Donating Paid Time Off – Are Generous Employees Creating Risk?

by Bethany Wright on July 30, 2018

in Compliance,Questions


In times of need, there are always people who will step up and offer to help. A lot of times, it’s those who are closest to us, but sometimes it’s complete strangers or someone we have worked with, but never really got to know. One of the many ways people help others is offering to donate their paid time off to a co-worker who may be struggling with a personal emergency.

Many employers have leave-sharing programs that allow employees to donate accrued paid time off to other employees. It is a noble gesture; offering to give someone your time that you’ve earned; time that could be used to spend with their own family or friends, doing things they love. But, regardless of how noble the gesture is, for employers there are risks associated with employees donating their accrued time off to other employees.

For example, there are tax implications to both the donor and the recipient of the donated hours if the employer’s leave=sharing program is not an IRS approved program. Employers also risk possible discrimination claims if employees are allowed to donate to specific employees, only in times of need.

However, employers can prevent some of that liability and allow employees to help each other out by establishing an appropriate program for leave sharing.

  1. Start with a written, detailed leave-sharing program in your handbook. Outline all aspects of the donor and recipient processes. The policy should be implemented and the leave pool available at all times, not just when something happens and there is a need. The program itself should generally be made available to all employees to prevent any possible discrimination claims, subject to specific eligibility requirements.

  2. Set limits regarding the amount of leave an employee may donate, to prevent employees from depleting their own leave banks. Employees who rarely use their available leave may feel like donating their leave will not impact them; however, it is not worth the risk that they might have a personal emergency and be in need of the leave they have already donated.

  3. Ensure that donated leave goes into the leave pool as a dollar amount, and is used as a dollar amount. This will help control cost to the company. For example, an employee who makes $20 an hour donates two hours of leave; that puts $40 into the leave sharing pool. This means an employee making $10 an hour has 4 hours of donated leave available to them; however, an employee who makes $40 an hour only has one hour of leave available to them.

  4. Be specific about what situations are eligible for receiving donated time from the leave pool. Typically, these policies are available to employees who are having a medical emergency for themselves, or an immediate family member. Remember to include details such as whether or not intermittent leave is eligible, or only employees out on continuous leave.

  5. Create an application for employees to complete prior to receiving donated leave. The form should include information describing the medical emergency necessitating the leave.

  6. The employee should only receive donated leave once he or she has exhausted their own paid leave banks, and are not receiving disability or workers’ compensation benefits. In addition, employees should not be allowed to “cash out” donated paid time off.

  7. Eligibility for receiving leave should be based on pre-determined criteria, and it should follow IRS guidelines for an approved leave-sharing program. If employers don’t have a set criteria to approve leave, they run the risk of employees feeling that they are not being treated equally, which could lead to a discrimination claim.

    Define what sort of medical emergency qualifies for this program, as well as if it covers just the employee’s serious health condition, or that of caring for an immediate family member as well.

  8. If the plan does not follow the IRS approved guidelines, there are tax implications for the donor of the leave, as well as the recipient. Generally, an employee donating leave must report the value of the donation as taxable income. In addition, the employee receiving the donation may also owe taxes. The IRS gives only two exceptions to the tax rule for either a “medical emergency” or for donating to a “major disaster” relief fund:

    • A “medical emergency” is defined as a “medical condition of the employee or a family member that will require the prolonged absence of the employee from duty and will result in a substantial loss of income to the employee because the employee will have exhausted all paid leave available apart from the leave-sharing plan.”

    • A “major disaster” is defined as “a) a major disaster as declared by the President under § 401 of the Stafford Act, 42 U.S.C. Section 5170, that warrants individual assistance or individual and public assistance from the Federal Government under the Act, or (b) a major disaster or emergency as declared by the President pursuant to 5 U.S.C. Section 6391, in the case of employees described in that statute.” There are other things employers should be aware of if they opt to start a leave-sharing program for a major disaster. (See IRS Bulletin Bulletin No. 2006-28.)

  9. Place limits on how many hours a recipient can receive, and how long they must wait before requesting leave from the pool again. Essentially, you don’t want to have one employee empty the entire pool so that there is nothing left for another employee in need.

  10. Establish specific times during the year when employees can donate time. For example, January 1st and June 1st. Not only does this help protect the recipient’s privacy, it also helps to limit exposure to discrimination claims if one employee has time donated to them, and another does not. In addition, it helps eliminate situations in which employees might feel pressured to donate their paid leave in specific situations.

While there are other considerations to think about when it comes to leave-sharing programs, this is a great place to start. If you implement your leave-sharing program correctly, it can promote positive morale in the workplace as well as give your employees the chance to help those around them.

If you realize your program may not be compliant, or if you are looking to try out a leave-share program, give us a call and we can help!

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