PTO, Parties and Pay: Holiday Hiccups to Address or Avoid

December typically brings a shift in the workplace for employees from business-as-usual to holiday activities, vacation time and perhaps the anticipation of a year-end bonus. Each of those seasonal items can create confusion and frustration for employees if total rewards professionals don’t head specific issues off at the pass. Keep employees happy by emphasizing communication and addressing the following matters before hiccups can occur.

Scheduling Paid Time Off

At the end of the year, employees all seem to want time off either for holidays, family gatherings, religious events or to take that sunny cruise to warmer climes. That reality can leave an employer scrambling to ensure proper staffing while maintaining compliance and employee morale. To start, lay the groundwork by reminding employees of any paid time off (PTO) usage requirements, such as:

The deadline for when requests must be made. Alternatively, limits on how early year-end time off requests can be made can even the playing field for those unable to plan ahead.
The methods used for PTO approvals (whether by seniority; first-come, first-served; or allowing manager discretion).

In all cases, clarifying organizational needs will help direct PTO approvals.

Religious Accommodations

Federal and state nondiscrimination laws require most employers to make reasonable accommodations for religious holidays. These requests should only be denied when granting them would create an undue hardship, which means more than a minimal burden on the business. Per the U.S. Equal Employment Opportunity Commission (EEOC), these could include:

Violating a seniority system;
Causing a lack of necessary staffing;
Jeopardizing security or health; and/or,
Costing the employer more than a minimal amount.

Consider allowing employees to trade shifts or split shifts when undue hardships are negatively impacting accommodation approvals.

Compressed Workweek Schedules

Employers often wonder whether employees on compressed schedules who were not scheduled to work on the holiday should receive holiday pay. The most straightforward answer to this is to review your holiday pay policy. If it indicates all employees will receive a certain number of paid holidays, you’ll need to find a way to honor that commitment. Some employers have those employees work a regular eight-hour-per-day schedule the week of a holiday or allow a floating holiday to be taken at another time.

Conversely, if the holiday falls on a regular workday for the employee, the issue becomes how many hours of pay they should receive, primarily if they normally work more than eight hours per day. Again, your holiday policy should address this, but in general, the idea is to keep the employee whole and prevent them from earning less due to a holiday closure.

Mandatory Holiday Parties

Some employers make holiday party attendance mandatory, even when it takes place after work hours. Even if it is not “required,” some managers may pressure employees to attend, leaving them with little choice. While giving employees the option to attend is recommended (especially as a religious accommodation), if attendance is mandatory, then nonexempt employees must be paid for their time. Additionally, if those party hours put them over 40 in a workweek, overtime will be due.

Holiday Pay Issues

Many employers have a holiday pay policy requiring employees to work the day before and the day after a holiday to be eligible for holiday pay. This policy is lawful for nonexempt employees but is not allowable for exempt workers.

Under the Fair Labor Standards Act (FLSA), if an exempt employee works any part of a workweek, they must be paid their full salary for that week. The law allows for some deduction exceptions, but holidays are not among them.

An exception: If the employer closes for a full workweek, then no pay is required for either exempt or nonexempt employees, unless employer policy or employment contracts state otherwise.

Holiday Gift Taxation

When providing employees with holiday gifts (or at any time of the year), tax compliance needs to be reviewed. Unless the gift is considered a de minimis fringe benefit by the U.S. Internal Revenue Service (IRS), the amount must be reported as wages on the employee’s W-2. De minimis gifts might include a small basket of holiday cookies or a holiday ham.

Cash, gift cards or gift certificates for general use are never considered de minimis, regardless of value. A specific certificate for an item of minimal value that cannot be redeemed for cash may be considered de minimis, depending on the circumstances. In all cases, consult with your tax professionals to ensure proper reporting and explain the tax implications to employees.

Year-End Bonuses

The IRS categorizes bonuses as “supplemental wages” (see IRS Publication 15, Section 7) and allows for various income tax withholding methods. Employees may be confused by the rate used, so communicate with them before the bonus is paid. The IRS allows employers to:

Withhold at the supplemental tax rate of 22%;
Use the aggregate method to calculate the withholding; or,
Pay the bonus as regular wages and withhold at the employee’s regular rate.

Work with your finance department to determine the method to be used and how to communicate it to employees.

Additionally, offering employees the opportunity to change their 401(k) elections for the bonus payment can help them make the most of this extra income. For those employees increasing their contributions, they should ensure the change doesn’t result in excess contributions beyond the tax year’s limits.

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