Compensatory Time off instead of Overtime Pay

My staff would prefer to have compensatory time off instead of overtime pay. Would doing so be in compliance with Arizona employment law?

Ever wonder how the overtime pay rule got started? Some time ago, so did I. Here’s a history lesson to provide a bit of background for the answer to your question.

During the time when our country was just recovering from the Great Depression, people were willing to do anything for menial wages and employers took advantage of this situation. Businesses known as “sweat shops” made workers toil incredibly long hours while paying very little for their time. Congress believed that imposing an overtime penalty on employers would induce shorter working hours and help the nation solve its economic problems by spreading work around. In 1938, the Fair Labor Standards Act, or FLSA, was enacted to require employers to pay nonexempt workers at least one and one-half times their regular rates of pay for all hours worked in excess of 40 per week. The premium overtime rule may have outlived its original purpose, but the law is still on the books. The law still needs to be in place to protect employees from unscrupulous company’s who would take advantage of workers by requiring them to work long hours without overtime pay. Employers are challenged in some cases with a changed work ethic among employees where unemployment is significantly lower than seventy years ago. The job at hand today is to inspire employees to do the job right, efficiently and effectively.

The FLSA doesn’t require an employer to pay a worker for overtime simply because he or she worked more than eight hours in a day. Generally, the law mandates that hours are calculated by the week and pay is provided accordingly. There is flexibility as to when the workweek can start; it can begin on any day and any hour the employer establishes. Regardless, each workweek stands alone; one can’t average two or more workweeks, and one can’t manipulate the start of the workweek merely to avoid paying overtime.

People often times are confused about who is exempt from being paid overtime.

Most workers who are not required to be paid overtime pay fall into one of five categories:

1. Executive employees – manages two or more employees, can hire, fire and promote employee.
2. Administrative Employees – performs specialized or technical work related to management or general business operations
3. Professional employees – performs original and creative work or work requiring advanced knowledge normally acquired through specialized study
4. Outside salespeople
5. People in certain computer-related occupations

Executive, administrative, and professional employees generally are paid a minimum weekly salary and spend at least 80% of the workday performing duties that require a measure of discretion and independent judgment.

In dentistry, the Professional employee is the closest example of what might constitute an exempt worker; perhaps even an Administrative employee. However, a test for these types of employees helps determine their exempt and non-exempt status:

• Person must earn at least $250 per week in salary
• The employee’s work requires advanced knowledge and education
• The employee must customarily and regularly exercise discretion and independent judgment
• The employee’s work requires invention, imagination or talent in a recognized artistic field, or
• The employee works as a teacher.

As one can determine from this quick test, dental personnel are typically not exempt from overtime pay.

So, with that bit of history and education, I’ll address the question regarding “Compensatory Time”. The practice of granting hour-for-hour compensatory time, for example, giving a worker time off for overtime hours worked the previous week, isn’t usually allowed for private sector employees covered by the FLSA. Employers and employees are often puzzled when they learn that comp time isn’t permitted in the private sector, because it seems like a sensible and mutually beneficial way to handle overtime in many situations.

One has a few options for avoiding premium overtime pay by giving a worker time off instead of money. One option is to rearrange an employee’s work schedule during a workweek. For instance, Kathy, a dental assistant, normally works nine-hour days, four days a week, and four hours on Friday. On Wednesday afternoon, a patient in the practice commits to a treatment plan for full upper and lower veneers. The patient wishes to have them done right away. The doctor asks Kathy if she would agree to work an extra four hours that evening, Kathy agrees. The patient agrees to pay in full, funds are verified and the treatment begins.

Kathy worked an extra four hours that day, and rather than shouldering the business with overtime responsibilities, the doctor grants Kathy the day off on Friday. Kathy is paid for her normal working hours that week, 40, and receives compensatory time off on Friday, but no overtime pay. This is legal because Kathy hasn’t worked any overtime as defined by the FLSA; only the hours over 40 hours a week counts as overtime hours.

The key here is to provide the compensatory time during the 40-hour workweek; not for another period of time to be determined later, for example.

It’s also permissible to reduce the worker’s hours in another week so that the amount of the employee’s paycheck remains constant. This comes in handy when an employee works more than 40 hours in one week. In essence, the time off is given within the same pay period as the overtime work, and the employee is given an hour and one-half of time off for each hour of overtime worked.

For example, Sara is a front office employee and gets paid $1500 at the close of every two-week pay period. Because the doctor she works for has started a promotion for Invisalign and anticipates a great demand for services, the doctor wants Sara to work longer hours that week. However, the doctor doesn’t want to increase Sara’s paycheck. He asks Sara to work 50 hours during the promotion week and gives her 15 hours off the next week. Since Sara is paid every two weeks, the office may properly reduce Sara’s hours the second week to keep her paycheck at the $1500 level.

Private deals can be risky. It’s unlikely that a federal or state labor investigator will look into ones’ comp time arrangements unless an employee files a complaint. Knowing this, it may be tempting to work out comp time deals with employees to meet the needs of the business and worker. This can be dangerous. One can never know when a friendly, loyal employee may turn sour and look for some legal technicalities to use against an employer.

Because employers and employees alike feel that the current rules on comp time are too rigid, relief may be on the way. Congress is working on changes. One plan being considered would allow a person to offer employees a choice between receiving overtime pay or one and one-half hours of comp time for each hour of overtime worked.

One final note, the Industrial Commission of Arizona, our State Labor Department regulating wage and pay, indicates that Arizona does not have an overtime law. Therefore, federal laws apply, as discussed in this article.

To sum up, be careful about offering employees compensatory time off in lieu of overtime pay. It can be done, but know that special deals can be risky, and the FLSA is very specific about paying overtime. Be proactive: work your schedule to avoid the issues and complications overtime presents.