What Is Holiday Pay? A Small Business Guide

Many employees may expect to have at least some holidays to look forward to and most probably want to be paid for them, whether or not they work on the holiday. Find out what holiday pay is, what it's for, and who is eligible for it.

What is holiday pay, and is it mandatory?

Holiday pay refers to compensation that employees receive for working on holidays, such as New Year’s Day or Thanksgiving. It can also refer to an agreement between the employer and employee that they will still get paid even if they don’t work on that holiday.

Since eight out of 12 months have at least one holiday on the calendar, you as an employer have to figure out how you're going to handle them. 

There are no federal holiday laws that say you have to give employees the day off for federal or state holidays. And if an employee is nonexempt or hourly, you may not even have to pay them for time not worked depending upon what state you're in. Understanding the legal rules of holiday pay is the best place to start. It’s also important to find a balance between taking care of your employees and keeping your business profitable.

Holiday pay is an incentive for employees. It encourages employees to work on a day that most people don’t want to by increasing their hourly wage. Or, it engenders loyalty by giving employees a paid day off. 

It’s important to clarify that holiday pay is different from overtime pay. Overtime pay refers to paying a higher rate for any hours an employee works over 40 hours in a week. Holiday pay refers to hours worked within a standard work week.

Under federal law, holiday pay is not mandatory. Employers are not required to pay employees extra or for not working on a holiday. Whether you offer your employees holiday pay will depend on your company policy and state law. 

Holiday pay rules and requirements

When it comes to holiday pay, it’s important to first gain an understanding of federal and state laws. In most cases, your company policy will determine whether or not employees receive holiday pay. 

Federal laws

The federal law that regulates holiday pay is the Fair Labor Standards Act. Under the FLSA, employers are not required to provide holiday pay for time not worked. While employers must provide reasonable accommodations for religious holidays, they are still not required to give holiday time off or pay for hours not worked.

Should a nonexempt or hourly employee be scheduled to work on a holiday, you are only required to pay for hours worked at the regular rate of pay. Exempt (salaried) employees, however, would be paid for the entire workweek at their regular rate should they work any time during the workweek. The distinction should be clear in your policy.

State laws

Some states require holiday pay for certain industries or types of employees. Be sure to check if your state has laws about holiday pay.

For example, hourly employees in Rhode Island are paid time-and-a-half or 150% of their usual rate to work on Sundays and holidays.

Company policy

For most private companies, the determining factor for whether or not they offer holiday pay is the company policy. Essentially, employers get to choose to offer holiday pay to employees. This company policy should be clearly written and included in the employment contracts of each employee.

Why you need a holiday pay policy

Everyone should have a holiday pay policy. Without a policy in place, there is a greater likelihood that people will be treated differently. "That opens up the argument that there's discrimination going on for one of the reasons protected under state or federal law," says Fisher Phillips senior counsel Michael Miller. "A policy will eliminate that possibility. And employers should follow the policies they enact."

Your policy should clearly state which days will be considered holidays and how you will or will not pay them for those days. "Many employers," Miller notes, "have a policy that, to receive holiday pay, [employees] must work the day before and the day after the holiday so people don't call in sick to extend their leave."

No matter what you decide your policy to be, it should be clearly written down in the employee handbook and all employment contracts. It should be easy to understand and the information easy to access.

Holiday pay policy components

When writing your holiday pay policy, you should include:

• Eligible holidays
• Pay rate for holidays
• Employee eligibility requirements

Some employers require that employees work for the company for a certain amount of time before they become eligible for holiday pay. It also should be clearly written out how much employees are paid when they don’t work on a holiday.

How much is holiday pay? How to calculate

Because holiday pay is discretionary at the federal level, it's often up to you to determine how you will handle payment when holidays fall on someone's sick or vacation day. In some states, if someone is out sick for an entire week when a holiday occurs, you do not have to pay holiday pay. This means a non-exempt hourly employee would be charged for sick days if you pay sick days.

Paid time off or PTO

Most employers separate holiday pay and paid time off, or PTO, and vacation time. While holiday pay is similar to PTO, it must be taken on a specific date. PTO can be taken any day and can be for personal reasons, illness, or vacation.

Your company might consider holiday pay similar to PTO by paying employees their normal rate for a day not worked.

