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Processing Your Payroll to Account for Vacation Pay: Case Study

Filed under Office & HR.

Various payroll issues are involved when calculating employees' pay for vacation time-off.

If an employee takes a vacation for an entire week, processing payroll is simple. However, if the employee is on vacation during part of a workweek, and works more than the statutory straight-time workweek during the balance of the week, vacation pay becomes more of an issue.

In this event, for purposes of determining minimum wage and overtime requirements, the vacation pay may be omitted from the regular-rate computation, provided it is approximately equivalent to the employee's normal earnings for a similar period of time. But the vacation pay does not qualify as a credit against overtime pay required by the federal Fair Labor Standards Act (FLSA). The general formula for figuring wages in split weeks is to ignore the vacation pay, figure the pay due for time worked, and then to that figure add the vacation pay.

The following case study illustrates this principle in action:

Anna's workweek runs from Tuesday through the following Monday. She takes a two-week paid vacation, which starts on Monday. Anna ordinarily works a 40-hour week at the rate of $8.00 an hour. Her vacation pay is figured at this rate for five eight-hour days per week. Her straight-time workweek under the statute is 40 hours. The record for the three weeks covering the vacation period is:

  Week 1 Week 2 Week 3
Tuesday 10 Vacation Vacation
Wednesday 10 Vacation Vacation
Thursday 10 Vacation Vacation
Friday 10 Vacation Vacation
Saturday 4 Vacation Vacation
Sunday -- -- --
Monday Vacation -- 8
Total Hours 44 0 8

For the first week, Anna should be paid $432.00, computed as follows: (40 x $8.00) + (4 x $12.00) + $64.00. The $64.00 paid for the day's vacation occurring during this week maybe excluded from the regular-rate calculation but may not be credited against the $48.00 owed for overtime.

The second week, being a full-time vacation week, calls for $320.00 pay. Pay for the third week is also $320.00, figured thus: (4 days' vacation pay x $64.00) + (8 hours worked x $8.00).

Suppose you have an employee who makes $12 per hour. The employee works 45 hours from Monday through Thursday and takes a vacation day on Friday.

You should not calculate the employee's pay like this:

40 hours straight time ($12/hr) + 13 hours of overtime ($18/hr) = $714

Calculate it like this:

40 hours straight time ($12/hr) + 5 hours of overtime ($18/hr) + 8 hours' vacation time ($12/hr) = $666

By not counting vacation time toward straight time, you'd save $48.

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