“Time-Off Plans" - Complying with the FLSA - Articles

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Posted by: Christy Gibson on Apr 2, 2013

Andy Naylor and Brian Clifford*

     Private employers seeking to take advantage of Fair Labor Standards Act (FLSA) provisions that allow "time-off plans" for non-exempt employees often face a conundrum: how to reconcile a "time-off plan" with the FLSA's overtime pay requirements?

     The FLSA prohibits private employers from offering employees compensatory time (“comp time”) off.  Comp time is paid time off which is earned and accrued by an employee in lieu of overtime.  Generally, comp time can be used by the employee anytime on a rolling basis, however, it is only available to public sector employees.

     However, the FLSA allows private employers to set up a “time-off plan” for non-exempt employees that allow mitigation of overtime in one week by reducing hours worked in another.  But how does that comply with the FLSA?

     The FLSA requires employers to pay non-exempt employees a minimum hourly wage and a premium pay-rate for any work in excess of 40 hours per week.  The Congressional purpose behind the FLSA is two-fold: (1) to effect greater employment by providing a financial disincentive to employers who require overtime hours; and (2) to compensate employees for the burden of a lengthier work week.  

     The Wage and Hour Division of the Department of Labor (“DOL”) and the courts interpret the FLSA as requiring overtime to be figured on the basis of a single work-week.  Under certain conditions, however, an employer can pay the same amount each pay period even where an employee works overtime during one or more weeks.  The DOL and the courts have approved time-off plans that balance overtime - not average it.

     Time-off plans allow the employer to schedule an employee off a number of hours during one week of the pay period so the wage or salary equals the desired amount of compensation for that employee even where the employee works overtime the following week.  Specifically, federal courts have held that “it is permissible for the employer employing one at a fixed salary for a fixed workweek to lay off the employee a sufficient number of hours during some other week or weeks of the pay period to offset the amount of overtime worked so that the desired wage or salary for the pay period covers the total amount of compensation, including overtime.”  

     There is no requirement under the FLSA that overtime compensation be paid weekly.  The employer can require that an employee accept the time off in lieu of overtime provided it is covered under the same pay period.  Here is how it could work:

Assuming a two week pay period - in Week One the employee works 44 hours (four 9 hour days, one 8 hour day).  That employee has thus accrued 4 hours of overtime that should be paid time and one-half.  In lieu of that premium pay for overtime, in Week Two, the employer can allow 6 hours of time off (4 x 1.5).  If the time off is not taken in Week Two, then the employer must be paid for the overtime.  The time off cannot accrue from week to week in order to create a bank of leave time to be used toward a larger amount of paid leave.  Also keep in mind that if an employee works the 44 hours in Week One and they leave employment or are terminated in Week Two, the employer must pay that employee their overtime for Week One

     Ideally, employers want to implement time-off plans without disrupting operations.  The principle idea of the time-off plan is the employer’s control over an employee’s earnings by controlling the number of hours an employee is permitted to work.  Due to the nature of “balancing” time over several weeks in a pay period, employers cannot implement time-off plans for employees who are paid weekly.  The time off cannot be accumulated in one pay period to be used in another.  Moreover, this is not a “use-it-or-lose-it” policy; it is a use-it-or-be-paid-for-it policy.  If the employee does not use the time off in the following week and works a full 40 hours, the employer must pay overtime from the previous week.

     Employers are constantly looking for new ways to manage employee pay in a way that fits their business.  Time-off plans can be an efficient, economic, and legal way to do so when implemented correctly.  Due to the intricacies of the FLSA and the administrative difficulty in managing time-off plans, employers are encouraged to consult with counsel prior to implementing a time-off plan.


*Andy Naylor is a partner, Practice Group Leader, Labor & Employment at Waller Law Firm in Nashville. He graduated from Creighton University School of Law, Cum Laude in 1993. Mr. Naylor received his M.S.J. from Northwestern University in 1989 and his B.A. from Washington University in St. Louis in 1987. He may be reached at (615) 850-8578 or andy.naylor@wallerlaw.com.

Brian Clifford is an Associate at Waller Law Firm in Nashville. He graduated from University of Tennessee College of Law in 2010. Mr. Clifford received his B.S. at Middle Tennessee State University in 2007. He may be reached at (615) 850-8504 or brian.clifford@wallerlaw.com.