5 Tips on Vacation Pay

Summer is here and vacations are inevitable. Here are some tips to consider if you have employees and dealing with payroll for vacation. 

When distributing vacation pay to employees:

1. Apply all withholding taxes to vacation pay. 

2. If a vacation pay advance is included in a normal paycheck, withhold for the entire check over a longer period. For example, if you pay weekly and include 1 week’s paid vacation, withhold for a 2-week period. 

3. You must pay earned or accrued vacation, even if the employee quits. You should have a written policy that clearly states who is or is not entitled to accrued vacation pay at termination. Reminder: Employees may be entitled to unused vacation pay under ERISA (covers early retirement) if there is a written policy, pattern or practice of paying unused accrued vacation to such employees. 

4. You need not include paid vacation days in overtime calculations. For example, if an employee works 40 hours, Monday-Thursday, and takes Friday as a paid vacation day and is paid 8 hours for it, you need not include this 8 hours’ pay when determining whether the employee is entitled to overtime pay. 

5. You can have a policy of accruing paid vacation differently for different jobs, because this is determined by company policy, not federal law. For example, you might give your managers 2 days paid vacation for each month worked; a clerk, 1 or no days. Or paid vacation may be based on salary, years worked or a mix of standards. But the policy should be in writing, made known to employees and applied consistently. 

Important: These are the rules under federal law. Also check your state laws.

Source: The American Institute of Professional Bookkeepers

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