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Start planning now to stay ahead of tricky summer pay issues

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in Office Management,Payroll Management

Before getting lost in daydreams about the lazy days of summer, start working with your colleagues in the payroll department to anticipate some of the headaches that accompany holidays and vacation time off.

A little work this spring will make your own vacation even more relaxing.

Vacation doesn’t count toward OT

Who doesn’t want to take a long summer weekend? And, since July 4 falls on a Thursday, it’s a safe bet employees will want Friday off, too.

Remember: Vacation pay is idle-time pay, which isn’t included in the regular rate of pay used to figure nonexempts’ overtime rates.

Example: Julie earns $15 an hour and works eight hours a day. Monday through Thursday she works 45 hours. She takes a paid vacation day on Friday, for a total of 53 hours.

Here’s the wrong way to calculate her pay for the week. She earns $600 in straight-time pay, $120 in vacation pay and $292.50 in overtime ($15 × 1.5 = $22.50 overtime rate × 13). Total pay: $1,012.50.

Here’s the right way to calculate her pay: She still earns $600 in straight-time pay and $120 in vacation pay, but only $112.50 in overtime ($15 × 1.5 = $22.50 × 5). The eight hours of vacation aren’t counted. Total pay: $832.50.

Julie’s employer saves $180 simply by making sure her vacation day didn’t count toward her overtime pay.

Note: What if nonexempts work 38 hours and then take a Friday off? Overtime still isn’t due, because they’re paid for 38 hours of straight time, plus eight hours of vacation pay.

The total equals 46 straight-time hours, but eight of those hours are for idle time.

Nonexempt holiday pay: Your choice

An annual issue is whether you must pay nonexempts for holidays on which they don’t work. There is no federal or state law that mandates holiday pay, so you could save money by limiting holiday pay. You could, for example, pay nonexempts for eight holiday hours when they don’t work the holiday, even though they normally work 10-hour days.

Just like vacation pay above, holiday pay should never be factored into the regular rate of pay for the purpose of calculating overtime.

Save when paying exempts, too

If you close for a full workweek, you don’t have to pay exempts if you choose not to.

They can take accrued paid vacation leave, if they have it.

Partial-week closings are trickier. If you have a bona fide time-off plan, you may require exempts to use accrued leave during a partial-week shutdown.

Caveat: This strategy fails for exempts whose leave banks would result in a negative balance due to current debiting and for those who already have negative time in their banks; they must receive their full pay.


A step-by-step payroll compliance guide to each pay period, month and calendar quarter of the year is now available. Download it free here.

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