 31% of workers want more flexibility in their benefits choices, while another 31% specifically want to convert paid time off into other benefits.
Scheduling adjustments within the workweek
Adjust daily schedules within the same workweek to avoid overtime. If an employee works 10 hours on Monday, they can work six hours on Tuesday. This strategy only works within a single workweek and must be calculated on an hourly basis.
How to build a comp time policy that protects your business
Even if you’re unable to offer traditional comp time, clear policies around scheduling flexibility can help to avoid confusion and prevent legal issues from arising. A well-designed comp time policy addresses eligibility, procedures, and compliance requirements.
Key components of a clear comp time policy
Start by defining which employees are eligible for flexible arrangements. Your compensation time policy should address the following:
- Eligibility requirements based on job classification and exemption status
- Approval procedures for flexible scheduling requests
- Documentation requirements to track schedule adjustments
- Maximum time limits for using flexible arrangements
Include specific calculation methods for any flexible time programs. Address what happens when employees leave your company.
How to communicate comp time policies to employees
In some cases, workers don’t understand the difference between salary vs. hourly pay classifications. The first step is to explain who qualifies for different types of flexibility.
What does this include? Hold training sessions using real examples. Put everything in writing. Directly address common misconceptions, such as private-sector workers expecting the comp time arrangements they’ve heard about from friends in government jobs.
Did you know? An OnPay small business survey found that over 25% of small business owners include PTO when building out a company perks program?
After reading about comp time, get more insights you can use to grow your business in our full report.
Common pitfalls for employers to avoid
The biggest mistake is assuming all comp time arrangements are legal. Don’t try to save money by offering time off instead of overtime pay to hourly workers. This is a no-no and violates the FLSA.
Avoid unclear policies that blur the lines between legitimate scheduling flexibility and illegal comp time substitution. Your compensatory time off policy should explicitly state which employees are covered.
Recordkeeping mishaps create additional compliance risks. Track all schedule adjustments, approval dates, and time usage. Don’t forget about state law requirements. Some states have stricter overtime rules than federal law.
Comparing comp time and overtime pay
In an October 2024 Pew Research Center survey, 46% of workers who work from home at least sometimes indicated they would be “very or somewhat unlikely” to stay if their employer no longer allowed remote work. Flexibility matters to today’s workforce.
Comp time gives employees control over their time off. Double-time pay provides immediate financial compensation but doesn’t offer the same flexibility.
From an employer’s perspective, comp time can reduce the immediate impact on cash flow for public employers. Private employers must immediately pay overtime premiums.
The administrative burden differs significantly. Comp time requires careful tracking of accrued hours, usage deadlines, and payout calculations. Straight-time pay plus overtime premiums involve more straightforward calculations.
How comp time impacts payroll and taxes
How does this come into play when paying employees? Comp time creates complex payroll scenarios. Accrued comp time appears as a liability on your books. When employees use comp time, you pay their regular wages without receiving productive work hours.
This affects your labor cost calculations and budgeting processes. Plan for these payments, even though they don’t align with current productivity levels.
Comp time payouts for departing employees count as wages subject to all normal payroll taxes. Some states require comp time payouts at premium rates.
“OnPay keeps adding HR features that make my life easier – like PTO requests, approvals, and tracking right in the app. After a negative PEO experience, we wanted outside payroll and benefits support with customization flexibility. I love OnPay’s simple, clear fee structure with no hidden fees. It’s a fantastic platform!”
— Annie Eaton, Futurus
State-specific rules to watch for
Federal law sets the baseline, but states can impose stricter requirements. For example, California requires overtime pay for hours worked beyond eight in a single day, not just beyond 40 per week.
Alaska and Nevada have similar daily overtime requirements that affect flexible scheduling programs.
Research your state’s overtime laws before implementing any flexible scheduling policies. What’s legal under federal law may violate state requirements.
Next steps: Building a compliant comp time strategy
Smart compensation planning begins with understanding what’s legal for your business type and what makes the most sense for your employees. Public employers have more comp time options than private companies, but both can offer meaningful flexibility within legal boundaries.
The key is to focus on creating clear policies that work for your specific situation. Exempt employees can benefit from flexible scheduling arrangements. On the other hand, hourly workers need consistent overtime pay, but they might also appreciate other forms of schedule flexibility.
Consider consulting with an employment attorney to review your policies. The cost of professional guidance is minimal compared to potential penalties for violations.
And keep in mind that OnPay offers online payroll solutions to help you comply with complex wage and hour requirements while offering the flexibility your team needs. Our tools automatically calculate overtime pay, track flexible scheduling arrangements, and maintain the necessary documentation for compliance audits. If you have any questions, our team would love to hear from you!