Compensatory leave, or “comp time”, is when you give employees paid time off instead of paying them overtime wages for hours worked beyond 40 in a week. It sounds practical. Your shift manager works 50 hours this week, so instead of paying time-and-a-half for those 10 extra hours, you give her 15 hours of paid time off to use later. Everyone wins, right?
Wrong. For most private sector businesses, comp time is illegal.
The Hard Truth About Comp Time
The Fair Labor Standards Act (FLSA) requires that non-exempt employees receive overtime pay at one and a half times their regular rate for all hours worked over 40 in a workweek. The law doesn't give you the option to substitute time off for cash. Period.
This catches many restaurant owners, retail managers, and service business operators by surprise. Comp time seems fair and employees sometimes prefer it. But the Department of Labor doesn't care about preference. The rule exists to prevent employers from avoiding overtime costs by promising time off they might never actually grant.
Who Can't Receive Comp Time
Any non-exempt employee in a private sector business cannot legally receive comp time instead of overtime pay. This includes:
- Hourly restaurant workers (servers, line cooks, dishwashers)
- Retail sales associates and cashiers
- Warehouse workers and delivery drivers
- Hotel housekeepers and front desk staff
- Salon stylists and spa employees
- Most shift supervisors and assistant managers
If your employee is entitled to overtime pay, you must pay them in cash, not time off. The fact that they agree to comp time doesn't matter. The law isn't negotiable.
Who Can Receive Comp Time
Government employees: Federal, state, and local government employers can offer comp time to their employees under specific rules. This is why your friend who works for the city can take comp time but you can't offer it at your coffee shop.
Exempt employees: Salaried exempt employees aren't entitled to overtime pay anyway, so giving them time off for extra hours worked isn't a legal issue. It's just company policy, not comp time in the legal sense.
If your restaurant's salaried general manager works extra hours during a busy week and you let him take Friday off, that's fine. He's exempt from overtime requirements. But your hourly assistant manager who puts in 50 hours must be paid time-and-a-half for those 10 extra hours.
Why Comp Time Is So Problematic
You might wonder why the law is so strict. Here's why comp time creates problems:
Employers control when time off is taken: You might promise comp time but never actually let the employee use it during busy seasons. Overtime pay can't be delayed.
Businesses can go out of business: If your restaurant closes, earned overtime pay is a debt you owe. Promised comp time evaporates.
Calculation confusion: Comp time at time-and-a-half means 10 overtime hours equals 15 hours of comp time. Tracking this accurately across multiple employees, pay periods, and usage creates errors.
Wage theft: Even well-intentioned employers sometimes "forget" about promised comp time or dispute how much was earned. Cash overtime creates a clear record.
What Happens If You Use Comp Time Illegally
The consequences are serious:
Back pay: You'll owe employees the overtime pay they should have received, plus an equal amount in liquidated damages (double the owed wages).
Department of Labor investigation: The DOL actively investigates comp time violations. Complaints from even one employee can trigger an audit of your entire business.
Legal fees: Employees can sue for unpaid overtime, and they'll likely win. You'll pay their attorney fees on top of back wages.
A Florida heating, ventilation, and air conditioning business ended up paying over $100,000 in back wages, penalties, and legal fees after one DOL investigation found the company awarded employees the number of overtime hours worked as comp time rather than paying an overtime rate.
Legal Alternatives to Comp Time
You still have options if you want to give employees flexibility without violating wage laws:
Pay Overtime, Then Offer PTO
Pay the overtime as required, then give additional paid time off as a separate benefit. Example: Your warehouse employee works 50 hours. You pay her regular wages for 40 hours plus time-and-a-half for 10 overtime hours (15 hours of overtime pay). Then, as a bonus, you give her 8 hours of PTO she can use later.
This is legal because you're meeting your overtime obligation first. The PTO is a separate, discretionary benefit.
Adjust Future Schedules Within the Same Workweek
If an employee works 10 hours on Monday, you can schedule her for only 6 hours on Tuesday to keep her weekly total at 40 hours. This avoids overtime completely.
Key requirement: The schedule adjustment must happen within the same workweek. You can't make someone work 50 hours this week and 30 hours next week to "even it out." Each workweek stands alone for overtime purposes.
Offer Flexible Scheduling to Exempt Employees
For salaried exempt employees, you can trade time freely. If your restaurant's exempt manager works a double shift on Saturday, let her take Monday off. Since she's not entitled to overtime anyway, this is just good management practice.
Create Genuine Paid Time Off Policies
Instead of promising comp time, create a robust PTO policy that gives all employees paid time off they can use when needed. Employees appreciate predictable benefits more than vague promises of future comp time.
Common Comp Time Mistakes
"My employee prefers comp time!"
Employee preference doesn't override federal law. An employee can't waive their right to overtime pay.
"We agreed to this in writing."
Signed agreements to accept comp time instead of overtime are void and unenforceable. The FLSA protects employees even from their own agreements.
"We've always done it this way."
Past practice doesn't legalize current violations. In fact, it means you've been violating the law for years and could owe substantial back wages.
"We only offer it occasionally."
Frequency doesn't matter. Even one instance of comp time instead of overtime pay is illegal for non-exempt employees.
Tracking Time for Compliance
Avoiding comp time problems starts with accurate time tracking. You need to know exactly how many hours each employee works every week. Breakroom's time tracking features help you monitor hours in real-time, preventing overtime surprises and ensuring accurate pay.
When your retail store's cashier approaches 40 hours by Thursday, you need to know it before scheduling her for a full shift Friday. Either limit her hours or budget for overtime pay. Either way, you're complying with the law.
The Bottom Line
Comp time feels practical and many employees like it, but it's illegal for non-exempt employees in private businesses. The penalties for violations are severe enough that it's never worth the risk.
Pay overtime as the law requires. If you want to give employees extra time off, create generous PTO policies or bonuses. But don't swap time off for overtime pay. It's one of the clearest, most enforced wage and hour violations.
When in doubt, remember: if your employee is entitled to overtime pay, they must receive it in cash on their next regular payday. Anything else is a violation waiting to be discovered.
