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Common Misconceptions About Compensatory Time Off

It is a common practice for nonprofits to give an employee extra paid time off in lieu of overtime pay, if the employee works more than 40 hours in a week.  The employee enjoys the extra free time, and it does not cost the nonprofit any additional cash.  From everyone’s point of view it seems like a win-win – but is it?

It may surprise you to know that such compensatory time off is not permitted for non-exempt employees under the Fair Labor Standards Act (FLSA).  Under the FLSA, a non-exempt employee is entitled to pay equal to one and a half times the employee’s regular rate of pay, for each hour the employee works more than 40.  This right is in the statute and the employee cannot agree to waive his or her right to overtime pay.

The employer can manage the employee’s schedule to avoid having to pay overtime.  For example, suppose an employee worked eight hours on Monday, Tuesday and Thursday, and 12 hours on Wednesday.  To avoid having to pay overtime, the employer may allow the employee to work four hours on Friday, so that the employee works a total of 40 hours.  

In addition, a nonprofit can avoid paying overtime by requiring an employee to take paid time off in one week to offset overtime hours worked in another week, provided it is within the same pay period.   However, the paid time off must equal 1.5 times the number of hours worked in excess of 40.  For example, if the employer uses a two-week pay period, and an employee works 45 hours in week one, the employee must be given 7.5 hours of paid time off in week two of the same pay period to avoid paying overtime. Under this provision, the employee will be paid the same amount as if he or she worked two, 40-hour work weeks.

However, the relief offered can be illusory. For instance, if the employee works more than 40 hours in the second week of a two-week pay period, paid time off is not available because it would not fall within the same pay period.

There are different rules for exempt employees, whose compensation is not dependent on the number of hours the employee works.  If an employee is not subject to overtime pay, an employer may elect to provide additional paid time off to an employee who has worked long hours.  The employer is not obligated to provide comp time, and can impose any restrictions it wants on how, when and how much compensatory time off it will provide the exempt employee.  In addition, an employer is not required to pay an employee the cash value of such comp time if the employee leaves the nonprofit without using all the comp time.

With the new overtime rules going into effect December 1, 2016, it is especially important that nonprofit employers understand and properly implement these rules.  Otherwise, an employer may end up owing an employee overtime pay without meaning to do so.