How to Create a Holiday Pay Policy

Happy employees make for a better business. They say money can’t buy happiness, but tell that to someone you’re asking to come into work at 9 a.m. on New Year’s Day.

Whether you open for business on typical holidays or give employees the day off, you need a concise holiday pay policy.

Overview: What is holiday pay?

Holiday pay refers to employee compensation on holidays. It encompasses two policies:

• Compensation, if any, for employees who are given the day off for a holiday
• Additional compensation, if any, for employees who work on a holiday

While it’s not required in most parts of the U.S., companies commonly give hourly employees major holidays off and pay them as if they had worked their regular shifts. Employees who work on Thanksgiving, New Year’s Day, and other holidays often earn a higher-than-normal hourly wage, called a holiday shift differential.

Every business with employees should draft a holiday pay policy to delineate the holidays on which it closes, offers holiday pay, or both. It might seem counterintuitive to pay employees for not working, but adding holiday pay to a list of perks could help attract and retain high-performing employees.

Holiday pay is subject to the same payroll taxes and minimum wage laws as regular pay.

How do overtime and holiday pay work?

To the Fair Labor Standards Act (FLSA), which sets federal labor laws, holidays are just another day of the year. You don’t need to pay employees extra for working -- or not working -- on holidays; that practice comes from the goodness of your heart.

Although it’s not required, companies might offer a premium wage rate to incentivize employees to pick up undesirable shifts on holidays. When you pay a higher-than-normal wage rate on a holiday, night, or weekend, you’re offering shift differential pay. If you provide shift differential pay to one employee, you’re offering it to everyone working those hours (not just your favorites).

Still, there are times when you owe your employees overtime. You’re required to pay FLSA time-and-a-half overtime pay when:

• An employee has already worked a standard workweek before starting a holiday shift
• An employee will have worked more than a standard workweek by the end of the holiday shift

In some states, you’re required to pay overtime to employees for working more than eight, nine, or 10 hours in a single day. Check with your state’s labor department for specifics.

What gets confusing is that shift differentials are like FLSA-mandated overtime pay, except shift differentials are voluntary and overtime pay isn’t. Even more confounding, shift differential and overtime pay can layer on top of each other, making payroll processing more laborious than usual.

Say you own a fireworks store that stays open on July 4, a major U.S. holiday known for fireworks displays. You pay your trusty employee, Amber, time and a half -- or 1.5 times her regular wages -- for showing up to work while her family fires up the grill for a backyard barbecue. In other words, you’re offering a time-and-a-half shift differential for working on July 4.

Amber’s regular rate is $15 per hour. With the shift differential, she earns $22.50 per hour ($15 standard wage rate x 1.5 shift differential rate).

To make this as complicated as possible, say Amber starts the holiday shift having already worked 40 hours for the week. Since she logged more hours than a standard 40-hour workweek, you’ll owe FLSA overtime pay in addition to the shift differential pay. FLSA requires time-and-a-half overtime pay, so in this case, Amber earns $33.75 ($22.50 shift differential wage rate x 1.5 overtime rate).

Although you don’t have to pay shift differentials on holidays, it becomes the basis for the FLSA-required overtime pay calculation. Your payroll software can help you crunch the numbers.

Who qualifies for holiday pay?

The magic of holiday pay is you get to write the policy from start to finish. There are no federal requirements for holiday pay, although it’s a good idea to adopt your industry’s conventions for it.

It’s standard practice to offer holiday pay to non-exempt, hourly employees. Think of servers, retail workers, and the like. When you tell them not to come in on a holiday, pay them as if they had worked. If you ask them to come in on a holiday, offer a time-and-a-half or double-time shift differential.

Full-time, salaried employees should expect to work any day that your business is open. Since they’re not paid by the number of hours worked, there’s no expectation for you to pay them extra for working on a holiday. Likewise, when your business closes for a holiday that falls on a workday, you still pay them for the full week.

How to set up a holiday pay policy

Don’t reinvent the wheel for your business’s holiday policy. Hit these major points in your employee handbook:

1. Identify your business’s observed holidays

List the holidays for which your business either closes or offers holiday pay. Many industries have developed norms for observed holidays. For example, government and nonprofit entities generally observe all federal holidays.

Sometimes holidays fall outside your business hours. Define what happens in those scenarios. You may choose not to observe the holiday or observe it on the closest business day. You should stipulate that employees are not expected to work on observed holidays unless asked.

2. Explain holiday pay eligibility

Your holiday pay policy will likely look different for different employee classes, like hourly vs. salaried or part-time vs. full-time. Mention that upfront.

For example, many businesses only offer paid holidays to non-exempt employees who have been at the company for more than a month or two. Temporary or part-time employees might not earn holiday pay at all.

Exempt, salaried employees customarily earn their regular salary whether or not they work on an observed holiday, so any additional compensation doesn’t apply to them.

3. Define holiday pay

Here’s the meat of your holiday pay policy. Your two-pronged compensation policy should answer the following questions:

• Do eligible employees earn their regular hourly wages on observed holidays even when they don’t report to work?
• Do eligible employees who work on holidays earn their regular wages, or is there a shift differential? If so, what is the differential rate?

For example, a business policy might say something like:

4. Address religious holiday observance

Employees might observe religious holidays not included in your business’s holiday list. The Civil Rights Act of 1964 says that companies with more than 15 employees must let employees take unpaid time off to observe religious holidays unless it would cause undue hardship to the business. Some states have instituted a similar law for smaller companies.

5. Consider offering a floating holiday

A floating holiday provides flexibility to employees who need a day off for religious holidays that your business doesn’t observe. Or, employees can treat it as an extra vacation day.

Businesses usually stipulate that a floating holiday doesn’t accrue, or roll over, to the next year, even if vacation days do.

Keep your best employees with holiday pay

Employee retention boosts your company’s productivity and lowers the time spent recruiting new workers. Holiday pay is just one piece of a benefits package that makes employees feel valued.