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Updated Jan 03, 2024

What Is Holiday Pay?

Establish a holiday-pay policy to incentivize your team.

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Kiely Kuligowski, Business Strategy Insider and Senior Writer
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This guide was reviewed by a Business News Daily editor to ensure it provides comprehensive and accurate information to aid your buying decision.

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While some businesses have the luxury of closing on days such as Christmas and Labor Day, others don’t. When you must remain open on holidays, the question becomes whether the employees who don’t work should be paid for those days and whether those who must work on holidays should be given extra compensation.

Because holiday pay is typically at the employer’s discretion, it can look different for each business. When you’re deciding how much, if anything, to pay employees who work or don’t work on holidays, it’s essential to understand what holiday pay is, how it’s calculated and how to develop a holiday-pay policy.

What is holiday pay?

Holiday pay is simply whatever compensation employees receive for working or not working on a holiday. Holiday pay can often serve as a “gift” to employees so they can take time off during the holidays without losing pay.

In the United States, holiday pay is often expressed as time-and-a-half pay, in which an employee is paid their regular rate plus one-half of their regular rate for each hour they work on a holiday. It may also be paid via a holiday bonus check or paid time off (PTO) on a holiday.

The United States has no laws requiring employees to be paid on holidays they do not work. However, it’s typical to give the following holidays off, with pay:

Some companies also may offer their employees other federal holidays — such as Martin Luther King Jr. Day, Presidents Day or Veterans Day — off with pay. 

A 2019 Society for Human Resource Management report found that 96 percent of private employers offer employee holiday pay. Similarly, as of March 2022, 68 percent of U.S. civilian workers receive between six and 10 paid holidays annually.

Note that public employers are required to observe all 11 federal holidays:

  1. New Year’s Day
  2. Martin Luther King Jr. Day
  3. George Washington’s birthday (Presidents Day)
  4. Memorial Day
  5. Juneteenth
  6. Independence Day
  7. Labor Day
  8. Columbus Day
  9. Veterans Day
  10. Thanksgiving Day
  11. Christmas Day

Who is eligible for holiday pay?

Anyone who works on an annual holiday is eligible for holiday pay, though that pay does not have to be more than the eligible employee’s standard pay rate. Employers may offer higher pay rates on certain holidays as a benefit and incentive to employees.

What religious accommodations do you need to make?

Title VII of the Civil Rights Act of 1964 stipulates that employers with 15 or more employees must accommodate employees’ “sincerely held religious beliefs or practices” unless doing so would cause “undue hardship or difficulty.” For example, you can offer your employees floating holidays to use at their discretion or paid or unpaid time off for religious holidays. 

When deciding which holidays deserve paid time off, you must determine how much PTO you can afford, the productivity impact of fewer workers, and what your competitors do.

How does holiday pay work?

Holiday pay generally does not work any differently than employees’ regular pay, with three general exceptions:

  • Overtime: If you have nonexempt employees who work more hours than usual during the holiday season (but not on the holiday itself), they are entitled to overtime pay for any time over 40 hours each week “at a rate not less than time and one-half their regular rates of pay,” according to the Fair Labor Standards Act (FLSA).
  • Time and a half: Though it’s not legally required, you may choose to offer time-and-a-half pay on specific holidays to incentivize employees to work on those days or to boost company morale.
  • Bonuses: You may choose to offer a bonus, which is essentially a gift to your employees, around the holidays. Holiday bonuses may be determined based on years of service, base salary or performance, and they are at the discretion of the company.

No special rules or laws govern holiday pay. You are only required to follow all state and federal labor laws, which do not dictate any special considerations for paying employees during holidays, other than overtime for nonexempt employees.

How do you calculate holiday pay?

If you offer time-and-a-half pay for working on a holiday, you take the employee’s regular hourly rate and add half of that rate. For example, if an employee’s regular pay rate is $12 per hour, their holiday pay would be $18 per hour. The best payroll software will typically handle all of the calculations for you.

Note that overtime is calculated weekly under federal law, which means that if you offer overtime pay to nonexempt employees, they are entitled to time-and-a-half pay for any time worked over 40 hours per week.

What are the benefits of providing holiday pay to employees?

There are several benefits of providing holiday pay, in any form, to employees:

Holiday pay can increase productivity and motivation.

