With the holiday season underway, questions about holidays, pay, and year-end bonuses tend to surface. To help you understand requirements and best practices related to these topics, here are several do's and don'ts to keep in mind.
Count hours worked accurately.
Under federal law, non-exempt employees are entitled to overtime pay (at 1.5 times their regular rate) whenever they work more than 40 hours in a workweek. Some states require overtime in additional circumstances. However, paid time off, such as paid holidays, doesn't count towards hours worked when determining whether overtime is due, unless you have promised otherwise.
Check state rules on premium pay.
Under federal law, there's generally no requirement to pay non-exempt employees a premium for working on a holiday, unless working on the holiday 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 for working on a holiday regardless of how many hours the employee worked in the workweek. Absent a state requirement, some employers choose to offer premium pay to employees as an incentive to work on a holiday.
Verify "regular rate of pay" when premium pay is provided.
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, shift differentials, and certain other forms of compensation. Employers may exclude premium pay for work on a holiday when determining an employee's regular rate but only if it's at least 1.5 times the employee's normal base wage (see 29 CFR 778.203). Check your state law, which may have additional rules.
Withhold taxes on bonuses.
Bonuses are generally considered supplemental wages and are subject to federal taxes as well as certain state taxes. For federal taxes, when an employee receives $1 million or less in supplemental wages during 2019 and those wages are identified separately from regular wages, the flat withholding rate is 22 percent. When an employee receives over $1 million in supplemental wages, the withholding on the excess is 37 percent.
Consider ways to reduce absenteeism around paid 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 pay for time off on a holiday. 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.
Adjust paycheck date if necessary.
If a scheduled payday falls on a holiday, some states require payment on the preceding business day. Absent 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.
Count bonuses toward meeting minimum salary for exemption (YET!).
The Department of Labor (DOL) has released a final rule that will increase the minimum salary requirement to be considered exempt from overtime under the Fair Labor Standards Act (FLSA). The rule allows employers to use nondiscretionary bonuses, incentive payments, and commissions to satisfy up to 10 percent of the new minimum salary requirement, as long as these forms of compensation are paid at least annually. However, the changes don't take effect until January 1, 2020, so bonuses earned in 2019 cannot be used to meet the minimum.
Make deductions from exempt employees' pay for company holidays.
Unless obligated by contract or agreement, private employers are generally not required to provide paid holidays to non-exempt employees. However, if your company closes on a holiday, exempt employees must generally still receive their full pay, as long as they work any part of the workweek.
Neglect reasonable accommodation requirements.
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 permitting voluntary shift swaps or offering flexible schedules.
Misclassify bonuses as discretionary.
As mentioned above, when determining an employee's regular rate of pay for the purposes of overtime, you 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. 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.
When calculating overtime, forget to apportion bonuses earned over multiple
If the nondiscretionary bonus is earned over a single workweek, the bonus is added to the employee's regular earnings for that workweek when determining their regular rate of pay. However, if the bonus is earned over a series of workweeks, the bonus must be included in the regular rate of pay in all overtime weeks covered by the bonus period. If necessary, you may temporarily disregard the bonus in computing the regular hourly rate until you know the bonus amount. Then, apportion it back over the workweeks in which the employee earned the bonus.
Example: If an employee receives a $2,600 bonus for meeting certain annual goals, divide $2,600 by 52 weeks ($50/week). Add the $50 to the employee's regular earnings in each workweek the employee worked overtime to figure out the employee's regular rate of pay and overtime due for that week. For any workweek in which the employee worked overtime, you would then need to make catchup payments for the difference between what you paid the employee in overtime at the time and what the employee is entitled to now that the bonus is known.
Assume small bonuses aren't taxable by the IRS.
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's generally not considered taxable income.
As the year comes to an end, make sure your pay practices comply with federal, state, and local rules.