Compensatory time off: definition, rules, and how it works

Compensatory time off, also called comp time, is when employers offer employees paid time off instead of overtime pay. Some businesses find it to be a good way to balance extra hours worked. However, there are strict rules for when they can offer it. In a lot of cases, private-sector employers can’t legally offer comp time. Public-sector employees can usually get it, but only under specific conditions.

Comp time matters because it affects both employers and employees. Employers need to know if they can legally offer it and how to track it properly. Employees need to understand their rights so they don’t end up working overtime for free. The Fair Labor Standards Act (FLSA) plays a huge role in determining who qualifies for comp time and how employers must handle it.

In this guide, we break it all down. We explain what comp time actually means, how to calculate it, the difference between comp time vs overtime, who’s eligible, and what rules and limitations employers need to follow.

Comp time meaning

Comp time is when employees work extra hours and their employers give them paid time off instead of overtime pay. So, instead of earning extra wages, employees take time off later to make up for the extra hours they worked.

The FLSA sets clear rules for comp time. Most private-sector employers can’t offer it legally. When employees work more than 40 hours in a week, they must provide them with overtime pay. Exempt employees, being those who don’t qualify for overtime, usually don’t get comp time either. But public-sector workers can earn it if they meet certain conditions.

When comp time is legal, it works like a time bank. If an employee works 45 hours in a week, they'll earn 7.5 hours of comp time instead of overtime pay. Employers must track these hours carefully.

Unfortunately, comp time isn’t just a simple swap for overtime pay. Employers need to know the rules, or they could face major legal trouble.

How do you calculate compensatory time off?

Employers need a clear system to track and calculate compensatory time off. If they get it wrong, they could face legal trouble or payroll issues. The key is to check time records, apply the comp time formula, and make sure employees take the time off correctly.

The first step to calculating comp time off is to track work hours accurately. Employers should use a good time-tracking system to ensure no guesswork around how many extra hours employees worked. If a manager doesn’t have a clear record, they can’t calculate comp time properly.

Once they know the extra hours worked, they can apply the comp time formula:

Overtime hours worked × 1.5 = comp time earned

For example, say an employee works 44 hours in a week. That’s four extra hours beyond their normal working schedule. Multiply those four hours by 1.5, and the employee earns six hours of comp time.

What’s the difference between comp time and overtime?

The biggest difference between comp time vs overtime is how employers compensate employees for working extra hours. With comp time, employees get paid time off instead of extra wages. With overtime, they receive extra pay for the extra hours worked.

Below, you can find some of the key differences between comp time vs overtime:

1. Eligibility

Not every employee qualifies for comp time or overtime. Non-exempt employees (hourly workers who qualify for overtime pay) must receive overtime wages if they work over 40 hours in a week. Private-sector employers can’t replace that with comp time.

In the public sector, non-exempt employees can receive comp time instead of overtime pay, but only if they agree to it in advance. The law also caps how much comp time they can earn.

Exempt employees (salaried workers who don’t qualify for overtime) usually don’t receive comp time or overtime pay. Their salary stays the same, no matter how many hours they work.

2. Employer costs

Private-sector employers must pay overtime in the next payroll cycle at 1.5 times the regular hourly rate. If an employee earns $20 per hour, overtime costs $30 per hour for extra hours. These extra wages increase payroll expenses, making overtime costly for businesses that rely on long hours.

Public-sector employers can offer comp time instead of overtime pay, which delays costs but doesn’t remove them. Employees bank paid time off at a 1.5x rate instead of receiving extra wages. This reduces immediate payroll costs, but employers still owe those hours and may face staffing shortages when employees take time off. If employees don't use their comp time within a set period, employers must pay it out.

3. Form of compensation

Overtime pay gives employees extra wages at a rate of 1.5 times their regular hourly rate for any hours worked beyond 40 in a week. This means employees see the financial benefit of their extra work in their next paycheck. Overtime pay is straightforward—work extra, get paid extra.

Comp time, on the other hand, doesn’t provide extra wages. Instead, employees earn paid time off at a 1.5x rate to use later. For example, if a public-sector employee works four extra hours, they don’t get paid more. Instead, they bank six hours of paid time off (4 hours × 1.5).

For employees, the difference is simple: overtime means more money, comp time means more time off.

Who can earn compensatory time?

