Integrated Time-Off Saves Money, Gets Employees Back to Work

April 14, 2002

One of the dirty words that is often associated with employee benefits is "entitlement."It’s frequently used when you’re talking about a benefit that’s beenaround for a long time, to the extent that employees begin to expect it. You canalways spot such a benefit when you try to change it.

One benefit that is often referred to as an entitlement is sick days andother paid-time-off plans. Many corporate benefit plans have separate vacationand sick day "banks," and then a separate long-term disability plan to takecare of lengthy illnesses. For example, a common program would give an employeeanywhere from one to three weeks of vacation pay, six to eight paid holidays,and six sick days each year. Depending on the company, the vacation and sickdays can either be rolled over each year or be subject to a "use it or lose it"rule.

Each provides a quandary. If employees can roll over sick time, they may endup accumulating a large bank of it, perhaps on the order of several months. Forsome people, this is a great protection against serious illness. For others, it’san excuse to "get sick" when they aren’t actually very sick.

On the other hand, if you have a "use it or lose it" rule, it creates thetemptation for the employee to use the sick days as a matter of entitlement,regardless of an actual illness (what could be called a "sniffle day"). Asit gets later in the year, and employees have several sick days left, they’lloften find a reason to use them even if they don’t need to. In either case,the company is paying far more for time-off benefits than necessary.

Integrated plans go further
You may have heard of the terms "integrated disability programs" and "24-hourcoverage." These terms get at the concept of providing continuity andefficiency in designing time-off programs that include the full spectrum ofbenefits affecting employees when they are away from work -- vacation, short-termand long-term sicknesses, and even workers’ compensation.

A more accurate term would be "integrated time-off plans," since not alltime off is the result of disability. A larger number of employers have moved topaid-time-off (PTO) programs, which bring together vacation and sick days in anattempt to lure employees with more vacation time in exchange for those "sniffledays." But integrated time-off plans go further.

For the employee, the main benefit of integrated time-off plans is continuityof income. As you look at your time-off programs, you may be able to identifyinstances in which employees have gaps in their income because of illness. Onesuch example is pregnancy. If you have a program in which an employee gets twoweeks of vacation and has six sick days each year, under a standardmaternity-leave policy, you will have at least three weeks when the employee hasno paycheck coming in, and that assumes she didn’t use a couple of sick daysduring the pregnancy.

For the employer, the main objective is keeping an employee healthy and atwork. Again, if employees know that their sick days will be lost at year-end,they may be tempted to find ways to use them. As you will see in the nextsection, the design of a good integrated time-off plan will create incentivesfor an employee to either get or stay healthy and at work.

Moving to an integrated design
The design of an integrated time-off plan can have many facets, depending onyour particular corporate culture and structure. This article presents anexample of one of many ways to set up such a plan, which is based in general ona plan that was set up for a large health system in Ohio. You most likely willhave to tweak it a little or a lot, depending on your circumstances. That said,the bread and butter of this program is made up of the following:

  • PTO (Paid Time Off): One bank that consists of vacation, sick, and evenholiday time (if you are in an industry in which not all employees have aholiday off, such as hospitals).

  • Short-Term Disability (STD) Plan: A plan that pays a certain percentage ofpay after an initial waiting period (e.g., seven days). The length of time thatthe plan pays is generally based on the waiting period for the long-termdisability plan. This benefit can be either insured or self-insured.

  • Long-Term Disability (LTD) Plan: Much the same as the STD plan, except thewaiting period is usually around 90 days and the payout can extend up to age 65.Generally, this is bought as an insured product because of the potential lengthof benefit payouts.

  • Return-to-Work (or Light Duty) Program: Designed to transition an employeeeither in or out of work on the basis of physician-prescribed limitations. Theemployer designs specific jobs for light-duty work.

To illustrate how an integrated time-off plan program might work, let’sassume the following:

  1. Days 1-3 of any illness come from the PTO bank (100 percent of pay)
  2. Days 4-90 of any illness come from the STD plan (75 percent of pay)
  3. Days 90 or more of any illness come from the LTD plan, if employee isenrolled (66 percent of pay)

Susan is 35 weeks pregnant and has been ordered by her doctor to reduce herstress. She doesn’t have to stop working, but will need to find less strenuouswork. Her employer decides to put her on a light-duty job for three weeks, atwhich time Susan delivers her baby. She did not use any PTO or STD time while onlight duty. She plans to take six weeks of maternity leave. The first three daysof leave are paid at 100 percent, days 4 through 45 are paid at 75 percent, andat the end of her maternity leave, she works one week of light duty because ofsome lingering effects of the delivery.

