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