Banked Hours vs. Overtime Pay: What Should I Choose?

Time, as they say, is money, and so when your employees start working more hours than usual you may start wondering how they’ll want to be compensated.

The Fair Labor Standards Act (FLSA) was a piece of legislation passed in 1937 to give greater rights to workers, and this included the first nationally-applicable overtime laws. They stipulate that there are two ways to be compensated for extra time worked: through banked hours and through overtime pay.

But how to compare banked hours vs. overtime pay, and how to figure out which method works better for your company at any given time? The experts here at actiTIME will explain the rules below, as well as describe some state-specific legislation that may impact that choice. Read on for more!

What’s the Difference Between Banked Hours and Overtime Pay?

The most common way that most workers react to working extra hours is asking for overtime pay. According to the FLSA, overtime hours are counted as any time worked over 40 hours in a workweek (a consecutive set of 7 days, set down beforehand as part of your contract with employees). This usually isn’t dependent on how many hours a day are worked, though your state may have additional rules regarding that, and any extra hours are paid out at 1.5x the regular rate of pay.

So if a worker makes $15 an hour and works 44 hours a week, their weekly pay stub (before taxes) will look like this:

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Banked hours, also known as “time in lieu”, work differently. Instead of opting for being paid out at time-and-a-half, most workers have the right to ask for additional time off. In this case, each hour of overtime worked will translate directly to one and a half hours of paid vacation time.

So if someone works 45 hours in one week, their banked hours calculation will look like this:

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After the week described above, they will then be in possession of 7.5 hours of paid vacation time. But how can they use it, how much can they store up, and are there any additional restrictions, federally or in-state?

What Can Be Done with the Accrued Banked Overtime?

Using banked hours can benefit both employees and employers alike: it gives extra paid vacation time, and it can help alleviate financial strain on small businesses. But whenever workers debate over whether to take banked hours vs. overtime pay, the main thing they want to know is how they can use their banked time and if there are any additional rules.

Just because an employee has certain banked hours doesn’t mean they can use them whenever they would like, however. Using them is similar to booking off regular paid vacation, according to the terms set between workers and their bosses when they sign an initial contract. Sometimes employers can allow employees to use banked hours soon after they’ve earned them (to compensate for a hard week or weekend, for example), but this isn’t obligatory.

One thing to watch out for is not banking too many hours at once.

For the most part, employees can choose to bank their overtime hours until they’ve reached 240, which approximately adds up to 30 paid days off. After that, they must be paid out at 1.5x their regular rate of pay (known as ‘time-and-a-half’). This is to prevent exploitation in the event that an employer decides to bank large amounts of hours indefinitely so as to pay their employees as less (and as infrequently) as possible.

Another thing to keep in mind when deciding with your employees how to use banked hours is state-specific legislation. While the FLSA only enforced the 240-rule nationwide, states like Wisconsin compel nongovernmental employees to use up time accrued within 31 days of earning it. In other states, like in Colorado, banking overtime is not allowed entirely and overtime hours have to be paid out at time-and-a-half.

As with anything, arming yourself with the right knowledge will help both your company and your employees make smart choices when it comes to overtime benefits. And we at actiTIME want to help empower you to do exactly that, so check out some of our other tools, like our overtime calculator or a free trial of our time tracking software!

Originally published at

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