Unfortunately, given the fast spread of the disease, it is now not uncommon for employers to have at least one employee who has contracted COVID-19, forcing the employee to take extended time off from work. In many cases, these employees will not have enough paid time off available to keep them paid until they are able to return to work. In some workplaces, generous co-workers are willing to donate their paid time off to the sick employee, and employers are exploring ways to implement paid-time-off donation or leave-sharing policies. As with everything in California, paid-time-off donation and leave-sharing policies present challenges and, if not implemented correctly, could come back to haunt the employer and the employees.
There are two main issues to address before adopting such a policy. First, will the policy run afoul of California’s prohibition on forfeiture of paid time off, such as vacation; PTO that combines vacation, sick leave, and personal days; and California’s paid sick leave statute, the Healthy Workplaces, Healthy Families Act of 2014? Second, will the donation program create tax issues for employees? Other considerations include the administrative burden of administering a donation program, the employee relations consequences that may result if some employees are donated time while others are denied, and the budgetary and cash flow impact of adopting a donation program.
Question 1. Will a leave-donation or leave-sharing policy run afoul of California’s prohibition on forfeiture of paid time off, such as vacation, PTO, and personal days or California’s paid sick leave statute, the Healthy Workplaces, Healthy Families Act of 2014?
Answer. There are two types of leave to consider: paid time off and paid sick leave.
Paid Time Off
Under California law, earned paid time off, including vacation, PTO that combines vacation and sick leave and personal days is considered wages, and is earned as the work is performed. Employees’ earned paid time off is vested, and it cannot be forfeited.
There is nothing in California law that prohibits employees from voluntarily donating accrued paid time off to co-workers in need. For such a donation to be considered lawful, the employer has the burden of proving the donation was purely voluntary. To accomplish this, the employer must obtain the written consent of the donating employees for the donation and inform the employees that their election to donate time is either a one-time occurrence, or, if the donations are on-going, that the employees can prospectively revoke their consent at any time. Employers may also want to reserve the right to rescind the policy at any time.
Paid Sick Leave
Similarly, employees may donate earned paid sick leave to a co-worker who is suffering from COVID-19. However, in the case of sick leave donations, the employer must be extra careful to avoid any inference that employees are encouraged, required, or pressured to donate sick time since. This is because, unlike vacation and PTO, paid sick leave is a statutory benefit. When obtaining written consent from employees to donate their sick time, the employer may want to remind them that if they need sick time to care for themselves or a family member in the future, they may not have enough paid time to cover their own needs.
Employers that provide more paid sick time than required by state or applicable local laws, may limit paid sick time donations to only the amount of time the donors have over their statutory entitlements. Such a limitation mitigates some of the concern for the employee who donates time and then later needs sick time for him- or herself later. This approach can get complicated for employers that have PTO polices that combine vacation and sick leave since it may be difficult to carve out unused sick time from the employee’s total PTO allotment. One more word of caution, employers that have “unlimited” paid time off policies may want to establish clear limitations on the amount of time that can be donated by employees.
Question 2. Will the donation program create tax issues for the employees?
Answer. In addition to taking into account how California law may impact a paid-time-off donation policy, employers and employees may want to be mindful of how the Internal Revenue Service (IRS) treats such policies. The IRS recognizes two types of paid-time-off donations: donations resulting from “major disasters” and donations for “medical emergencies.” Both of the programs are likely applicable to the COVID-19 pandemic.
Before implementing a donation program, employers may want to consider whether the program meets the IRS’s specific criteria for each type of donation program. If the program does not meet the criteria established by the IRS, the donor employee must pay federal income and employment taxes on the amount of time donated (even though he or she did not receive the benefit of the paid time off). Note that the recipient is not required to pay any federal income or employment taxes on the amount of paid time received. On the other hand, properly drafted and carefully implemented policies will allow the donor employee to avoid paying federal income and employment taxes on the donated time, and the recipient will be responsible for the federal income and employment taxes.
The IRS defines a “major disaster” in Notice 2006-59 as a disaster or national emergency as declared by the president. To qualify under the major disaster exception to the IRS’s stance against donation policies, the employer’s written policy must include the following requirements:
- The potential recipient of the donated time must make a written request for the time off.
- The donated time must be deposited into an employer-sponsored leave bank for use by employees who have been adversely affected by the COVID-19 pandemic.
- The donor may not designate a specific recipient.
- The employer is required to make a reasonable determination (based on need) as to the amount of leave a recipient may utilize from the leave bank.
