Vacation Pay: Case Study

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. Check the case study below to see this principle in action.

Figuring wages in split weeks. Jim-Bob's workweek runs from Tuesday through the following Monday. He takes a two-week paid vacation, which starts on Monday. He ordinarily works a 40-hour week at the rate of $8 an hour. His vacation pay is figured at this rate for five eight-hour days per week. His 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, the employee should be paid $432, computed as follows: (40 x $8) + (4 x $12) + $64. The $64 paid for the day's vacation occurring during this week is excludable from the regular-rate calculation but may not be credited against the $48 owed for overtime.

The second week, being a full-time vacation week, calls for $320 pay. Pay for the third week is also $320, figured thus: (4 days' vacation pay x $64) + (8 hours worked x $8).

Save Money Suppose your employee 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 employees 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.