Not every worker qualifies for compensatory time off, according to the FLSA. Employers must correctly classify exempt vs. nonexempt employees to avoid compliance issues. Misclassifying employees and failing to pay overtime can result in serious FLSA violations.

Here are the different kinds of workers and whether they qualify for comp time: 

Nonexempt employees in the public sector

Public-sector employers can legally offer comp time, but only to nonexempt employees, which are those who qualify for overtime pay under the Fair Labor Standards Act. These employees must agree to comp time before working the extra hours, and there are strict limits on how much they can accrue.

• Most nonexempt employees can accrue up to 240 hours of comp time.
• Law enforcement, emergency responders, and certain public safety workers can accrue up to 480 hours.
• If employees don’t use comp time within a specific timeframe, employers must pay it out at the overtime rate.

Public-sector employers must track comp time carefully to avoid exceeding these limits or facing unexpected payout obligations.

Private-sector employees

Private-sector employees almost never qualify for comp time. The FLSA doesn't allow private businesses to offer comp time instead of overtime pay. If a private employer requires an employee to work more than 40 hours in a week, they must pay overtime. They cannot replace it with paid time off.

Private-sector employers can only adjust extra hours within the same pay period, a system called flex time. Employees must use flex time within that pay period and can’t bank it like comp time. 

Exempt employees

Exempt employees don't qualify for either comp time or overtime pay. These employees receive a fixed salary. This means their employer doesn't have to compensate them for extra hours worked. Even if an exempt employee works 50 or 60 hours in a week, they still receive the same paycheck.

Compensatory time rules

Public-sector employers who offer comp time need to track hours carefully, follow correct pay rates, and ensure employees use accrued time within the proper timeframes. Without clear policies and accurate tracking, businesses can run into compliance issues, disputes, and unexpected payroll costs.

Here are the key rules employers must follow when offering compensatory time off:

They must pay comp time at 1.5x the hourly rate

Comp time isn’t a one-for-one trade. Employees earn 1.5 hours of comp time for every extra hour worked. If someone works 10 extra hours, they don’t get 10 hours of comp time; they get 15 hours (10 × 1.5). Employers must track and calculate this correctly, or they could end up owing back pay.

Union agreements may affect comp time policies

For unionized workers, collective bargaining agreements take priority. If a union contract requires overtime pay instead of comp time, the employer must follow that rule. Even in public-sector jobs where comp time is an option, union agreements can limit when and how employees use it.

Employers must set clear comp time policies

Comp time can quickly turn into a payroll nightmare if employers don’t have clear policies. Employees need to know:

• how much comp time they can accrue
• when they can use it
• if there are limits on how long they can hold onto it
• whether they receive a payout for unused comp time

Without written policies, employees and employers can disagree on when and how to use comp time.

Comp time usage timeframe 

The FLSA doesn't explicitly specify a strict deadline for using compensatory time. Though, many public-sector employers require employees to use their accrued comp time within a reasonable period, often within 26 pay periods (approximately one year) from when they earned it. If employees don’t use their comp time within this timeframe, employers might need to pay the unused balance at the overtime rate for those hours.

It's important to note that specific policies can vary by agency or employer. For instance, certain agencies might mandate that employees use their comp time within a shorter period, such as 13 pay periods (approximately six months).

It's essential for both employers and employees to be aware of their specific comp time policies to maintain compliance and avoid potential forfeiture of earned time off.

Compensatory time off limitations

Comp time comes with limitations. Public-sector employers must follow strict limits on accrual, usage, and payout to avoid legal trouble. Without clear restrictions, employees could stack up too much unused time, leading to staffing shortages and unexpected financial costs.

Here are some of the major limitations employers need to think about when managing compensatory time off:

Union agreements

Union contracts often add extra rules on comp time. As mentioned, even if FLSA allows public employees to earn comp time, collective bargaining agreements may require overtime pay instead. It's also worth noting that some agreements cap accrual, set deadlines for using comp time, or limit cash-out options. So, employers need to carefully check union agreements before offering comp time.

Example: A city government allows firefighters to earn comp time, but their union contract caps accrual at 100 hours. Once a firefighter reaches that limit, they can’t earn more comp time and must receive overtime pay in cash for any additional hours worked.

Pre-approval required

Public-sector employers can’t force employees to take comp time instead of overtime pay. The FLSA requires employers to get employee approval in advance before replacing overtime wages with comp time. This agreement must happen before they work the extra hours, not after.

