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Governmentwide regulations do not prohibit using a time-off award as an incentive. What is described in the question is an informal suggestion program (i.e., the contest) that is encouraging employees to provide suggestions for one specific desired result – a title for the new newsletter. In this particular situation, setting a 1-day time-off award would be the incentive (i.e., the prize) for encouraging employee suggestions. The employee who submits the best title would be recognized with the time-off award for his or her contribution. Agencies who choose to do this, should make sure that everyone involved understands the rules of the contest (i.e., the suggestion program) and that the "winning" employee is being recognized for his or her valuable contribution to the organization and is not merely receiving a "prize." Also, make sure to follow the specific rules for using time-off awards established in the agency's awards program.
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