How to be thorough when assessing the true cost of paid sick leave

The health and well-being of the employees is the companies’ top priority. As news about the coronavirus (COVID-19) continues to develop, giving employees more paid sick time gets in the focus.

Although Congress has just passed (March 18, 2020) a major package including an expansion of paid sick days and emergency paid leave for a subset of workers, the bill is not universally applicable to all sizes of businesses and all employees.[1]  

Knowing the actual cost of paid time off can help companies assess the financial impacts of giving more paid time.  

So, what is the cost of the paid sick days? 

Calculating the cost of additional paid time off is relatively straightforward for companies with both 40 hour or 24/7 schedules.

Let’s start with this: there are 52 weeks in a year.  This represents 2,080 hours of work if your workers are on a 40-hour schedule and 2,184 hours of work if they are on a 24/7 schedule (per person before unscheduled overtime).  For example, increasing paid time off by 3% is equivalent to giving employees an extra 62 to 65 hours of paid time off every year.

However, most employers would continue the calculations as follows: “I just gave one person 64 more paid hours off.  I also now need to pay someone else to cover those 64 hours at an overtime rate. Thus, this cost me 64 pay hours plus 1.5 times 64 pay hours for a total of 160 pay hours!”

What’s amiss with this latter way of thinking? There are three inaccuracies with this calculation: 

  • First of all, the 64 hours that you are paying the person to be absent were going to be paid to him/her if she was at work so this is not an “extra” cost. 
  • Secondly, there is an extra cost to pay someone overtime to cover the newly created opening, however, overtime generally costs about 10% to 15% more than straight time; much less than the assumed 50% additional cost.  The reason for this is that while people get paid at a higher rate when working overtime, they don’t earn extra medical benefits, vacations, holidays, etc.  Those costs are associated with straight time wages, not overtime wages.  The liability for these costs is incurred when companies hire someone, not when someone works overtime.
  • And finally, the statement includes no consideration for what would happen if you didn’t give people paid sick time.  What is the cost of a sick person coming to work?  How many others will become sick? How well does a sick person perform?  How does a person view their company when they have always been there when needed and now that they are sick, they are on their own?  How are you viewed as a prospective employer if you don’t pay for sick days but the plant across the street does? The consequential costs of not providing paid sick leave are harder to measure, yet can be substantial.

There is another consideration with regards to paid sick time: How will it be administered? 

  • People shouldn’t be able to schedule it in advance because then it becomes a vacation instead of sick time. 
  • A use-it-or-lose-it policy encourages people to take all of their sick time every year.  A buy-back policy encourages people to come to work when sick so they can get a check at the end of the year when they sell the time back.
  • Carrying sick time over is probably the best idea, however, some companies don’t like carrying an ever-increasing paid sick time liability on the books, even though there is no additional cost.   There are several ways to make this more acceptable.  For example, let employees carry over as much time as they want, then when they retire, the company can buy back the unused sick time at a reduced rate.  This allows a worker to build up a huge store of sick hours that are available for use if they ever get seriously sick.  When they retire, they may have a year’s worth of sick time that is worth half a year’s wages. 

I’m not advocating for or against increasing paid sick time.  These guiding posts are here to help you make informed decisions ― about a subject that needs careful and accurate considerations.

Call us today to discuss your questions. (415) 858-8585.

[1]: https://www.vox.com/2020/3/18/21185065/congress-coronavirus-tests-paid-sick-days

How many people does it take to staff your schedule? (Part 2)

There is a short answer and a long answer to this question.  Here is a link to the short answer.

As for the long answer:

Take a look at the “short answer” in the previous blog post.  That is a good place to start.

The following should be considered to refine the number you get using the “short answer”:

  1. The cost of full-time labor matters.  How much does it cost you to pay someone for an hour of straight time?  How much does it cost you to pay for an hour of overtime?  I am not talking about “how much an employee receives.”  I’m talking about cost-to-the-company.  If you do the analysis correctly, you should find that the two costs (overtime and straight time) are within 10% of each other.  This is important because the amount of overtime you use will play a big factor in staffing levels.  For a fixed workload, the higher the overtime, the lower the staffing level you need.
  2. How much training does it take to qualify an employee for a position?  It is likely that there is a wide variance in this with regard to different positions.  Do Not use and “average”.  If you need an astrophysicist and a box stacker, an average will give you a bad number (4 years of post-graduate study for the physicist and 5 minutes for the stacker = about 2 years, on average, to train an employee).  Long training times lead to increased use of overtime and less reliance on other labor options such as temporary help.  If your workforce is staffed with highly skilled people, whose skills are easily transferable to another nearby company, then you will have to bend a more towards compensation scheduling and employee preferences for overtime so as to not lose these people.
  3. How variable is your workload?  If your workload level is flat, you will still have some fluctuations in staffing as people are on vacation or FMLA, etc.  When staffing fluctuates, you have extra staffing available or you can use overtime or you can reduce production.  Cost, degree of variability, employee preference and the nature of your operations will all play a role in determining how you staff for variability.   It’s worth noting here that the most expensive option is to over-staff or staff for peak production as this leads to frequent over-staffing which is costly. A highly variable workload tends to mean lower staffing and higher overtime.
  4. How available are alternative sources of labor? Is your workforce pro-overtime or overtime-adverse?  Is temporary or part-time labor available? If you are in Memphis and need temporary, highly skill forklift drivers, there are temp. agencies that can give you all this type of labor that you want.  However, if you need those same temporary skills in San Francisco, you may need to “grow your own.”  Can you scale back with seasonality by using shorter workweeks or voluntary layoffs?  Note: If the answer is no, the staff to the lower end and use overtime when things get busy.
  5. What about support activities?  Things like maintenance, engineering, quality shipping/receiving and administration all need to be staffed appropriately as you grow (or shrink).  There is no simple formula for how to staff these as there is often not a “straight line” relationship between staffing numbers in operations and staffing numbers for support areas.  For example, a 30% increase in operation staffing does not mean you need 30% more CFO’s.  In some areas, you may actually find that you need less support staff.  For example, maintenance struggles to fix everything on the weekend but if you go to a 24/7 schedule, maintenance can now take place any time in the week; including weekdays where it can be performed more efficiently.
  6. Are you LEAN?  It’s “old school” to think you should stockpile between cells in a value stream to ensure you never run out of product either upstream or downstream.  Instead, just-in-time is what modern operations strive for.  Many companies can maximize or throttle production using staffing alone.   This may mean you staff an area below its maximum capacity to ensure it does not outrun its value stream neighbors.
  7. What is the opportunity cost of lost time?  This must be a consideration if you are going to staff with as few people as possible.  You may save a lot of money by having fewer maintenance specialists but then you might lose even more money if you suffer downtime because you are understaffed.

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