Premium rates

Alternatively, you can pay employees a premium rate for working on a holiday. 

Many employers offer their employees time-and-a-half or double time for working on a holiday. This means the employee receives a rate above their normal pay, such as 1.5 times or 2 times the regular amount. 

For example, if an employee is typically paid $20 per hour for an eight-hour work day, they would receive $160 on a normal day. If you pay 1.5 times for working on a holiday, they would receive $30 per hour, for a total of $240. If you pay twice the wages for holidays, they would receive $40 per hour and a total of $320. 

Premium pay incentivizes employees to work on a day that most people want to take off and spend with family or friends.

Best practices for employers

When creating your holiday pay policy, keep in mind that you want to provide consistency, communication, and compliance. Creating your policy should be done carefully. 

It is perfectly legal to allow one class of employees, e.g., office workers, to receive holiday pay but not another class, e.g., field workers.

You have to be careful, though, not to inadvertently discriminate against a protected class, such as sex, age, race, etc. For example, say all of your field workers are men, and all of your office workers are women. Should only your office workers be eligible for holiday pay, your male field workers could have a basis for a sex discrimination lawsuit.

"Reasonable policies," says Miller, "are going to be in compliance with applicable local, state, and federal discrimination laws."

It’s also important to properly communicate your holiday pay policies and update those policies regularly. The policy should be easy to access and understand, so all employees are aware. When updates are made, it should be communicated to all employees. Your policy should also be in compliance with all state and federal laws.

It’s best practice to include in your holiday pay policy:

• Eligibility criteria
• Which holidays are paid
• Payment calculation
• What happens if they choose to work on that day
• Process for using unused holiday pay
• Exceptions to the policy

How do sick, vacation, and FMLA days figure in?

Because the holiday is discretionary, it's totally up to you to determine how you will handle payment when holidays fall on someone's sick or vacation day. For example, if someone is out sick for an entire week when a holiday occurs, you do not have to pay holiday pay. This means a non-exempt, hourly employee would be charged for sick days if you pay sick days.

If you do not have sick days, then the employee would be out one week's pay. An exempt, salaried person out the entire week would also be out one week's pay if you do not pay sick days, and the person did not do any work (e.g., take or make a work phone call, work on documents, etc.).

Holidays that fall within the time an employee is out on Family Medical Leave Act (FMLA) leave are generally unpaid, as FMLA leave is unpaid leave, though an employee may use sick and vacation days to cover unpaid days.

What days are eligible for holiday pay?

Since holidays are discretionary, many employers follow the federal holiday schedule. 

Typical paid holidays might include:

• January: New Year's Day; Martin Luther King, Jr. Day (Observed)
• February: Washington's Birthday (President's Day)
• May: Memorial Day
• July: Independence Day
• September: Labor Day
• October: Columbus Day/Indigenous Peoples Day
• November: Veterans Day, Thanksgiving Day
• December: Christmas Day

State holidays may be included as well. 

To compensate for non-standard holidays (e.g., Yom Kippur, Kwanzaa), Miller advocates giving everyone two floating holidays to be used at the employees' discretion. This gives them the opportunity to observe religious holidays.

Although there are no specific holiday pay laws in the U.S., there are several federal and state laws that require employers to treat employees fairly when a holiday pay policy is established. Regardless of how you choose to pay—or not pay—for a holiday, create a standard, and stick to it.

FAQs

How does holiday pay for hourly employees work?

For most hourly employees, holiday pay depends on whether you worked on that day. This generally applies to both full-time and part-time employees who work hourly.

If you do work, many employers offer holiday premium pay. This might mean getting paid time-and-a-half or double time. 

Who is eligible for holiday pay?

In the U.S., there is no federal law mandating holiday pay for anyone or listing designated holidays. Holiday pay is usually left up to company policy, though some states do require premium holiday pay.

What happens if a holiday falls on the weekend?

In general, if a federal holiday falls on the weekend, it is observed on the preceding or following work day. So, holidays that fall on a Saturday are observed on Friday, and those that fall on Sunday are observed on Monday. 

Your company policy will determine whether you receive pay or time off if a holiday falls on the weekend. There is no federal law regulating that.

Diane Faulkner contributed to this article.