Under the Fair Labor Standards Act, ("FLSA") compensatory time is statutorily prescribed for governmental-entity employees.  29 U.S.C. 207(k). Generally, compensatory time is impermissible in the private sector.  The US Department of Labor (“DOL”), however, does allow the use of so-called “time-off plans.”  Time-off is very similar to compensatory time but involves leave taken during the same pay period.  Time-off plans are only allowed under the following conditions:

1) The employee must get time off at time and one-half (1 ½) for all hours over forty (40) worked in a week; and

2) The employee must take the compensatory time off during the same pay period in which it was accrued.

Dunlop v. New Jersey, 522 F.2d 504 (3d Cir. 1975), vacated on other grounds, 427 U.S. 909 (1976); Wage Hour Opinion No. 913 (December 27, 1968) (employer may not credit an employee with compensatory time even at time and one-half rate if taken subsequent to the pay period in which the overtime is earned).

For example, an employee who works fifty (50) hours the first week of a biweekly pay period can take off fifteen (15) hours in the second week and, accordingly, only work twenty-five (25) hours during the second week without the cash payment of any overtime.  If the fifty (50) hour week occurs in the second week of the pay period, then the overtime premium must be paid in cash.

It appears that an employer can require that an employee accept compensatory time in lieu of being paid cash overtime provided the boundaries of the individual pay period are not exceeded. The US DOL has approved, by Opinion Letter, a procedure by which an employer could lay off an employee for a fixed number of hours in the second week of the pay period in order to offset the compensatory time earned in the first week of the pay period. 

In another Opinion Letter, the DOL held that the FLSA does not prohibit an employer from maintaining employee salaries at a constant level by controlling the number of hours worked; approving “layoff” concept in second week of a bi-weekly pay period.  By analogy, an employer could “order” an employee to take compensatory time in the second week of the pay period, as opposed to being required to pay cash overtime, even if the employee preferred to be paid in cash.

The kicker for employers is that if they allow private sector employees to bank overtime and the DOL comes in, albeit for an unrelated reason, and discovers that, the agency will deem it a violation and order the employer to pay the employees their “overtime.”  The DOL may also (and probably will) impose penalties for late payment of wages and/or improper payment of overtime.