Any alternative might seem better than paying employees overtime for putting in more than 40 hours of time and attendance in a single workweek. At one-and-a-half times the standard hourly rate, it's easy to see how payroll can quickly go from being a manageable business expense to an excessive drain on resources.

To manage these costs, employers use a number of tactics that include capping the amount of overtime employees are allowed to accrue, substituting exempt managers into schedules if staff members surpass the 40-hour benchmark and offering other benefits in place of cash money. The Fair Labor Standards Act (FLSA) establishes that there are certain circumstances in which employers are allowed to pay staff members with compensatory time off in lieu of additional wages. This means employees can accrue vacation allowances instead of wages.

However, these options are limited to state agencies, interstate government organizations and political subdivisions of states. If companies qualify for this option, they will need to know how compensatory time is calculated.

Similar to overtime wages, comp time must be paid at a rate of time-and-a-half the norm. So one hour of overtime must be awarded with one-and-a-half hours of free vacation time, rather than a straight conversion.

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