Compensatory Time Off: What It Means for Employers

What it means in practice

The Fair Labor Standards Act (FLSA) generally requires covered, nonexempt employees to receive overtime at not less than one and one-half times their regular rate for hours over 40 in a workweek (DOL Fact Sheet #23). Section 7(o) creates a narrow alternative for public employers, defining compensatory time as "hours during which an employee is not working, which are not counted as hours worked during the applicable workweek or other work period for purposes of overtime compensation, and for which the employee is compensated at the employee's regular rate" (29 U.S.C. 207(o)(7)(B)). The two terms are interchangeable (29 CFR 553.22(a)).

Who may offer it. Part 553 defines a public agency as a state, a political subdivision of a state or an interstate governmental agency (29 CFR 553.1). DOL Fact Sheet #7 says the public agency definition "does not extend to private companies that are engaged in work activities normally performed by public employees," so a contractor running a city service cannot use section 7(o). Federal agency employees follow separate rules administered by the Office of Personnel Management (OPM), covered below.

Why private employers generally cannot use it. Section 7(o) authorizes comp time only for the public agencies it names. The DOL Field Operations Handbook says the FLSA "takes a single workweek as its standard and permits no averaging of hours over two or more weeks," and that overtime compensation "must be paid in cash and normally at the time of the regular pay period" and "may not be accumulated to be paid at any time subsequent thereto" (FOH 32j16a). A 1986 DOL opinion letter (FLSA-204) put it directly: where overtime premium pay is due, substituting comp time off "will not satisfy the requirements of FLSA." Fact Sheet #23 adds that the overtime requirement may not be waived by agreement, and overtime is generally paid on the regular payday for the period in which the workweek ends (29 CFR 778.106). The Texas Workforce Commission calls private-sector comp time "an extremely frequent misconception."

The agreement requirement. A public agency may substitute comp time only under an agreement or understanding reached before the work is performed (29 CFR 553.23(a)). Where employees have a representative, the agreement is with that representative through a collective bargaining agreement, memorandum of understanding or other oral or written agreement. Where they do not, it is with the individual employee; it need not be in writing, but a record of its existence must be kept, and the agency need not offer comp time to every employee (553.23(c)). It may be an express condition of employment if the employee knowingly and voluntarily agrees and is told the comp time may be preserved, used or cashed out consistent with section 7(o). A notice that comp time will be given creates a presumed agreement for any employee who does not object, but the choice must be made "freely and without coercion or pressure." A 2005 DOL opinion letter (FLSA2005-13NA) said personnel regulations, orientation and notice at hire can meet this standard. Agreements may also mix comp time and cash, such as one hour of comp time plus one-half the regular rate in cash per overtime hour, as long as time and one-half is maintained (553.23(a)(2)).

Which cap applies. The 480-hour cap covers employees whose work regularly involves public safety (law enforcement, fire fighting and related activities), emergency response (dispatching emergency vehicles and personnel, rescue work and ambulance services) or seasonal activity (29 CFR 553.24). The work performed controls, not the job title: a maintenance worker who fights fires in an emergency stays under the 240-hour cap, while a snowplow operator with a long peak season may qualify for the higher one. An employee who transfers from a 480-hour position to a 240-hour position may carry over the balance, but must be paid cash for later overtime until the balance falls below 240 hours. Once an employee reaches the applicable cap, additional overtime hours must be paid in cash (29 U.S.C. 207(o)(3)(A)).

Using comp time. An employee who requests to use accrued comp time must be allowed to use it "within a reasonable period" if doing so does not "unduly disrupt" the agency's operations (29 U.S.C. 207(o)(5)). Reasonableness turns on customary practices such as peak workloads and available substitutes, unless an agreement defines it (29 CFR 553.25(c)). "Mere inconvenience to the employer is an insufficient basis for denial"; denial requires a reasonable, good-faith expectation of an unreasonable burden on services to the public (553.25(d)). Comp time "cannot be used as a means to avoid statutory overtime compensation," and employees must not be coerced into accepting more comp time than the agency can realistically grant (553.25(b)). Hours of comp time used are not hours worked when counting overtime (see hours worked), and pay for comp time used may be excluded from the regular rate in a week with cash overtime (553.26(c)).

Cashing out. An agency may pay cash for overtime instead of comp time in any workweek, and may freely substitute cash for comp time in whole or in part (29 CFR 553.26(a)). Payment for accrued comp time "may be made at any time" at the regular rate the employee earns when paid (553.27(a)). At termination, unused comp time is paid at no less than the higher of the average regular rate during the 3 years immediately before termination or the final regular rate; if employment lasted less than 3 years, the average uses the rates in effect during that period (553.27(b) and (c); DOL Fact Sheet #8). This payout belongs in offboarding.