- The donated amount may not be more than the maximum amount of time off the donor earns annually.
- The recipient (or his or her immediate family) must suffer a severe hardship relating to the COVID-19 pandemic that requires such employee to be absent from work. For example, a situation in which the recipient’s work location is temporarily closed or the employee is asymptomatic but may have been exposed and is required to remain at home would qualify.
- The recipient must receive the donated time at his or her normal rate of compensation. The donated time may not be converted into cash, in lieu of use of the time off.
- The recipient must use the time for purposes related to the major disaster.
- The plan must include a reasonable limit on the timing of donations and use of the time by recipients. For example, a policy may require that the donated time be used only during the COVID-19 pandemic.
- Any leave remaining in the bank at the end of the major disaster must be returned to the donors in the same proportion as the amounts of leave they donated bear to the total amount of leave donated.
Employees may donate paid time off to co-workers who suffer a “medical emergency” under IRS Ruling 90-29. A medical emergency occurs when an employee requires time off for his or her own medical condition or to care for a family member with a medical condition. There is no limit on the amount of time employees may donate to a co-worker, and the donors can designate a specific recipient. In addition, the plan may be ongoing (as opposed to limited in duration). Employers are not required to return unused time but can keep it in the bank for future use.
The medical emergency plan must meet the following criteria to pass muster under the tax code:
- Employees requesting the additional leave must submit a written application describing the medical emergency to the employer.
- The employer must approve the application.
- The recipient must use all of his or her existing paid time off before using the donated time.
- The employer must distribute the paid time to the recipient at his or her normal rate of compensation.
In the event an employer decides to implement a donation program, the written policy must clearly explain the rules for the donor and recipients to ensure that everyone understands how the policy will be administered.
Here are some steps to take when establishing a leave donation program:
1. Which type of program?
First, employers will need to decide which type of program to offer. Note that employers may wish to offer one or both types of programs. As mentioned above, each type of plan (major disaster or medical emergency) has specific requirements.
2. What is the budget?
Second, employers will want to establish a budget for the program and consider placing limits, if any, on the amount of time that can be donated. The budget for these programs must take into consideration the cost of paying benefits in the near future versus the cost of these payments spread out over the course of an entire year. Keep in mind that the donated time may negatively impact the recipient’s ability to obtain state disability benefits, the enhanced unemployment benefits established under state and federal laws, and/or company-sponsored short-term or long-term disability benefits.
3. Who are the recipients?
Third, employers will want to establish the criteria for determining which employees will receive the donated time. Under both programs, employers may want to establish a fair and neutral eligibility and selection criteria for the selection of both the donors and the recipients. If the program is viewed as favoring one group or excluding employees in protected categories, the employer may leave itself open to discrimination charges and employee relations problems. In the case of a major disaster program, the employer may need to establish criteria to determine which employees need the benefits more than others. In the case of a medical emergency program where specific recipients can be selected, the employer may need to consider how to handle situations in which employees want to give more time to one employee over another employee who may be in a very similar situation. There are no clear answers to these questions.
4. What is the donation procedure?
Fourth, employers may want to consider establishing a detailed procedure for the donors and recipients. In the eyes of the IRS, to establish a valid policy, employers must adopt a written donation policy and establish a process for donors to use when designating how much time they wish to donate. In this regard, employers may wish to consider the following factors when drafting a policy: length of service of the donors and recipients, salaries of the recipients and donors, exempt or non-exempt status of the donors and recipients.
A written agreement signed by the donor could be critical in establishing the voluntary nature of a donation. Likewise, the recipient should sign an agreement requesting the time and verifying that they are using the time for the intended purpose. Note that employers should beware of privacy issues under the Americans with Disabilities Act, the Health Insurance Portability and Accountability Act, and the California Confidentiality of Medical Information Act. In accordance with these laws, employers are prohibited from announcing to the workforce the reason why an employee needs the donated time.
5. Who will administer the program?
Finally, employers will want to designate an employee or group of employees to administer the program. Namely, the employer must decide who will be the point of contact for donors and recipients. While the human resources department may seem like a natural choice, it may not have the staffing and systems to administer the program. Similarly, the payroll department may have the systems but lack the employee relations expertise to administer the program.
At the end of the day, employers must weigh the benefits and costs of implementing a paid-time-off program against the employee relations benefits that may flow from such a program and make a thoughtful decision that serves the workforce and the company.