Donating sick time to fellow employees or faculty in the workplace is an act that shows compassion for others who may need it more. A co-worker is diagnosed with a severe illness, requiring them to have surgery and not be able to work for several months. They don’t have enough earned days off (be it sick, personal, or vacation days) to be paid during the recovery period and have bills to pay. Imagine how this employee would feel if they knew that they can get the care they need and not have to worry about making ends meet by having to go on unpaid leave. Many school districts, as well as organizations, offer employees the opportunity to donate sick time for just these scenarios. From the initial idea, it seems like a very simple procedure to do. However, proper procedures must be enforced so that the transfer of sick time is done correctly in accordance with policies and procedures, is properly accounted for, and that any tax consequences are mitigated.
A best practice is to ensure that there are detailed documented procedures to be followed. The specifics regarding who can donate sick time, the procedures for documenting and approving the donation of sick time, as well as the rules for the recipients of sick time donations should be clearly stated. The ability to earn sick time is often based on an employee category and may therefore be documented in the employee’s bargaining unit contract. The process to donate sick time can be included in the contract, or the district may opt to create specific policies that are managed by staff in the human resources department. To facilitate the leave-time sharing, school districts may create a “leave bank” or “sick pool” where employees can donate their sick time to either the sick pool or to a specific employee.
To ensure that employees clearly understand how the donation process works and how the donated time can be used, the following are some considerations to include in the documented procedures:
- Whether donating sick time is on a voluntary basis (i.e., it is important to assess whether employees are being pressured to donate, and if the donations can be given confidentially);
- How any unused sick leave in the donor pool will be handled and accounted for and is there a minimum number of days that must be maintained;
- If there is a minimum and/or maximum amount of sick leave time that a benefits-eligible employee may donate within an established timeframe;
- If there is a minimum number of sick days an employee must retain in order to donate any sick time;
- What happens if an employee who donated sick time becomes ill or is an accident;
- How donated sick leave can be utilized (e.g., on an hourly or daily basis);
- Who can request and utilize donated sick time;
- If borrowed sick time needs to be paid back to the sick pool;
- Required forms used to document and approve donating sick time as well as requesting donated time;
- If an employee can request donated sick time for caring for an immediate family member;
- What requirements are needed to approve eligible employees to receive donated sick time (e.g., proof that all available accrued time off has been exhausted, and proof of a serious medical condition);
- What conditions or circumstances do not qualify an employee to receive donated sick time (e.g., if the accident or illness is compensable under Worker’s Compensation benefits, or if the accident or illness occurred while committing a crime); and
- If there is a specific time period when sick leave can be donated.
Another consideration when implementing a sick time donation process is avoiding tax issues that may arise. The tax law states that “income for services is taxed to the person who earned it.” If employees are seeking to transfer their unused sick time to other employees, technically the donor would be taxed on the pay and not the recipient. This is a common problem for many employers who are engaged in leave-sharing arrangements. However, the Internal Revenue Service (IRS) does allow employers to avoid this issue for their employees through two exceptions: for medical emergencies and major disaster recoveries, both of which anticipate the employee will miss work for an extended period of time. Under these two exceptions, the employer must administer their leave-sharing program in writing and have their employees specify the reason for their leave of absence, in order to properly approve it. Recipients should only be eligible to receive donated pay if they have run out of their own sick time. It is also good practice to ensure that the transferred sick time under the plan is actually used by the recipient to cover medical emergencies or major disaster recovery. Otherwise, it may appear that the employee is receiving income that they are not entitled to. A major point to consider with these two exceptions is that the donor is not taxed on the donated time, as the transfer is considered the recipient’s “wages.” Consequently, the donor is not entitled to claim their donation as an expense, charitable contribution, or a loss deduction. As long as an employer’s program follows these guidelines for the medical emergency or disaster plan exceptions, the tax liability will be effectively transferred from the donor to the recipient.
Donating sick time can be a very admirable gesture. Proper planning, documented procedures, and consideration for each request for donated sick time can help mitigate potential problems down the road, and ensure that employees who are in need, can be helped by other compassionate employees.
Matthew Hecker, MS
Matthew is a member of Cerini & Associates’ audit staff where he works with our nonprofit and school district clients. Matthew has experience in internal claims auditing and external auditing, including financial statement audits and pension plan audits. Matthew’s knowledge and experience allow him to provide specific services including systems testing and analysis, internal and external audit functions, and claims audit functions.