"Other" comp time. Time earned for hours that are not FLSA overtime, such as hours over 8 in a day, over 35 in a week under a local ordinance, or under an employer policy, is "other" compensatory time. It may be earned at any rate, including straight time, and the section 7(o) limits do not apply (29 CFR 553.28). If both kinds share one bank, DOL says the agency cannot deny use of FLSA comp time because they are commingled (FLSA2004-24NA).

Example: reaching the cap. A Remindax illustration with assumed numbers: a city clerk under the 240-hour cap has 237 hours banked and works 46 hours in a workweek. The 6 overtime hours would earn 9 hours of comp time, but only 3 more hours fit under the cap, which covers 2 overtime hours. The other 4 overtime hours must be paid in cash at time and one-half (29 U.S.C. 207(o)(3)(A)).

Example: termination payout. A Remindax illustration: an employee leaves with 40 hours of unused comp time. If the average regular rate over the last 3 years was $24.00 and the final rate is $26.00, the payout is at least 40 x $26.00 = $1,040. If the employee had moved to a lower-paid job with a final rate of $22.00 and a 3-year average of $23.00, the payout is at least 40 x $23.00 = $920 (29 CFR 553.27(b)).

The private-sector "time off plan." The Field Operations Handbook describes a time off plan that lets an employer keep pay constant across a pay period that contains more than one workweek. The employer "lays off the employee a sufficient number of hours during some other week or weeks of the pay period" so that the fixed pay covers all FLSA compensation due "for each workweek taken separately" (FOH 32j16b). It is control of hours, "not payment for overtime in time off," cannot be applied to an employee paid a fixed salary for all hours worked, and overtime due the employee may not be carried beyond the pay period (FOH 32j16a and 32j16c).

Example: time off plan. A Remindax illustration: an hourly employee earns $20 and is paid $1,600 every two weeks for a standard 40-hour week. In week one the employee works 44 hours, earning 40 x $20 plus 4 x $30, or $920. In week two the employer schedules 34 hours, earning $680. The two weeks total $1,600, and each workweek was paid in full on its own terms. The 4 overtime hours were offset by 6 fewer hours in the same pay period, not banked for later.

Payroll taxes. IRS Publication 15 (2026) says overtime compensation is subject to Social Security, Medicare, FUTA and federal income tax withholding, and that for tax years 2025 through 2028 individuals may deduct up to $12,500 ($25,000 if married filing jointly) of qualified overtime compensation, the premium portion of FLSA-required overtime. IRS FAQ Q18 (FS-2026-13) says section 7(o) comp time becomes qualified overtime when paid as comp time taken or cashed out, not when earned, at hours times the applicable rate divided by three. A Remindax illustration: a county worker cashing out 30 hours at $30 at termination is paid $900, of which $300 is qualified overtime compensation. The FAQ says it must be separately reported on the Form W-2 (box 12, code TT) to be claimed.

Federal employees. OPM's fact sheet says federal agencies may approve comp time for irregular or occasional overtime at 1 hour per overtime hour; it must be used by the end of the 26th pay period after it was earned, or an FLSA-nonexempt employee is paid at the overtime rate in effect when earned.

Exempt employees. Overtime rules do not apply to employees who meet an exemption (see exempt vs. non-exempt). Extra compensation for an exempt employee's work beyond the normal workweek "may include paid time off" without losing the exemption, if the minimum salary is guaranteed (29 CFR 541.604(a)). Like paid time off (PTO), the FLSA does not require it (DOL FLSA FAQ). Salaried non-exempt employees remain entitled to cash overtime.

Where states differ. Two examples from official state pages: Oregon's Bureau of Labor and Industries says "only government agencies are permitted to offer compensatory time in lieu of overtime"; a private employer may schedule 35 hours the week after a 45-hour week, but must still pay the 5 overtime hours. Washington's Department of Labor and Industries (Publication F700-150-000) says businesses covered by federal law cannot enter into comp-time agreements, while a business not covered by federal law may be able to offer comp time under state policy. Check your own state agency; DOL lists state labor offices.

Recordkeeping. For each employee under section 7(o), the agency keeps the basic FLSA payroll data required by 29 CFR 516.2 plus comp time hours earned each workweek or work period, hours used, hours paid in cash with the amount and date, and any collective bargaining agreement or written understanding about comp time, or a record of an unwritten one (29 CFR 553.50). FLSA payroll records are kept at least 3 years and time cards at least 2 years (29 CFR 516.5 and 516.6).

Liability. An employer that violates the overtime rules is liable for the unpaid overtime compensation and an equal amount as liquidated damages, and the action may be brought against any employer, including a public agency (29 U.S.C. 216(b)). For a specific situation, check the cited source or ask the Wage and Hour Division or a qualified professional.

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