The Fair Labor Standards Act (FLSA), administered by the Department of Labor, requires that you pay your employees overtime pay if they work more than eight hours a day or 40 hours per week. Under certain statutory circumstances, you can pay your employees compensatory time in lieu of overtime, but it also must be awarded at the rate of time and one-half the employees' rate of pay, as required of overtime pay.
Substitution of Overtime Pay
According to FLSA, you must pay workers cash compensation for overtime hours worked unless you are a public entity defined as a state, an interstate governmental agency or a political subdivision of the state. If you qualify, you may substitute compensatory time for cash overtime, paid at a rate of time and one-half the employee's regular rate of pay, subject to certain restrictions. Collective bargaining agreements can also subject workers to compensatory time.
Aside from the public status requirement, you must meet other obligations in order to offer compensatory time. You must have a written agreement between yourself and your employee, prior to the performance of the work. If you have a standard policy that is prominently posted, and all employees are made aware of the policy, this can be deemed as written notice that compensatory time is granted in lieu of overtime. The terms of your agreement cannot violate the requirement that you award time and one-half for each hour worked over 40 hours and the compensatory hours cannot exceed the number of hours allowed by law.
If your employee's overtime is accrued performing public safety work, emergency response or seasonal work, he can accrue up to 480 hours of compensatory time. If the work was anything other than the aforementioned, he can accrue no more than 240 hours of compensatory time. For the purposes of calculating the maximum hours of compensatory time, it is calculated as straight time hours, not time and one-half.
Compensatory Time Payouts
If an employee leaves your service and has unused compensatory time on the books, you must pay that out at a rate equal to the average of the employee's rate of pay for the last three years. If the amount of overtime hours your employee accrues exceeds the number allowed by law, you must pay cash overtime for hours worked in excess of those hours. If you pay out an employee's compensatory time while you still employ her, it is paid at the employee's current rate of pay.