The end of the year often brings a bevy of holiday compensation: bonuses, paid days off, and higher rates of pay. However, it is critical for employers to keep the Fair Labor Standards Act in mind when doling out these benefits. Failing to do so could result in underpayment and liability exposure. Any employer with non-exempt employees – those that are eligible for minimum wage and overtime protection under the FLSA – has to carefully consider how holiday compensation is paid. Because, unless the holiday compensation falls into one of the FLSA’s tightly prescribed exceptions, it has to be included in calculating employees’ regular rate for overtime purposes.

As a quick refresher, the regular rate is the wage rate non-exempt employees earn in a specific workweek where they also earn overtime. It is used as the base of the 1.5x overtime calculation for those overtime hours. In most cases, the regular rate is easy to determine—it is simply the pay rate the employee earns throughout the week. However, when additional compensation is paid, that additional compensation may have to be included in the regular rate calculation. For example, if Employee A earns $15 per hour and she worked 50 hours on Thanksgiving week, normally, Employee A’s rate for those 10 overtime hours would be $22.50 per hour (1.5 x $15/hour). However, let’s assume Employee A also earned an additional $5 per hour for working eight hours on Thanksgiving. Employee A’s overtime rate for that week is now $23.70 per hour (1.5 x new regular rate of $15.80). That new regular rate has to include the extra $40 Employee A earned for working on Thanksgiving.

What gives?! I thought we were just doing something nice for our employees that have to work on Thanksgiving?

To avoid this unpleasant surprise, it is important to understand how the FLSA treats holiday compensation. There are three major forms of holiday compensation: holiday bonuses, paid days off, and holiday wage rates. Each have their own rules and regulations.

Holiday bonuses

Here, we are talking about lump sum gifts paid once around the holidays. Generally, these bonuses are excludable from the regular rate calculation. However, these bonuses must be discretionary (not promised), and the amount paid cannot be measured by or dependent on hours worked, production, or efficiency. Additionally, if the bonus is so large that employees consider it part of wages, it cannot properly be classified as a gift and would have to be included in the regular rate.

Paid days off

As a general rule, payments made for occasional periods where the employee is not working, including holidays, are excludable from the regular rate so long as the payment made is in an amount “approximately equivalent” to what the employee would have earned that day. The FLSA regulations specifically caution us that the term “holiday” is meant to confer its normal usage and refers to days “customarily observed in the community.” See 29 C.F.R. § 778.218. It is not meant to refer to “days of rest given to employees in lieu of or as an addition to compensation for working on other days.”

In some instances, employees may wish to forego their day off and work on a holiday when they would otherwise be compensated for not working. In those circumstances, the amount that would have been paid for the idle day is generally excludable from the regular rate. However, the amount earned for actually working on the holiday would be includable.

Holiday rates

Some employees have to work on holidays because they are scheduled to do so. Likewise, some employers prefer to provide additional compensation to those employees to recognize the sacrifice being made. Additional pay at a premium rate for working a scheduled holiday is potentially excludable, but the employer has to carefully follow the FLSA’s requirements. The first, and most important rule, is that this holiday rate must be equal to or greater than 1.5 times the employee’s normal rate for work performed. Similar to paid days off, the FLSA imposes a strict standard for what is considered a holiday. Additionally, an employer should distinguish between these bona fide holiday premium rates and increased rates paid to employees who have to report in emergency situations on their regular days off. Moreover, certain pay at premium rates that comply with the FLSA regulations may actually be credited towards overtime payments.

How to properly provide holiday compensation

Every situation is unique, but the FLSA’s regulations provide a solid framework for determining whether holiday compensation must be included in employees’ regular rates. Employers with non-exempt employees should carefully consider the form of holiday compensation to ensure they are meeting the FLSA’s requirements. Following the FLSA may mean reducing the amount of overtime owed. But making a mistake may mean paying a higher overtime rate than intended.