Holiday pay: What is it and how to calculate it

Employee incentives are great motivators for boosting productivity and creating a positive work environment. Holiday pay is an incentive and employee benefit that can help keep your business on track during the holidays. Roughly four out of every five civilian employees have access to holiday pay, according to the US Bureau of Labor Statistics. 

Holiday pay ensures you fairly compensate employees for working on designated holidays. Both employers and employees should understand how to calculate holiday pay and the rules governing it. 

Let’s dive into how holiday pay works, how to calculate it, and how holiday policies can vary.

How does holiday pay work? 

Holiday pay is not mandatory for private employers, according to the Fair Labor Standards Act (FLSA). It’s up to each individual private company to determine their holiday pay policy. Many companies offer extra compensation such as a higher hourly rate to incentivize employees to work on holidays. Requirements differ for federal employees and employers in Rhode Island.

Holiday pay for federal employees includes the 11 federal holidays and Inauguration Day. Rhode Island is the only state that requires holiday pay. Rhode Island holiday pay requires a premium rate for nonexempt employees who work certain holidays. 

Private businesses do not have to offer holiday pay and do not have to observe federal holidays. If you offer holiday pay, you can select which holidays to include. You also have the flexibility to create qualifying criteria for your holiday pay policy. This may include having different policies for full-time, part-time, and seasonal employees. You’ll also want to ensure your holiday pay policy is clearly outlined in their employment contract. 

Nonexempt vs. exempt employees 

Holiday pay works differently for exempt vs. nonexempt employees. Examples of exempt employees include executive-level positions and professional roles. Nonexempt employees include hourly workers, skilled tradespeople, and technicians.

Here’s how holiday pay works for exempt and nonexempt employees: 

• Exempt employees are typically salaried and not eligible for overtime pay. They receive their full salary regardless of the number of hours worked or the holidays taken. For holiday pay; they receive their regular salary on holidays they do not work. 
• Nonexempt employees are usually hourly workers who are eligible for overtime pay. They may receive holiday pay (if the company offers it) for working on designated holidays. 

Exempt employees receive their regular salary on holidays, while nonexempt employees may receive extra pay for working on holidays.

How to calculate holiday pay? 

The calculation of holiday pay for exempt employees typically involves an additional compensation rate. It’s generally a premium to the employee's regular pay rate, such as 1.5 or double their typical hourly rate. The formula for calculating holiday pay is:

While this formula is the standard for calculating holiday pay, employers have the flexibility to establish their own rates and conditions. Some employers may pay an even higher rate, such as triple time, depending on the circumstances.

What is an example of holiday pay?   

As an example, your business is open on a designated holiday, such as Memorial Day. You have an employee that makes $22 per hour. Your holiday pay policy is to pay double time (two times their regular hourly rate) for working hours on designated holidays.

Your employee works eight hours on Memorial Day, then their holiday pay for the day is: 

• Employee’s hourly rate x Holiday premium x Hours worked on the holiday 
• $22 per hour x 2 x 8 hours = $352 

Alternatively if your holiday pay policy is to pay employees time-and-a-half, the holiday premium would be 1.5. In that case, your employee’s holiday pay for an eight-hour shift on the holiday would be $264 ($22 x 1.5 x 8).

Benefits of holiday pay 

Holiday pay provides several benefits for you and your employees. For you, holiday pay helps maintain productivity and ensures your business is adequately staffed during the holidays. For employees, holiday pay is a great incentive for earning more money during the busy holiday period.

Here are the key reasons you might consider offering holiday pay:

• Improves productivity
• Builds motivation
• Fosters employee loyalty
• Promotes a positive work culture
• Boosts employee satisfaction

Offering holiday pay as part of an employee's compensation package can also be a way for employers to attract and retain talent. It demonstrates that the company values work-life balance and acknowledges the additional effort and considerations for working holidays.

How to develop a holiday pay policy 

Developing a holiday pay policy ensures fair and consistent compensation for employees who work on holidays. It may also be part of your broader paid-time-off policy. 

Your holiday pay policy takes into account federal holidays, religious holidays, and other company policies. Here’s how to develop a paid holiday policy:

1. Define your holidays  

When implementing a holiday pay policy, it is crucial to define the specific holidays and dates that will qualify for holiday pay. These days typically include federal holidays, like New Year's Day and Independence Day.

Companies may include optional holidays, like those with cultural or religious importance. Some companies also offer floating holidays that employees can use at their discretion. Consider your workforce's diversity and background, and accommodate specific holidays relevant to your region.

2. Clearly state who’s eligible 

Eligible employees for holiday pay typically include full-time employees who work 40 hours per week. Part-time employees may also be eligible, depending on your specific criteria. 

3. Decide how you’ll calculate holiday pay 

The most common holiday pay rate formula is 1.5 times or 2.0 times the employee's regular pay rate. For example, if you pay 1.5 times and an employee earns $15 per hour, their holiday pay rate would be $22.50 per hour. Alternatively, if you offer 2.0 times holiday pay, the hourly holiday pay for the employe above would be $30 per hour.

4. Communicate your policy 

Let employees know about your holiday pay policy, and remind them ahead of the holiday. Clearly outline your policy in employee handbooks and employment contracts. 

Businesses, like retailers, that plan extended hours for holiday shopping should also communicate their schedules to employees. Consider hiring seasonal employees if you find yourself in need of additional help.

Next steps for streamlining your payroll process

While holiday pay is not mandatory for private businesses, it’s important in creating a productive and positive work environment. A clear and well-communicated holiday pay policy is essential for you and your employees. Consistency in applying holiday pay policies is vital to avoid misunderstandings or conflicts.

Accounting software with integrated payroll features like time tracking and tax penalty protection can help ensure your holiday pay is accurate and adheres to paid holiday policies.

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