On July 1, 2017, all Arizona employees became eligible to begin accruing “Paid Sick Time” benefits under the Fair Wages and Healthy Families Act (“the Act”).¹ For several months following the law’s enactment on November 8, 2016, the Industrial Commission of Arizona (“ICA”), the agency charged with enforcing the Act, provided little guidance on how employers must comply with the new paid sick time (“PST”) portions of the law. 

However, over the past few months, the ICA has issued two sets of proposed regulations and created and regularly updated “Frequently Asked Questions” on its website designed to help employers understand their obligations under the new PST law. The proposed regulations will not be finalized until later this summer, and employers should continue to be watchful for additional guidance from the ICA. In the meantime, because the PST law and implementing guidance have many nuances, this article will highlight the aspects we most commonly have been addressing, and what companies should consider doing now.

Paid Sick Time – General Overview

Beginning on their first day of work, all employees (full-time, part-time, temporary, and on-call) are entitled to accrue PST at a rate of one hour for every 30 hours actually worked, up to an annual cap of 40 hours for “large employers” (15 or more employees) or 24 hours for “small employers” (fewer than 15 employees), unless an employer sets a higher annual limit.

Employees are entitled to use PST in the following general circumstances:

• An employee’s or family member’s need for medical care or mental or physical illness, injury or health condition;
• A public health emergency; or
• Absence due to domestic violence, sexual assault, abuse, or stalking.

The Act broadly defines “family member” to include the following relationships by blood, adoption, marriage, or otherwise: child, parent, spouse, domestic partner, grandparent, grandchild, sibling, or any other person whose close affinity is the equivalent of a family relationship.

1.        Counting Employees to Determine Employer Size.  As noted above, the number of employees determines which annual accrual and use cap applies. A “large employer” has 15 or more employees working in Arizona on payroll for some portion of a day in each of 20 nonconsecutive weeks in the current or preceding year, and a “small employer” has fewer than 15 employees working in Arizona.

Employers must count all full-time, part-time, on-call, and temporary workers performing work in Arizona. It should be noted that the ICA previously directed employers to count all employees regardless of location to determine employer size. This drastic change of course is a prime example of how fluid the ICA’s guidance has been and likely will continue to be as the realities of implementing the PST law are realized.

2.        Year One Prorating Accrual and Use.  For the first year of PST, the ICA will permit an employer whose selected “year”² ends less than 365 days after the effective date of July 1, 2017, to prorate employees’ annual PST accrual and usage caps based on the number of days remaining in the employer’s selected year. Prorated accrual and usage caps should be rounded up to the nearest “use” increment (discussed further below). Thus, for a large employer that uses hourly increments and elects to use a calendar year (January 1 – December 31), employees need not be given more than 20.2 hours of PST for 2017.

3.        PST Use Increments.  Employers must allow employees to use accrued PST in the smallest increment in an employer’s payroll system, up to one hour. The ICA recently proposed a regulation to clarify that employers can apply the smallest increment used to account for absences or other paid time off, and not to the increment used in the timekeeping system generally.

4.        Designating Leave as PST Without Employee’s Request.  The ICA has indicated that it will not pursue enforcement against an employer that designates an employee’s time off from work as PST, provided the employer has a good-faith belief the absence fits within the parameters of PST use. If an employer that has designated leave as PST in good faith later learns it did so in error, the employer should promptly correct the error.

5.        PST Use Cannot Count Towards Attendance Policy.  Employers may not count an employee’s use of PST towards its attendance policy, or otherwise as grounds for taking an adverse employment action against the employee. However, an employer may require employees to comply with established call-in procedures outlined in a written, distributed policy to provide notice of an unforeseeable need to use PST, provided the employee does not have a reasonable justification for failing to follow the policy (e.g., an emergency).

6.        Reporting Requirements – Paychecks.  The law states employers must include in employees’ regular paychecks (or in an attachment to the paycheck): (1) the amount of earned PST available to the employee; (2) the amount of PST taken by the employee to date in the year; and (3) the amount of pay the employee has received for PST use in the year.  Recently, however, the ICA clarified that an employer that makes the above information available online (i.e., via an email to the employee or through the company’s intranet) is compliant with the law.  Further, employers utilizing a general PTO policy are not required to carve out PST balances for reporting purposes, but rather may report the data from the general PTO balances.

7.        Carryover Versus Payout at Year End.  Employees must be allowed to carry over up to 40 (or 24 for “small” employers) hours of accrued, unused PST to the following year.  However, this carried-over amount will not affect the annual accrual and use caps as described above. Thus, a “large” employer need only allow employees to accrue and use a maximum of 40 hours of PST per year.

However, employers have two options to avoid this carry-over requirement. First, employers may elect to pay out accrued, unused PST at year’s end, but must make the following year’s PST balance available for immediate use.  Second, according to a recently proposed regulation, employers that frontload the full annual allotment of PST at the beginning of a new year (rather than requiring employees to accrue it throughout the year) are not required to carry forward or pay out unused PST.

8.        Calculating Hourly Rate for PST Payout.  The ICA has stated that shift differentials and premiums such as hazard pay should be included when determining an employee’s rate of pay for PST, but overtime, holiday pay, bonuses, incentive pay, tips, or gifts do not need to be included.  The FAQs on the ICA website also provide direction and examples for determining the hourly rate for piece-work and commissioned employees.

9.        Using a General PTO Policy to Comply with the PST Law.  Employers with existing general paid leave policies (i.e., PTO) that provide an amount of paid leave that meets or exceeds the requirements under the Act, and can be used for the same purposes as provided under the Act, are not required to provide additional PST.  However, there are a number of reporting and posting requirements specific to PST.  As such, the practical implication of the new law is that most employers should update their policies to account for these potential PST issues.

10.      Multistate Employers.  Many employers have operations in multiple jurisdictions, many with different or conflicting PST laws. Accordingly, multistate employers should consider creating a standalone Arizona PST policy or an addendum for Arizona employees that explains the parameters of the Arizona PST law.

Conclusion

This article attempts to address the most frequent questions and concerns we are fielding from employers, large and small.  However, there are many other issues, requirements, options, and possible consequences that are best discussed on an individualized basis.  As such, companies are encouraged to contact their employment counsel to discuss their practices to ensure compliance with the Arizona PST law.