What Every Small Business Needs to Know About Holiday Pay Laws in the United States

Especially around the holidays, treating your employees fairly—and keeping your small business running smoothly—means understanding holiday pay laws. You need to understand who is entitled to paid holidays, how holiday pay for hourly workers is dealt with, the difference between holiday pay and paid time off (PTO)… that’s a lot to keep straight! As a business owner, a firm grasp on the nuances of state and federal holiday pay laws is a must. Let’s go through some of the most common questions about holiday pay, then we’ll take a look at a payroll tool that makes managing holiday pay a whole lot simpler.‍

What is holiday pay?

Holiday pay is a form of employee compensation that businesses can choose to offer during federally observed holidays. If an employee chooses to take the day off, holiday pay can be fully paid time off or partially paid time off. If an employee chooses to work instead of observing the holiday, holiday pay can take the form of an increased hourly rate or a bonus.

What are the federal holidays in the United States?

So, what are the official federal holidays in the United States? As per the Office of Personnel Management (OPM), the US observes 11 legally recognized federal holidays, also called bank holidays, each year. In 2024, these 11 holidays are:

• New Year’s Day – Monday, January 1
• Martin Luther King, Jr. Day – Monday, January 15
• George Washington’s Birthday – Monday, February 19
• Memorial Day – Monday, May 27
• Juneteenth National Independence Day – Wednesday, June 19
• Independence Day – Thursday, July 4
• Labor Day – Monday, September 2
• Columbus Day – Monday, October 14
• Veterans Day – Monday, November 11
• Thanksgiving Day – Thursday, November 28
• Christmas Day – Wednesday, December 25

The US also celebrates Inauguration Day on 20th January every four years (unless the 20th of January falls on a Sunday, in which case Inauguration Day is celebrated the following Monday). If a federal holiday falls on a Saturday, employees are allowed to observe it the preceding Friday. If a federal holiday falls on a Sunday, employees are allowed to observe it the following Monday. And if a federal holiday falls on a day when an employee is not scheduled to work, they can observe it on the scheduled workday immediately before the actual holiday.

Time off during federal holidays: how it works

So now that we’ve covered the official federal holidays in the US, let’s talk about federal holiday pay laws. Are companies required to give employees these holidays off from work, and must the employees be paid? The answer depends on whether an employer is a federal employer or a private sector employer.

Federal employers

Public employers must offer their employees the 11 paid federal holidays each year (12 if it’s an Inauguration year). On a federally recognized holiday, all non-essential federal government offices shut their doors, the stock market stops trading, and all federal employees are paid—even if they aren’t working that day.

Private sector employers

It’s a different case for private sector employers. Under the Fair Labor Standards Act (FLSA), it’s not a requirement for private-sector employees to be paid for time not worked. And if they work on a federal holiday, private sector workers aren’t entitled to higher-than-usual pay. (Though if they work overtime, they’re of course entitled to overtime pay.)

Holiday pay laws in the United States

For federal employees, paid holiday time off is required for all 11 federal holidays. Paid holiday time in the American private sector, while not mandated, exists as an agreement between an employer and an employee. While offering holiday pay isn’t required by federal law, many companies offer some amount of holiday pay as a perk. In one form or another, many businesses make the choice to offer holiday pay—usually for federally recognized holidays. They might make the observed holiday a paid day off, or they might choose to offer employees time-and-a-half for working that day.

Is holiday pay required by law?

In short: no. Offering holiday pay is not required by law in the private sector, but many companies choose to offer it.

What about holiday pay for US state and regional holidays?

Across the country, other recognized holidays are marked in certain states. Take Arizona, for instance, which recognizes the second Sunday in May as a holiday for Mothers' Day. Or Florida, where the second Monday in October is recognized as Farmers Day. Similarly, different regional holidays are observed in particular regions and are peculiar only to them. For example, a group of six states—California, Arizona, Colorado, New Mexico, Texas, and Utah—have designated March 31 to commemorate Cesar Chavez Day, celebrating the late activist’s leadership over the nation's first successful farm workers' union. As with federal holiday pay laws, it’s only state government offices and schools that must close their doors on state-recognized holidays. In the private sector, the decision to recognize a state holiday will be on a company-by-company basis.

What are the holiday pay rules for religious holidays?

When it comes to religious observance, federal law says that companies with 15 or more people must give “reasonable accommodation” to their employees for the celebration of religious holidays (like Good Friday). In this case, you can offer your employees paid or unpaid time off for religious holidays, or floating holidays to use at their discretion. Federal employers, to protect the separation of church and state, are only allowed to give employees a religious holiday as PTO if the employee can offer a legitimate reason for doing so.

