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Holiday Pay: 8 Things Every Payroll Administrator and Small Business Owner Should Know

Published on by Adam Bluemner

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‘Tis the season for family, food, presents… and confusing payroll administration situations? Could be!

Handling holiday pay may be easier than juggling multiple state holiday travel plans or hanging lights on an icy roofline, but it can still raise some pretty tricky questions.

What do you need to know? Check out the following 8 important holiday pay insights and get on to the egg-nog:

Holiday gift sitting under holiday lights

1. Technically, you are not legally required to provide holiday pay.

If you’re an employer who’s more Grinch than St. Nick, bear in mind that you are not required to compensate employees for the time they are out of the office on the holidays. As described on the United States Department of Labor page covering holiday pay, the Fair Labor Standards Act stipulates that neither vacation nor holiday pay is federally required; it’s a matter of agreement between the employer and employee.

2. It’s considered pretty awesome if you do offer holiday pay, though.

While the federal government doesn’t require employers to pay employees when they are celebrating holidays, it turns out that employees like it when they do. Surprise, surprise!

A study by the Society for Human Resource Management (SHRM) indicated that “paid time off” was listed as the 2nd most desirable employer-provided benefit—ahead of 401k and pension contributions and behind only health and medical coverage.

Another SHRM study found that the vast majority of employers are making good on employee wishes, as 97% of studied organizations reported providing holiday leave pay to full-time employees.

3. However, there are some edge cases where employers must provide holiday pay.

While companies at large are not legally required to pay holiday wages as a standard practice, there are some situations where it is required of government contractors. For bid work where the McNamara O’Hara Service Contract Act (SCA) or Davis-Bacon and Related Acts (DBRA) apply, one of the stipulations is that employees must receive holiday pay.

4. Many states have said no to holiday pay “takebacks.”

Had a change of heart on providing holiday pay? Better check state payroll laws. Many states have made “use-it-or-lose-it” rules illegal, banning businesses from reneging on previous holiday or vacation pay commitments.

In fact, printer manufacturer, LexMark International, recently lost a $13.6 million class action lawsuit after a California appeals court upheld the finding of a lower court that employees were due holiday and vacation back pay. Law360.com (free registration required).

An alternative for employers who no longer wish to pay out on holidays is to cap the ability to accrue holiday or vacation pay moving forward. Law360 noted:

An accrual cap is legal… because it prohibits the employee from earning vacation time in the first place, rather than taking away vacation time after the employee has earned it.

5. Covering holidays? There are 10 in Canada and the US, each.

Which holidays should your business provide pay for? It’s a question for every company to answer individually. But many companies opt to provide paid time off coinciding with federal holidays. Here’s a list of the 10 most frequently business holidays in US & Canada:

US Holidays

  • New Year’s Day
  • Birthday of MLK, Jr.
  • Washington’s Birthday
  • Memorial Day
  • Independence Day (4th of July)
  • Labor Day
  • Columbus Day
  • Veterans Day
  • Thanksgiving Day
  • Christmas Day

Canadian Holidays

  • New Year’s Day
  • Good Friday
  • Easter Monday
  • Victoria Day
  • Canada Day
  • Labour Day
  • Thanksgiving
  • Remembrance Day
  • Christmans Day
  • Boxing Day

For a more complete list of popular holidays: Public holidays in the United States, Public holidays in Canada (Wikipedia)

6. Floating holidays are increasing in popularity.

Progressive employers are increasingly augmenting their paid leave options with “floating holidays.” A floating holiday is a paid day off which can be utilized at the employee’s discretion. Technically, a floating holiday is functionally equivalent to a standard vacation day. But a floating holiday option can help companies with diverse employee backgrounds more visibly honor the desire of employees of all faiths to observe religious holidays.

7. For hourly employees, distribute holiday pay as a bonus line-item.

Managing holiday pay for salaried employees is straightforward. Standard pay period compensation continues as normal without debiting vacation hours to cover sanctioned holiday time out of the office.

However, there are a couple of different ways to handle holiday pay disbursements for wage-earners.

  1. Add a commensurate number of hours worked to the pay period to make up for the shortfall on the actual holiday.
  2. Add a line-item bonus, paid out at the value of the holiday time.

The benefit of the latter approach is that it keeps holiday hours from getting mixed in with actual hours worked. Additionally, paying out holiday time as a bonus rather than “hours worked” can prevent the early onset of an overtime payout threshold.

8. Managing holiday pay is easy with the right tools.

As with any payroll task, the tools that you have at your disposal will greatly impact the efficiency and accuracy with which you complete the job.

A capable payroll software package can help you answer yes to the following questions:

  • Does your software know it shouldn’t debit vacation hours when a full-time employee’s week adds up to less than 40 hours because of a holiday?
  • Can you produce reports identifying holiday pay has been furnished should you need to meet government contract, union, or other relevant compliance standards?
  • Do your employee pay stubs clearly reflect that holiday time has been paid?
  • If you provide holiday pay for some employees but not others, does your system know which employees are which?
  • Is it easy to define standard or floating holiday pay eligibility and accrual rules?
Adam Bluemner

is a Managing Editor at Find Accounting Software. He's been helping software buyers make informed investments in business software since 2004.

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