One of the biggest drains on a budget is overtime pay. At time-and-a-half an employee’s hourly wage, overtime can easily skyrocket, especially when an entire crew is working more than 40 hours a week. Companies may consider offering comp time instead of paying out overtime. Compensatory time, or comp time, is paid time off given to an employee instead of overtime pay. For example, you have an employee who works 45 hours in one week. Instead of paying that employee five hours at time-and-a-half, you offer five hours of PTO instead, in exchange for those extra hours worked. But be cautioned, comp time isn’t a legal option for all employees.

Can Any Employee Receive Comp Time?

The short answer is no. But there are always exclusions to consider.

When considering offering comp time to your employees, you need to determine how they’re classified under the Fair Labor Standards Act (FLSA). The FLSA has two types of classifications for employees to determine if they’re eligible for compensation for hours worked over 40 per week.

There are always exceptions to these rules. According to the Department of Labor (DOL), certain types of state or local government employees may receive comp time instead of overtime pay. Law enforcement, fire protection, and emergency response personnel and employees engaged in seasonal activities may accrue up to 480 hours of comp time; all other state and local government employees may accrue up to 240 hours.

The DOL suggests reviewing your state law before figuring who is eligible, excluded or exempt from comp pay.

Comp Time Vs. Overtime

Give many employees the option between a day off and extra money and they might just choose to sleep in instead of accepting a higher paycheck, especially if they’re worn out from working late hours. But if that employee is nonexempt and has accrued overtime hours, the choice really isn’t there—even if the overtime is unauthorized. The FLSA is pretty clear; unless the nonexempt employee is working in the public sector, comp time can’t be used for hourly employees. Offering comp time to your nonexempt employees instead of overtime could set you up for a potential lawsuit.

How to Calculate Comp Time

Once you determine if your employees are eligible for comp time, the next task is determining how to calculate it.

Many companies choose to designate one hour of comp time equal to one hour of overtime. Since comp time is a term usually designated to government employees, some guidelines apply. For government FLSA-exempt employees, accrued comp time must be used within 26 pay periods from the pay period in which it was earned. The same goes for government nonexempt employees. Although for these employees, if the comp time isn’t used within the 26 pay period or if the employee transfers to another agency, the employee must be paid for the comp time at the overtime rate, according to Workplace Fairness.

What is the Difference Between Comp Time and Flex Time?

As long as your employees are exempt from overtime you can give additional time off as a reward. But SHRM cautions companies against providing hour-for-hour comp time and even suggests reconsidering using the term “comp time”. Because comp time is a legal term that refers to providing noncash payment to nonexempt public sector employees, the association suggests using the term “flex time” instead.

Flex time offers more than comp time, or PTO for any hours worked above 40]. It also encompasses lenient policies with regard to when employees must work in their offices. The basics are that the employees can choose when and where to work because the employer trusts them enough to make their own choices. Flex time allows employees to adjust their hours to go to their child’s soccer game, visit the dentist or work from home. Employees who are granted some freedom in their work habits tend to be more engaged and productive.

Creating a Flex Time Policy

Before offering flex time to your exempt employees, create a policy with set guidelines on how it will work. Your flex time policy may be as simple as telling employees as long as they work 40 hours per week in office, they can work whenever they want. It can also encompass, as stated above, receiving PTO in exchange for extra hours worked during a certain period—i.e. allowing a four-day workweek with 10-hour days. Another option is allowing employees to work from home during set office hours.

The policy you choose depends on what will work best for your company. For example, if you’re in a workplace that thrives on individual work, your employees will likely have more flex time options than a workplace that is highly collaborative and requires in-person contributions; telecommuting works really well for an advertising agency but not so much for a construction company. You can also consider adding the option to video chat or conference call for meetings.

Administering comp time or flex time all comes down to tracking the amount of time your employees work. ExakTime’s Time Clock App is a GPS mobile clock-in app that allows companies to easily track their employees’ time. Not only does it allow employees to use their own devices to clock in and out of work but it comes with available features like photo ID verification, scheduling, equipment tracking, mobile forms and overtime approvals that help ensure your project doesn’t go over budget due to payroll costs.