Creating your own holiday pay rules

Whatever holidays you choose to observe at your small business, they must be clearly outlined in your employment contracts and your employee handbook. As part of your onboarding process, every employee should be familiar with the rules and understand them. In your time-off request policy, clearly communicate to all your employees:

• Which holidays they'll have off
• Whether they will be paid for that time off
• Whether they'll get additional compensation (i.e. time and a half) for working on a holiday

It’s important to adhere to your policy to keep morale high and avoid any sense of favoritism. Plus, failing to do so could lead to an employment lawsuit.

Why do companies offer holiday pay?

There are some very good reasons to consider offering holiday pay at your small business. A perk like holiday pay can significantly enhance your benefits package and your company brand, helping you attract and retain top talent. Let’s face it: most people wouldn’t want to work for a company that doesn’t provide any paid time off. Holiday pay is a proven boost to morale. It helps you build and maintain a satisfied, productive, and motivated workforce. Plus, offering time and a half can be a great incentive to your employees to work on federal holidays, ensuring you don’t have to deal with understaffing and scheduling issues. Remember, there’s no faster road to employee burnout than if they’re understaffed during a rush season.

How much is holiday pay?

So, how much is holiday pay when it’s offered? There are four general options when it comes to handling federal holidays:

• Time off without pay: Your employees can take time off for holidays if they want, but it must be taken as unpaid leave (as long as you comply with overtime laws). Or, your employees can use their regular PTO allowance or a floating holiday to cover their time off.
• Time off with holiday pay: Your employees can take a day off work without any pay deductions. They are paid the same rate as any other day when they went to work.
• Work and receive the same pay: Your employees don’t get the day off, and they are paid the same rate as any other working day.
• Work and receive extra pay: Your employees can choose whether they work on the holiday. If they choose to go to work, you can offer them a bonus or a higher rate of pay (usually time and a half) as compensation for working that day.

Oftentimes, there’s a link between paid holidays and industry. While workers in tech, finance, and manufacturing are more likely to have paid holidays, it’s less likely for employees in leisure and hospitality to have paid holidays. Unfortunately, the limited or lack of paid time off in these industries may contribute to their high turnover rate.

Setting your holiday pay policy

When drafting a holiday pay policy for your small business, start by doing market research to see what your competitors are offering. At the very least you should match them, but if you want an advantage, you could consider designating an additional holiday. Then, once you’ve defined your criteria, it’s essential that you document everything in a holiday pay policy. Make sure you cover the following points in your holiday pay policy:

• Which federal holidays you designate as paid holidays
• Which employees are eligible: exempt (salaried), hourly, full time, part time
• How you calculate holiday pay: bonuses, time and a half
• If you offer any floating holidays, and whether they must be taken before year-end
• Your time-off request process, including how much notice employees need to give
• What happens if a paid holiday falls on a weekend
• What happens if an employee accrues overtime while working on a paid holiday

Above all, make sure your policy is clear and specific and that employees always have easy access to it—in both your employee contracts and in your employee handbook. That way, everyone will understand how it works and what employees’ rights and obligations are. And if you have different policies for full-time workers part-time staff, make sure you clearly define the terms for both categories of workers.

Offering part-time and hourly employees holiday pay

Whether hourly or part-time employees get holiday pay is up to employers. As with full-time employees, there is no federal law governing holiday pay for these kinds of workers. What you offer depends 100% on what internal policies you choose. Something to think about as an employer as you’re making this decision? By nature of their jobs, many hourly employees are required to work on federal holidays. Take a 24/7 job like a healthcare worker in a hospital or care facility, a front desk hospitality worker, or a restaurant worker. To offer vital customer service, these hourly workers are very often sacrificing time with their families and friends. Offering holiday pay to your hourly employees is a gesture that can go a long way in keeping employee morale and loyalty high, showing them that they’re valued by you and that your business cares about the people who keep it running.NOTE: Massachusetts and Rhode Island are the only states with a law dictating holiday pay for hourly workers. The state of Massachusetts’ blue laws have different requirements for retail businesses and non-retail businesses, but generally employees are entitled to 1.5 times their regular rate of pay for working on certain holidays. Rhode Island also requires employers to pay time-and-a-half to employees who work on Sundays and certain holidays. If the holiday falls on a Sunday, the following Monday is when it is observed. Take a look at your state labor law guide to learn more.

Manage holiday pay with Homebase

Whether you’re required to provide holiday pay or simply want to offer it as a benefit to your team, a tool like Homebase makes figuring out holiday pay a whole lot easier. The Homebase payroll tool makes it simple to keep track of regular hours, overtime hours, and holiday pay premiums. From PTO policies to time-off approvals, Homebase lets you streamline everything:

• Automatically add PTO to timesheets to easily incorporate in payroll
• Set up PTO policies to track employees’ accruals and balances
• Get a complete view of time off across your team and business
• Get more control over time-off requests by setting black out dates, request limits, and advance notice policies
• Get added visibility into your budget through advanced scheduling and alerts
• Forecast labor costs and overtime automatically when building your schedule

Manage holiday pay the smart way. No complicated calculations needed. Get started with Homebase today.