Compensating employees with holiday pay can make them feel more valued, which tends to increase employee engagement. Additionally, paid holidays off can be a significant motivator because employees know they’ll be given days to rest without losing out on wages. Paid time off has been shown to lower stress levels, improve mental health and increase productivity, all of which are good for employees and your business.

“Holiday pay and automatic time off is a fairly low-cost, sensible fringe benefit,” said Jim Pendergast, senior vice president at altLine. “It shows goodwill and, in most cases, is pretty financially reasonable to take on, especially compared to other fringe benefit types out there.”

FYIDid you know
It's crucial to understand taxable vs. nontaxable fringe benefits. For example, retirement planning services and achievement awards aren't taxable, but discretionary bonuses are.

Holiday pay is an incentive to work on holidays.

It’s no secret that few employees are eager to work on holidays, so offering special pay for holidays, like time-and-a-half or overtime pay, is a great way to make it worth your employees’ time. This is especially important if you have to be open or do most of your business on holidays, which is likely the case if your business is retail.

“The promise of extra money will get people to work days most would choose not to work,” said Ravi Parikh, CEO of RoverPass. “It’s a good motivator, and many of your employees may find it preferable to taking that holiday off.”

Holiday pay can attract top talent.

“Top talent will always look for an organization with excellent benefits,” said Daniel Cooper, managing partner at Lolly.

Excellent employee benefits often include time off, especially around the holidays. Providing holiday pay shows you value your employees and their personal time, which helps you attract and retain top talent.

Did You Know?Did you know
More employers are designating the Monday after Super Bowl Sunday a holiday to accommodate sports fans who may call in sick anyway.

How can you develop a company policy for holiday pay?

When you create a holiday-pay policy, you must be clear and specific about what is allowed, what is not, and how holiday pay is calculated. This specificity helps you avoid disgruntled employees and potential legal action. 

Include these four elements in your holiday-pay policy:

1. Define floating holidays.

If you choose to offer floating holidays to cover religious or cultural holidays, clearly define how and when they accrue (e.g., three days at the start of every calendar year) and whether any unused floating holidays can be carried over into the next year or cashed out when an employee leaves the company.

2. Be clear about who is eligible.

Your policy should state which employees are eligible and which conditions make employees eligible or ineligible for holiday pay. For example, you could stipulate that employees must be scheduled for at least 20 hours per week and be in good standing with the company to receive holiday pay. 

3. Explain how time-and-a-half pay is calculated.

If you have hourly employees who are eligible for time-and-a-half pay, describe in detail how that pay is calculated and determined. By law, hours worked on holidays must be paid at no less than the regular rate. The FLSA does not require time-and-a-half or double-time pay for hours worked on holidays, but it does require time-and-a-half pay for any time that nonexempt employees work over 40 hours in a given workweek.

4. Describe holiday pay for exempt employees.

If your business only has salaried, exempt employees, detail how holiday pay will work. For example, if your business closes for the week between Christmas and New Year’s, state in the policy whether those days will be paid or unpaid. The FLSA mandates that any exempt employee receive their full salary for any workweek in which they do any work, and any business closure (including holidays) is not an approved FLSA deduction, meaning exempt employees must get their full salary if the business closes for a holiday. 

Include all holiday pay information in your employee handbook, and update your policies as necessary.

To work and to celebrate

With a robust holiday-pay policy, you clearly demonstrate how employees are paid for holiday time off or hours worked. Your team members will know what you do and don’t expect during the holidays, and you’ll have official documentation in case of legal action. That way, complying with holiday-pay law and treating your employees well during the holidays will be as easy as celebrating the occasion. 

Max Freedman contributed to this article. Source interviews were conducted for a previous version of this article.

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Kiely Kuligowski, Business Strategy Insider and Senior Writer
Kiely Kuligowski is an expert in project management and business software. Her project management experience includes establishing project scopes and timelines and monitoring progress and delivery quality on behalf of various clients. Kuligowski also has experience in product marketing and contributing to business fundraising efforts. On the business software side, Kuligowski has evaluated a range of products and developed in-depth guides for making the most of various tools, such as email marketing services, text message marketing solutions and business phone systems. In recent years, she has focused on sustainability software and project management for IBM.
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