Many employees believe they are entitled to holiday pay, even if they do not work on the holiday. This is not the case. In fact, neither the Fair Labor Standards Act ("FLSA") nor most state laws, including Ohio, require a private employer to pay hourly employees for working or not working on holidays (federal or otherwise). (For employers in Massachusetts, however, be sure to check your Blue laws.) This type of pay, if provided, is typically considered a fringe benefit and is a matter of agreement between an employer and an employee (or the employee's union representative). Please note that this does not apply to salaried, exempt employees who get paid for holidays (even ones they don't work) because the law prohibits employers from making wage deductions if the company is closed on a holiday.
What if an employer pays its employees for holidays for which they don't actually work?
Some employers may choose to pay their employees for the holiday, e.g., eight hours for New Year's Day, so it is important that employers understand the FLSA and comparable state law overtime implications. While employers may choose to pay employees for an additional eight hours on a holiday they did not work, these additional eight hours of time that did not constitute actual work cannot be used to go into a calculation for overtime purposes. Federal and most state laws require employers to pay nonexempt employees one and one-half times their regular rate for each hour worked over 40 in a workweek. These non-worked hours don't count.
Here's what it looks like in application:
Say an employee works 42 hours in a workweek and gets an additional 8 hours of pay for New Year's Day, even though the employee did not actually work on New Year's Day. The employee earns $10 an hour. The employee is entitled to 48 hours of straight pay and 2 hours of overtime, not 40 hours of straight pay and 10 hours at time and a half.
48 hours x $10 $480
2 hours x $5 (half time) $10
What if an employer gives an employee a holiday bonus?
Some employees really get into the holiday spirit and include holiday bonuses, along with other compensation. The FLSA excludes eight types of payments from the regular rate, one of which is the discretionary bonus. Discretionary bonuses are when the employer has discretion both on whether the payment is actually awarded and on the amount of the payment until a time close to the end of the period for which the bonus is paid. Nondiscretionary bonuses, on the other hand, typically are those agreed to, promised or contracted. Thus, for FLSA purposes, only nondiscretionary bonuses affect the overtime calculation.
For purposes of the FLSA, nondiscretionary bonuses must be included in the calculation for regular pay when computing overtime. For example, if an employee earns $10 an hour and works 45 hours in a work week, the employee would be entitled to 40 hours at $10 an hour and 5 hours at time and a half, or $15 for a grand total of $475.
Now let's go one step further. Let's say the employer gives the employee a holiday bonus that is a matter of contract between the employee and the employer paid out the bonus in the amount of $500 in the week discussed above, when the employee worked 45 hours. To calculate the overtime due for a week covered by a nondiscretionary bonus, the employer must first calculate the average rate of pay for the week, given the impact of the bonus. Here's how that calculation works:
Step 1: Add the nondiscretionary bonus paid (or the value of the nondiscretionary bonus given) to the total pay for the week.
Regular pay = ($10.00 x 45 hours) + $500 nondiscretionary bonus = $950.00
Step 2: Calculate the premium regular rate by taking the amount from Step 1 and divide that by the number of hours worked.
$950.00/45 hours = $21.11 an hour is the new regular rate
Step 3: Determine the premium pay owed by dividing the new regulate rate in half and multiply that by the number of overtime hours worked.
$21.11 x .5 x 5 hours worked = $52.78
Step 4: Determine total weekly compensation by adding amount in Step 1 to amount of premium pay due in Step 3.
$950.00 + $52.78 = $1,002.78
Failing to include the $500 non-discretionary bonus when calculating the regular rate of pay would violate the FLSA and could mean steep penalties for the employer. So, if you decide to give holiday bonuses, make sure you comply with the FLSA and comparable state laws regarding overtime pay or make sure your holiday bonuses qualify as discretionary so they can be excluded from this calculation.