Comp Time Instead of Overtime Pay: Who Can Offer It

Who may offer comp time

Section 7(o) of the FLSA, 29 U.S.C. 207(o), allows comp time in place of overtime pay for employees of a public agency that is a State, a political subdivision of a State, or an interstate governmental agency.

That is the only general comp-time authority in the FLSA. The IRS, explaining the overtime tax deduction, puts it plainly in FS-2026-13: section 207(o) does not apply to private employees or federal employees.

• Private employers: no FLSA comp time. Section 207(o) has no counterpart for private employers. Fact Sheet #17S, on colleges, says it directly for one group: private higher education institutions may not pay employees comp time in lieu of overtime pay.
• Federal agencies: federal civilian employees have separate comp-time rules in Office of Personnel Management regulations based on 5 U.S.C. 5543. They are not covered here.
• Public universities and colleges: they may use comp time only if they qualify as a public agency, as Fact Sheet #17S explains.

Why a private employer cannot bank overtime

Two FLSA rules close the door.

First, overtime is owed in cash for each workweek. The FLSA requires 1.5 times the regular rate for hours over 40 in a workweek. Each workweek stands alone, and averaging hours across two or more weeks is not permitted.

Second, overtime cannot be waived. Fact Sheet #23 says the overtime requirement may not be waived by agreement between the employer and employees. An employee asking for time off instead of overtime pay does not change that.

The effect, using the site’s overtime engine with stated inputs ($22.00 an hour, FLSA rule only):

Week 1’s 2 overtime hours stay overtime even though week 2 is under 40 hours. Giving time off in week 2 does not erase the overtime premium the FLSA requires for week 1. This is true on a bi-weekly payroll as well. The guide on overtime in a bi-weekly pay period works through it.

What a private employer can do: schedule within the workweek

Federal overtime is measured per workweek. So rearranging hours inside the same workweek, so that the total stays at 40 or under, creates no FLSA overtime.

Same inputs, one workweek: Monday 10 hours, Tuesday through Thursday 8 hours, Friday 6 hours. The total is 40:00 (40.00 hours), and under the FLSA alone there is no overtime: $880.00 gross.

Two cautions:

• Daily overtime states. In the site’s state data, Alaska, California and Nevada have overtime over 8 hours in a day (Alaska and Nevada with conditions), Colorado over 12, and Oregon over 10 in mills, factories and canneries. Under California’s rule as the engine applies it, the same 40-hour week has 2:00 hours of daily overtime on Monday, and gross pay is $902.00. See overtime laws by state for each state’s rule and source.
• Different workweeks. Moving time off into a different workweek, even within the same pay period, does not cancel overtime earned in the first week, as the table above shows.

Paid time off is also different from hours worked. Under the FLSA, paid holiday, vacation and sick hours do not count toward the 40. Some states add their own rules on comp time or overtime; check your state’s row and your state labor department.

The rules for public agencies

A state or local government that wants to use comp time under section 7(o) has to meet each of these conditions.

1. Agreement before the work. It must be under a collective bargaining agreement, memorandum of understanding or other agreement with the employees’ representative. For employees without a representative, it must be an agreement or understanding with the employee reached before the work is done. Under 29 CFR 553.23, that individual agreement need not be in writing, but a record of it must be kept. It can be a condition of employment if the employee knowingly and voluntarily agrees.
2. Rate. At least 1.5 hours of comp time for each hour of overtime, the same ratio as cash overtime.
3. Caps. Up to 480 hours for employees in public safety, emergency response or seasonal activity, and up to 240 hours for others. Under 29 CFR 553.22(b), 480 hours of comp time represents no more than 320 hours of overtime worked, and 240 hours represents no more than 160. Once at the cap, further overtime must be paid in cash.
4. Use. Fact Sheet #7 says an employee must be permitted to use comp time on the date requested unless doing so would unduly disrupt the agency’s operations.
5. Cash payouts. Comp time cashed out during employment is paid at the regular rate earned at the time of payment. At termination, unused comp time is paid at no less than the higher of the average regular rate over the last 3 years of employment or the final regular rate.

Fact Sheet #7 describes the caps and the use rule. The statute and 29 CFR part 553 hold the details.

Comp time and the overtime tax deduction

For public employees, comp time affects the timing of the federal overtime deduction for tax years 2025 through 2028. The IRS says in FS-2026-13 (Q18) that qualified overtime compensation is not paid when comp time is earned. It is paid when the employee is paid wages for comp time used, or when unused comp time is cashed out at termination. The counted amount is the comp hours paid, times the applicable rate, divided by three. That is the premium part of 1.5 hours.

The deduction counts only FLSA-required overtime, the premium only, for federal income tax only, and it is capped and phased out. The guide on no tax on overtime explains the limits.

Next step

Before offering time off for extra hours, check where those hours fall. Enter each day’s hours and your state in the overtime calculator: if the workweek is over 40, or a day is over your state’s daily threshold, the rules treat the overtime shown as payable in cash for that week, unless you are a public agency with a valid 7(o) arrangement.