Just Ask Jacob: Beware of discrimination, tax issues when employees donate PTO
Q We have exempt employees who accrue paid time off (PTO) each pay period. They would like to be able to donate some of their PTO to coworkers who don’t have any more PTO. Does that violate any federal or state laws? Are there any special exceptions or issues we should be aware of?
A No. Neither federal nor state law prohibits an employer-sponsored leave-sharing program similar to the one you describe. When implemented correctly, leave-sharing programs can foster a good workplace culture by giving employees the opportunity to donate their accrued PTO to coworkers. However, be aware of the following issues when implementing such a program.
A badly implemented leave-sharing program may raise inferences of discrimination if too much control is given to the employer. As a best practice, leave-sharing banks should be made available to all employees. Determine eligibility criteria in advance, and review employees’ needs against the criteria. When possible, avoid approving PTO donations on an ad hoc basis since doing so could cause employees to perceive that all workers are not treated uniformly, foster jealousy and resentment, and lead to potential discrimination claims. The best practice is to apply PTO donation procedures fairly and uniformly.
Moreover, as a general rule, a PTO donation under an employer-sponsored leave-sharing program is treated as an assignment of income that is taxable to the donating employee and is subject to income tax and employment tax withholdings (i.e., it should be included in the employee’s W-2). However, there are two caveats.
First, under IRS Revenue Ruling 90-29, a leave-sharing program that allows donated leave to be used only for medical emergencies results in taxation to leave recipients but not to leave donors. Under that scenario, an employee must submit a written application describing the medical emergency and may receive donated paid leave (at his normal rate of compensation) only after he has exhausted all of his paid leave. The IRS defines “medical emergency” as a medical condition that would require a prolonged absence from work and result in a substantial loss of income to the employee.
Second, the IRS allows employees to donate PTO to be used by coworkers affected by a major disaster. The PTO will be considered taxable income for the recipient employee only, not for the donor employee. The IRS defines “major disaster” as an event declared a major disaster by the president of the United States under Section 401 of the Stafford Act. However, it is important to note that such a plan does not allow a leave donor to deposit leave for a specific recipient, nor does it allow a recipient to convert leave received under the plan to cash in lieu of leave.
Finally, be clear on the method of calculating PTO donations for employees who receive different wages. You can standardize PTO donations to either hours worked or salary accrued. For instance, Employee A may donate three hours of PTO at $10 per hour to Employee B, who receives a standard wage of $30 per hour. Most leave-sharing programs allow Employee B to accrue three hours of leave in that scenario. Regardless of your election, be clear on the method, and apply it uniformly.
Q If an employee receives a pay raise, does she need to fill out a new W-4?
A Probably not. The decision to fill out a new W-4 depends on the employee’s election to claim a certain number of withholding allowances on her pay, not on her salary. But there’s a caveat: When an employee receives a raise that is so significant that it elevates her to the next tax liability bracket, she is not obligated to fill out a new W-4, but she should nevertheless consider doing so to reassess her tax liability. For practical purposes, employees also should update their W-4 whenever there is a change in their (1) marital status, (2) amount of itemized deductions, or (3) number of dependents.
Jacob M. Monty, the managing partner of Monty & Ramirez, LLP, practices at the intersection of immigration and labor law. He can be reached at firstname.lastname@example.org or 281-493-5529.