Employers Beware of Compensatory Time Off Instead of Overtime Wages

Unless you are a public sector employer, such as a government agency, a fire or police department, you may not accumulate and use compensatory time in lieu of overtime wages. Private sector employers can award compensatory time – that is allowing the employee to take the time off in lieu of overtime pay — only if the time off is taken in the same pay period  the overtime occurred.

While several proposals were put before Congress in the 1990’s (all passed the House, but were defeated in the Senate), the Fair Labor Standards Act (FLSA) continues to require that  private employers MUST pay overtime to workers who are subject to the act and are covered by its overtime provisions.

FLSA Covered Private Employers

Who is covered – private employers?

□        Sales in excess of $500,000 or meet other criteria

□        Engage in interstate commerce (sales or other activities across state lines) or produce goods for interstate commerce

□        Handle, sell, or work on items that have been moved in or produced for interstate commerce

□        And

“Employees of firms that do not meet the $500,000 annual dollar volume test may be covered in any workweek when they are individually engaged in interstate commerce, the production of goods for interstate commerce, or an activity that is closely related and directly essential to the production of such goods.” – excerpted from the Department of Labor FLSA Compliance Assistance Guide

FLSA covered employers must meet the minimum standards established by this act.  The minimum standard includes the following:

□        Pay time and a half for all hours worked in excess of 40 hours in a single week

“Unless specifically exempted, employees covered by the Act must receive overtime pay for hours worked in excess of 40 in a workweek at a rate not less than time and one-half their regular rates of pay.  There is no limit in the Act on the number of hours employees aged 16 and older may work in any workweek.  The Act does not require overtime pay for work on Saturdays, Sundays, holidays, or regular days of rest, as such.”  – excerpted from the Department of Labor website Fact Sheet #23.

□        Pay time and a half to workers who are contractually obligated to work more than 40 hours per week

“Salary for Workweek Exceeding 40 Hours:  A fixed salary for a regular workweek longer than 40 hours does not discharge FLSA statutory obligations.  For example, an employee may be hired to work a 45 hour workweek for a weekly salary of $300.  In this instance the regular rate is obtained by dividing the $300 straight-time salary by 45 hours, resulting in a regular rate of $6.67.  The employee is then due additional overtime computed by multiplying the 5 overtime hours by one-half the regular rate of pay ($3.335 x 5 = $16.68).” – excerpted from the Department of Labor website Fact Sheet #23.

What is a “workweek”?

A workweek is defined by the Act as a fixed and regularly recurring period of 168 hours (24/7 period).  The workweek does not have to be a calendar week, and it may begin on any day of the week at any time of day.  Further, different employees or groups of employees may have different workweeks established.

While FLSA provides a definition, keep in mind that the “minimum standard” state wage and hour legislation may impose other definitions, standards, and practices.  It is important to understand the applicable legislation which will govern the employer/employee relationships in your organization.

“Overtime” and “Over time”

A workweek is just that – a seven day, 24 hour per day, consecutive period of time.  The hours worked in a particular week determine if overtime is due.  An average of the hours over two or more weeks is not permitted.  The “normal” practice is that overtime pay earned in a particular workweek must be paid as a part of the regular payday for the pay period in which overtime occurred.

Exempt or Not Exempt – That IS the Question

Determining which employees are eligible for overtime pay is an important process for employers.  The list of exempt employees is extensive and should be reviewed by each business.  When making the review, keep in mind that the job title isn’t sufficient to determine whether or not an employee is exempt; the substance of the work performed makes the determination.

Because the exemptions are narrowly defined, the local office of the DOL and your state agencies are a phone call away to help you make these determinations and explain the “tests” that are used to make the determinations.  If you get assistance from these offices, please get their determinations and analysis in writing for your records.

Costly Mistakes

It only takes one employee complaining to the Department of Labor about not receiving overtime to open the door for ALL employees to be compensated for back wages not paid (plus fines and penalties).  If as an employer you do not have good recordkeeping practices and don’t have records showing the time worked, then an estimate will be made.

Also, keep in mind that overtime pay may not be waived, nor can an employer and employee agree that only 8 hours per day and 40 hours per week will be counted or recorded.  An employer may say that no overtime will be permitted or worked or that no overtime will be paid unless authorized by a member of management in advance, but that does not mean the employee will not retain the right to be compensated for actual hours worked – even the overtime.

Other Options for Employers

Employers do have other options which are compliant with FLSA requirements.  An employer may rearrange schedules so that an employee works four 10-hour days and then has three days off per week.  The employer may allow for an employee to take the time-off within the same pay period as the overtime worked.

Penalties and Sanctions

When an employer is investigated by the DOL Wage and Hour division and is found to have violations, the investigators will “recommend” changes to bring the business into compliance AND request the back wages due to the employees.  IF these investigators decide that your organization is a “willful violator,” then criminal prosecution may be pursued and fines up to $10,000 may be imposed.  Once an employer has had a first violation documented, subsequent violations up the penalties and sanctions to imprisonment and additional monetary civil penalties of up to $1,000 per violation. If that isn’t enough incentive to comply, the Department of Labor may also bring suit for back pay and an equal amount of “liquidated damages” and injunctive restraints.

A Matter of Company Policy

If your business has a practice of using “comp time”, then now is the time to reevaluate that practice.  The risks are substantial for businesses which are caught violating FLSA provisions.  If you have a written policy that includes “comp time”, then get it revised as soon as possible.  Consult with an employment practices attorney or a qualified human resources or business consultant on the language and changes you are making.

Checklist of Questions to Ask About Your Policy

□        Do you have a written policy?

□        Do all of your employees, managers, and supervisors have a copy?

□        Have you defined and established a “workweek” for your business and/or the different categories of employees?

□        Does your policy include provisions on accuracy of reporting time worked?

□        What is the policy statement on whether or not overtime can be required?

□        Does your policy comply with the federal and applicable state(s) regulations?

Copyright ©2006 FOCUS Resource, Inc.