Paid sick leave is a double-edged sword. Some employees consider it like vacation – extra paid days off.

Paid days off are one of the most costly employee benefits offered by companies. The employee is paid but did not work. Therefore, no revenue was generated to offset the pay – a double whammy.

To avoid this negative impact and encourage more responsible use of sick time, some companies choose to buy back unused sick pay to level the playing field.

Without this policy, responsible employees who do not get sick must forfeit their sick days and therefore receive a lesser benefit than employees who are less dependable but receive all their sick pay each year. But it’s expensive. The money that would have been saved for unused sick days now must be paid out.

Another downside to sick pay buyback policies is a new requirement of the Department of Labor. Companies that pay out unused sick pay now must pay even more money for hourly employees who worked overtime in the same year.

The DOL considers this money as a “bonus” and requires that sick leave buyback money be added into each employee’s “base pay” amount for the calculation of any overtime.

To understand this, bonuses fall into two umbrella categories: “discretionary” or “nondiscretionary.”

Each affects overtime differently.

• Discretionary bonuses are bonuses that are paid totally on management’s nonquantified assessment of a business criterion, such as a Christmas bonus based on a general impression of how the business is doing. These types of bonuses do not affect overtime calculations.
• Nondiscretionary bonuses are based on a specific business-related formula or calculation, such as a bonus to share a percentage of company profits, accomplishment of a specific objective, or a specific lump payment amount, such as sick pay buyback. Under the new DOL regulations, all nondiscretionary bonus amounts are to be added into each employee’s annual straight-time earnings for the recalculation of overtime.
• This total earnings amount must be divided by the employee’s annual straight-time hours worked to equal the “new” year-end “base pay rate.”
• Overtime paid each pay period was based on their “regular” base pay rate and multiplied by 1.5 times this rate for either their weekly hours or daily hours (some state-specific laws on this).
• By providing this bonus, the company must now recalculate the total annual overtime, using 1.5 times the “new” base pay rate, which is always a bit higher than the original calculation.
• If a nondiscretionary bonus was paid to cover a period of work that is less than one year, quarterly or monthly for instance, the overtime recalculation is only performed for overtime worked within that period of time.
• This is the new hidden cost of any nondiscretionary bonus, such as sick pay buyback. Now you can weigh the pros and cons of sick pay buyback policies.