Some agreements happen at the individual level, where an employee signs off on comp time each time they work overtime. Others happen through union contracts or workplace policies that set comp time as the standard option. Either way, employees must have the right to choose the compensation method for extra hours.

Example: A city government allows office staff to choose between comp time and overtime pay. Before an employee works extra hours, the employer must get their written approval to provide comp time instead of overtime wages. If the employee doesn’t agree, the employer must pay overtime.

Overtime compensation rate

Comp time must follow overtime pay laws, meaning employees earn comp time at 1.5 times their extra hours worked, not on a one-to-one basis. Employers can't round down or offer comp time at a lower rate, even if both parties agree. Failing to apply the correct multiplier can lead to wage violations and legal disputes.

Employers must keep accurate records of comp time accrual and ensure payroll systems apply the 1.5x rate correctly. Otherwise, there may be a requirement for them to provide back pay and potential damages for violating FLSA rules.

Example: A state employee works 10 extra hours in a week. Instead of getting 10 hours of comp time, they must receive 15 hours (10 × 1.5). If the employer mistakenly records only 10 hours, the employee could file a claim for the missing five hours of comp time or demand an overtime wage adjustment.

Same pay period usage

Some employers require employees to use comp time within the same pay period to prevent large accumulations of unpaid overtime. This practice, known as flex time, allows employees who work extra hours in one week to take time off later in that same pay period instead of banking comp time for future use.

Flex time helps employers avoid long-term tracking and payouts, but it’s important to note that the FLSA doesn't recognize flex time as comp time. Private-sector employers must pay overtime if employees exceed 40 hours in a workweek, regardless of how they adjust their schedule.

Example: A school district allows administrative employees to adjust their schedules within a two-week pay period. If an employee works four extra hours on Monday, they must take four hours off later that week. They can't bank the hours for later. If they fail to use the extra hours, they receive overtime pay instead of comp time.

Time limits apply

Many public-sector employers set strict deadlines for using accrued time, often within one year. Employees must use comp time before the deadline. If they don’t, their employer pays them for the unused balance at the overtime rate that applied when they earned the hours.

Large comp time payouts put pressure on budgets, especially when employee wages increase over time. To avoid these costs, many agencies push employees to use comp time early instead of stockpiling hours. Some employers set shorter deadlines or send reminders to prevent last-minute payouts.

Example: A state transportation worker accrues 200 hours of comp time but doesn’t take time off for a year. Their agency’s policy requires them to use all comp time within 12 months. They now have two options:

1. Use the comp time immediately before the deadline.
2. Take a payout for any remaining comp time at their original overtime rate.

Streamline compensatory time off management with Rippling

Managing compensatory time off can get complicated fast. Keeping track of overtime hours, time-off requests, scheduling conflicts, and payroll compliance takes time, unless you automate it. Rippling’s all-in-one workforce management platform built on a single source of truth makes compensatory time tracking seamless, automated, and error-free.

Automate Time & Attendance tracking

Rippling’s Time & Attendance system eliminates manual tracking by automating your exact time-tracking needs. Whether you need to enforce overtime policies, track hours by job codes, or route timecard approvals to managers, Rippling can take care of it all, automatically. With real-time reporting, you can always have an accurate view of comp time balances, overtime trends, and time-off usage, without juggling spreadsheets or manual calculations.

Take the stress out of compliance with overtime and comp time rules

FLSA compliance is key when managing compensatory time. With Rippling, you can automatically apply and enforce overtime pay rules across employees, helping you ensure that non-exempt employees receive the correct compensation. Whether they earn comp time at a 1.5x rate or require overtime pay after exceeding 40 hours, Rippling can help you align every payroll cycle with federal, state, and local labor laws.

Seamless scheduling and time-off approvals

Rippling’s Scheduling feature integrates directly with Time & Attendance, making it easy to approve, modify, and enforce compensatory time off requests. Employees can request time off through the system, and managers can approve it instantly while checking for coverage gaps and conflicts. Automated workflows ensure employees take their comp time within policy limits, reducing last-minute scheduling issues.

All-in-one workforce management: HR, Payroll, IT & Spend

Rippling is far more than just a time-tracking system. It’s a complete workforce management platform. You can manage HR, Payroll, IT, and Spend all in one place. Rippling automatically syncs employee data across every system, from payroll and benefits to time tracking and scheduling, so you can automate processes, reduce errors, and eliminate manual work.

