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Holiday Pay and Year-End Bonuses: What’s Required, What’s Not?

Are you required to pay employees for time off on a holiday? Are they entitled to premium pay if they work on a holiday? What happens if a payday falls on a holiday? And what are the overtime and tax implications of year-end bonuses? Below, we address these and other common questions about holiday pay and bonuses.

Company-Observed Holidays:

Unless obligated by contract or agreement, private employers are generally not required to provide paid holidays to non-exempt employees (those entitled to minimum wage and overtime). However, if your company closes on a holiday, exempt employees (those who meet specific salary and duties requirements) must generally still receive their full pay, as long as they work any part of the workweek.

Holidays to Observe

Many employers voluntarily offer various paid holidays to employees. Employers may generally choose which holidays to observe as paid holidays. While some states have laws that restrict certain types of businesses from opening on a holiday, these laws don’t require employees to be paid for this time off.

Religious Observances

Under federal and many state laws, employers are generally required to provide reasonable accommodations for employees’ sincerely held religious beliefs and practices, unless doing so would impose an undue hardship on the business. This may include providing time off for religious observances. Consider voluntary shift swaps or flexible scheduling.

Overtime & Paid Holidays

Under federal law, non-exempt employees are entitled to overtime pay (at 1.5 times their regular rate of pay) whenever they work more than 40 hours in a workweek. Paid time off doesn’t count towards hours worked when determining whether overtime is due, unless you have promised otherwise. For example, if a non-exempt employee had a paid holiday on Monday and then worked 40 hours (or less) from Tuesday through Friday, the employee wouldn’t be entitled to overtime for that workweek under federal law. Note: Some states require overtime in additional circumstances, such as when employees work more than eight hours in a single workday. Therefore, the non-exempt employee in this scenario may be entitled to overtime in some states.

Reducing Absenteeism around Holidays

To help reduce absenteeism, some employers require that non-exempt employees work the day before and after a company holiday in order to receive holiday pay. Typically, employers don’t apply this policy to employees who scheduled the time off in advance. Note: This policy may not be used for exempt employees.

Premium Pay for Working on a Holiday:

Under federal law, there is generally no requirement to pay non-exempt employees a premium for working on a holiday, unless it results in the employee working more than 40 hours in the workweek. However, there are exceptions in states like Massachusetts and Rhode Island, where some employers may be required to provide premium pay regardless of how many hours the employee worked. For example, Rhode Island requires employers to pay 1.5 times an employee’s normal rate of pay for any hours worked on designated state holidays (certain industries are exempt from this requirement). Absent a state requirement, some employers choose to offer premium pay to employees as an incentive to work on a holiday.

Premium Holiday Pay & Overtime

Under federal law, an employee’s regular rate of pay for the purposes of calculating overtime includes their hourly rate plus the value of nondiscretionary bonuses (see below), shift differentials, and certain other forms of compensation. However, under federal law, employers may exclude premium pay for work on a holiday when determining an employee’s regular rate of pay. Check your state law, which may have additional rules on whether premium pay must be included in the determination.

Payday Falls on a Holiday:

If a scheduled payday falls on a holiday, some states require payment on the preceding business day. Absent such a requirement, employers generally have the option of paying employees on the day before or after the holiday. If your check date falls on a bank holiday and you wish to pay employees the day before, adjust your check date to avoid delaying payroll delivery. For more information, see ADP’s Year-End Payroll Guide.

Bonuses:

If you provide bonuses to your employees, there may be overtime and tax implications to consider:

Overtime Considerations

When determining an employee’s regular rate of pay for the purposes of overtime, employers must include nondiscretionary bonuses. A nondiscretionary bonus is announced to employees in advance typically to encourage them to work more efficiently and/or to remain with the company. With this type of bonus, employees expect that if they meet certain criteria (such as attendance or productivity targets), they will get a bonus. Examples include bonuses for meeting set production goals, retention bonuses, and commission payments based on a fixed formula. Note: Most bonuses are considered nondiscretionary.

By contrast, discretionary bonuses aren’t announced or promised in advance (and do not need to be included when calculating overtime). For example, if you decide at the end of the year to surprise employees with a bonus, this would generally be considered a discretionary bonus.

Tax Considerations

Bonuses are generally considered supplemental wages and are subject to federal taxes as well as certain state taxes. For federal taxes, bonuses up to $1 million are typically taxed at a flat rate of 25 percent (a higher percentage for amounts over $1 million). Keep in mind that many types of bonuses are considered taxable by the IRS. For example, cash, a gift certificate, gift card, and similar items that can easily be exchanged for cash are typically considered taxable wages, regardless of the amount (see IRS Publication 15-B). However, if an employer gives a turkey, ham, or other item of nominal value for the holidays, it is generally not considered taxable income.

Payroll Processing

If you’d like to surprise your employees with a year-end bonus, run a special bonus payroll after you run your regular payroll. This approach won’t impact your normal payroll processing cycle (period ending dates and check date). To be sure that your W-2 amounts are correct, process your bonus payrolls before the end of the year. Note: There are two types of bonus earnings available in RUN Powered by ADP®: Bonus and Supplemental Bonus. Be sure to use the appropriate type because each one is taxed differently. For more information, see ADP’s Year-End Payroll Guide.

Final Thoughts:

With the holiday season fast approaching, review your policies and practices to make sure you are paying employees in accordance with federal, state, and local rules.

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