What exactly makes holiday pay so tricky to calculate?

The answer is: a LOT of things.

Having a holiday pay dilemma is not uncommon. Because even though calculating holiday pay is not officially a part of a company’s legal requirements, it is an important way to ensure your employees are getting treated well for the work they’re doing in your organization.

When calculating holiday pay, there are many variables to take into account. As such, it’s important for employers and employees alike to understand their rights and responsibilities in the calculation of this employee benefit. Here’s everything you need to know about it.

What is holiday pay?

Let’s start with defining what is holiday pay.

The term holiday pay refers to any kind of alternative compensation an employer may grant to their employees during holidays. It’s given as time off or as a bonus for work performed on a normal day off. Employees who work on a holiday generally receive “time-and-a-half,” or 150 percent of their normal hourly pay from their employers. Some employers give 2 times their hourly pay for working on holidays as well!

What are paid holidays?

An employer-paid holiday is paid time off that allows an employee to observe a holiday if they want to. Typically, employer-paid holidays are part of a larger compensation package that also includes other paid time off, such as vacation days and sick days. They are also called public or national holidays and are usually included as a leave type in most leave policies too.

Some common paid holidays in the United States are:

• New Year’s Day
• Martin Luther King, Jr. Day
• Presidents’ Day
• Memorial Day
• Independence Day
• Labor Day
• Thanksgiving
• Christmas

Is holiday pay mandated by law?

Long story short, no. But here’s the thing: you should offer it! It’s highly recommended to offer it as a part of your employee benefits package. 

Even though there is no legal requirement for employers to offer holiday pay, many realize that this type of benefit has become a major factor in attracting top talent. More and more employees are looking for growth opportunities with companies that offer benefits such as paid holidays, which can help a company keep its best employees, attract top talent and improve productivity. Sometimes, a company may offer a floating paid holiday that employees can take as needed. Other companies offer paid time off for the employee’s birthday or for Election Day. It is also a benefit available to both full-time and part-time employees.

A generous benefits package is one of the easiest ways to retain top performers. Take it from us — holiday pay is a big deal in any office, especially in the world of Covid-19 where employees are facing burnout from remote work and are placing a bigger emphasis on their work/life balance.

The basic principle behind it

Holiday pay refers to what an employee should receive if they were at work and not taking leave, rather than a replacement for statutory reimbursement. 

For years, calculating an employee’s base pay has been a relatively simple exercise. In most cases, an employer would take the annual salary and divide it by the number of days in a year to arrive at an “average daily rate” (which is then multiplied by the number of days worked).

These days, the story is different. Holiday pay seems like a pretty straightforward concept in theory. But in reality, calculating it can be complex as a number of additional factors need to be taken into account when calculating the amount due. It differs based on factors like where your company is located, your employee’s pay history, and their base salary. Overtime, commission, cash bonuses… it includes all elements of pay in it. 

How to calculate holiday pay

The process of calculation here is going to make you revisit your school days.

When you’re calculating holiday pay, there are two things to consider. Is your employee getting paid for the day-off or are they getting rewarded for working on a day-off? If your employee is getting paid for the day-off, the first thing you need is their hourly pay for the last month. It’s great if you have this information in hand. However, if that’s not the case, you can calculate this with a simple formula:

Hourly pay = Previous Month’s Salary as an Employee / Number of Hours Worked

Now that you have successfully calculated your employee’s hourly wage, the next step is to determine the number of hours not worked on a day off and then arrive at the employee’s pay based on those hours.

Hence, the Holiday pay = Hourly pay × Number of Hours not worked on day-off.

Next, if your employee is getting paid for working on a normal day-off (such as a bank holiday) the process is similar, but also kind of different. Employees can also get extra pay for working on holidays, for which they get paid double or get paid time-and-a-half of their usual pay. Sounds great, doesn’t it?

Here, the first thing you have to do is figure out what your employee’s normal hourly pay is. 

Hourly pay = Previous Month’s Salary as an Employee / Number of Hours Worked

Then calculate the number of hours worked on the day-off and multiply it either by 1.5 or 2 depending on your company’s holiday pay policy. Then, your formula will look something like this:

Holiday Pay = Hourly Pay × Hours Worked on Day-Off × 1.5 or 2

That’s it. Yes, it really is that simple. Try it for yourself today!

Snigdha Gupta

An avid writer and aspiring marketer, Snigdha is a student at Concordia University’s John Molson School of Business.