Compensatory time FAQs

What is comp time at work?

Comp time at work refers to paid time off that public-sector employees earn instead of receiving overtime pay. When eligible employees work extra hours, they accrue comp time at a rate of 1.5 hours for each overtime hour worked. They can then use this time off later, following employer policies and FLSA regulations.

Is comp time legal for hourly employees?

Compensatory time off is typically not legal for hourly employees in the private sector. Under the Fair Labor Standards Act, non-exempt hourly employees must receive overtime pay, not comp time, when they work more than 40 hours in a workweek. Private-sector employers can't substitute comp time for overtime wages.

However, public-sector employers can offer comp time to hourly, non-exempt employees instead of overtime pay. But only if the employee agrees to it in advance and the employer follows FLSA rules. There are also limits on how much comp time employees can accrue before employers must pay it out as overtime wages.

What is considered compensatory time?

The Department of Labor defines compensatory time off as paid time off given instead of overtime wages. Instead of receiving time-and-a-half pay for extra hours worked, an eligible employee banks time off at a 1.5x rate to use later.

Private-sector employers can't offer comp time instead of overtime wages. However, they can adjust work schedules within the same pay period (flex time) as long as employees don't exceed 40 hours in a week.

What does compensate for time mean?

To compensate for time means to give something in exchange for extra work hours, typically extra pay or time off.

In the case of compensatory time off, employers compensate employees in lieu of overtime wages by offering paid time off instead of extra pay. However, comp time is only legal in the public sector under specific conditions.

Employers who fail to compensate for time correctly, whether by misclassifying employees or not following labor laws, can face significant legal and financial consequences.

What is comp time vs PTO?

Comp time and paid time off (PTO) aren't the same. While both give employees time away from work with pay, they differ in how employees earn and use them.

• Employees can earn comp time by working overtime.
• Employers provide PTO as a benefit, separate from overtime. Employees use PTO based on company policies, and it doesn't depend on extra hours worked.

For example, an employee with 40 hours of PTO can take a week off, regardless of overtime. In contrast, an employee earns comp time only by working overtime and can only use it under specific conditions.

Can employers pay out compensatory time?

Yes, but only in certain situations:

• Public-sector employers must pay out comp time if an employee reaches the accrual cap (typically 240 or 480 hours, depending on the job).
• If an employee leaves their job with unused comp time, the employer must pay it out at the overtime rate that was current when the employee did the overtime hours. 
• If an employer sets an expiration period for comp time and an employee doesn’t use it, there might be a requirement for the employer to pay out any unused hours at the applicable overtime rate.

What happens if you get comp time wrong?

Employers who fail to follow compensatory time off laws can face serious consequences, including wage violations, legal penalties, and financial liabilities. The FLSA sets strict rules on how employers and employees can use comp time, and mistakes can lead to costly enforcement actions.

• Legal penalties and lawsuits: If an employer improperly offers comp time instead of paying overtime wages, employees can file complaints with the Department of Labor. There may be a requirement for employers to pay back wages for unpaid overtime, plus damages equal to the unpaid amount. In cases of willful violations, they could also face civil penalties of up to $2,500 per infraction.
• Budgeting issues and unexpected payouts: Employers that allow comp time to accumulate without setting usage deadlines risk large, unexpected payout obligations. If an employee leaves their job with unused comp time, the employer must pay it out.
• Operational and scheduling disruptions: When employees stockpile comp time, it can lead to workforce shortages when multiple employees try to use their accrued hours at once. Employers must manage scheduling carefully to prevent business disruptions.

How can employers avoid comp time mistakes?

By staying proactive, employers can avoid legal trouble, financial risks, and operational disruptions while ensuring fair compensation for their workforce. To stay compliant, employers should:

• Follow FLSA guidelines on when and how employees can use comp time.
• Ensure comp time accrual follows the correct 1.5x overtime rate.
• Set clear policies on comp time usage and deadlines.
• Use automated time-tracking and payroll systems to prevent calculation errors.
• Regularly audit payroll records to ensure compliance.

This blog is based on information available to Rippling as of March 4, 2025.

Disclaimer: Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide or be relied on for tax, accounting, or legal advice. You should consult your own tax, accounting, and legal advisors before engaging in any related activities or transactions.