As the year comes to a close, many employers will be facing the annual challenge of managing holiday pay, year-end bonuses, and leave. This year, the COVID-19 pandemic and recent rule changes may present some additional considerations for employers. To help you understand requirements and best practices related to these topics, here are some key points to keep in mind.
Unless obligated by contract or agreement, private employers are generally not required to provide paid holidays to non-exempt employees (those entitled to minimum wage and overtime). However, if your company closes on a holiday, exempt employees (those who meet specific salary and duties requirements) must generally still receive their full pay, as long as they work any part of the workweek.
Holidays to Observe:
Many employers voluntarily offer various paid holidays to employees. Employers may generally choose which holidays to observe as paid holidays. While some states have laws that restrict certain types of businesses from opening on a holiday, these laws don't require employees to be paid for this time off.
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 voluntary shift swaps or flexible scheduling.
Overtime & Paid Holidays:
Under federal law, non-exempt employees are entitled to overtime pay (at 1.5 times their regular rate of pay) whenever they work more than 40 hours in a workweek. Paid time off doesn't count towards hours worked when determining whether overtime is due, unless you have promised otherwise. For example, if a non-exempt employee had a paid holiday on Monday and then worked 40 hours (or less) from Tuesday through Friday, the employee wouldn't be entitled to overtime for that workweek under federal law. Note: Some states require overtime in additional circumstances, such as when employees work more than eight hours in a single workday. Therefore, the non-exempt employee in this scenario may be entitled to overtime in some states.
Reducing Absenteeism Around Holidays:
To help reduce absenteeism around holidays, some employers require that non-exempt employees work the day before and after a company holiday in order to receive holiday pay. Typically, employers don't apply this policy to employees who scheduled the time off in advance and this policy may not be used for exempt employees.
Premium Pay for Working on a Holiday:
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 triggers federal or state overtime obligations. 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.
Premium Holiday Pay & Overtime:
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.
Paid Holidays & FFCRA Leave:
In March, the United States enacted the Families First Coronavirus Response Act (FFCRA), which requires covered employers to provide paid leave to certain employees impacted by COVID-19 and offer tax credits to employers that do so. Effective April 1, 2020, the law requires two types of paid leave: Emergency Paid Sick Leave (EPSL) and Public Health Emergency Leave (PHEL)/Expanded FMLA.
To date, the Department of Labor (DOL) hasn't specifically addressed situations in which a company paid holiday falls during a time in which an employee is on FFCRA leave. Consider consulting legal counsel to help determine how to treat these types of situations.
As a result of the COVID-19 pandemic, budgets may be even tighter this year. If you're unable to offer year-end bonuses, consider other perks that may help boost employee morale, such as additional time off, flexible work arrangements, professional development, and recognition programs.
Tax Withholding on Bonuses:
If you do plan to provide a bonus this year, remember that 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 2020 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.
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.
Bonuses and Overtime Pay:
When determining an employee's regular rate of pay for the purposes of overtime, employers 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.
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 their 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.
Bonuses and Overtime Exemption:
Effective January 1, 2020 the DOL's final rule increased the minimum salary requirement to $684 per week to be considered exempt from overtime under the Fair Labor Standards Act (FLSA). The rule also 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.
As 2020 comes to a close, it's important to ensure you've satisfied this requirement, if applicable. Employers may make one final catch-up payment no later than the next pay period after the end of the year if the bonus, incentive payment, or commission ended up being less than anticipated. For example, if an employer chooses this option, each pay period, the employer must pay their exempt executive, administrative, or professional employee at least 90 percent of the salary level ($615.60 per week). Then, if at the end of year, the employee's paid-out salary plus the nondiscretionary bonuses and incentive payments (including commissions) doesn't equal at least $35,568, the employer would have one pay period to make up for the shortfall.
Note: Some states have their own rules for exemption from overtime that don't allow employers to apply bonuses toward meeting the minimum salary requirement. Therefore, to maintain the overtime exemption under state law, these employers must satisfy the state's requirement with a salary alone.
Bonuses and the Fluctuating Workweek Method:
Earlier this year, the DOL issued a final rule (effective August 7, 2020) that allows employers to offer bonuses or other incentive pay to employees who are paid overtime under the FLSA's fluctuating workweek method. Employers must include these payments when calculating the regular rate of pay if otherwise required under the FLSA (see above). The DOL says the final rule can help employers navigate the challenges of the COVID-19 pandemic by offering an alternative pay method to address varied schedules implemented to promote social distancing.
While the fluctuating workweek method can seem like an attractive option for reducing overtime costs when compared with the standard overtime calculation, there are some things to consider. For example, some states, including California, expressly prohibit employers from using the fluctuating workweek method for paying overtime. Additionally, this method is a common source of employee lawsuits. Check your state (and local) law and consult legal counsel as necessary before using it.
With the holiday season fast approaching, review your policies and practices to make sure you are paying employees in accordance with federal, state, and local rules.