As you can see from this example, the employee doesn’t have a day when sheis without some sort of pay, and the employer is able to retain at least someproductivity from her during her medically restricted time before and after thedelivery.

Analyzing your time off
The first step in moving to an integrated time-off plan is to do a detailedanalysis of how your time off is currently being used. In the example of thehealth system above, average sick-day usage was close to five days per year.However, because the plan was to help control the use of sick days (and savemoney), only an average of three days were added to the existingvacation/holiday bank to create the PTO bank. If you really feel as if your sicktime is being overutilized, you can even cut that number by a day.

If you use the blueprint in the example design above, this will alsodetermine the waiting period for the STD component. Self-insuring the STD willgive you the most flexibility in designing exactly when the benefits will kickin, since most insured products have specific requirements.

Another important part of the design process is determining any transitionissues from the old plan to the new, especially if you have accumulated sickbanks for current employees. For the health system in our example, they frozeany additions to the sick bank and then allowed employees limited access to thebanks to receive 100 percent of pay. Another option would be to convert sickdays to PTO time. The advantage is that this creates a clean break from the oldto the new plan and the need to track sick-time banks into the future; thedownside is that the PTO time will have to be paid out upon termination,whereas, in most cases, sick time is not. Regardless of the option, a transitionplan is a must.

You need a staff
Unless you are specifically qualified to perform case-management functionswithin your company, it probably makes sense to outsource some or all of theclaims processing for your integrated time-off plan.

If you already have an in-house employee health department that manages suchareas as health, safety, pre-employment physicals, and drug testing (our examplecompany did), you may have a good foundation with the addition of a case manageror two to self-manage your integrated time-off plan. It is helpful in thedo-it-yourself shop to cover, at a minimum, the following functions:

  • Claims intake: A person who evaluates each illness/injury that may extendinto STD territory and beyond and coordinates payroll and/or insurer payments.

  • Case Manager: A person who follows each person that gets into the STD partof the program and coordinates the appropriate care for the individual (e.g.,sets up light duty, authorizes STD payments, initiates LTD applications).

  • Program Assistant: An administrative assistant who handles all of thepaperwork and letters that are required by insurers, payroll, workers’compensation, etc. Also serves as receptionist if you provide walk-in servicesor have a toll-free number to collect employee or manager reports of extendedillness.

In the end, you will have to evaluate the cost of staffing and equipment topull off the in-house administration versus the cost of using externaladministrators. Often, the decision will come down to what your corporateculture will accept: talking with a fellow employee or with an unknown name atanother company.

Sell the program
As mentioned earlier, you find out how much employees value a benefit whenyou start tinkering with it. Changing paid time off is no different. Here is alist of things you are most likely to hear and how to address them:

  • "The program is a ‘take-away' -- I don’t have as many sick days as Idid before." This gets at the heart of why you are offering the program. Whilein total you may not be giving as many vacation and sick days, the importantpoint to drive home is that if employees strive to remain healthy, then theywill have more elective vacation days to use throughout the year. This willspeak most loudly to the occasional "sniffle day" users.

  • "This program encourages me to come to work when I’m sick." This isa tough question because the downside of PTO banks is that employees give up apotential vacation day to use a sick day. The best answer to this question is toencourage employees to stay home if they feel they could give coworkers theillness. Even though it costs the employee a PTO day, it may save many more PTOdays (and company productivity) in the long run.

  • "I know best how I feel and when I should come back to work." You willhear this when trying to encourage someone to return to work through either thelight-duty program or an evaluation as a part of case management. The simplemessage is: We’re paying you to work here, even for time that you aren’tworking; we have a right to determine your physical readiness to work. Rememberthat you are trying to change people's thinking from "entitlement to sickbenefits" to "utilizing sick benefits to be a more productive employee."

Moving to an integrated time-off plan philosophy has as much to do withaffecting culture as affecting the bottom line, and the latter is not successfulwithout the former. As with any other change in corporate culture, it'simportant to get managers involved and sold on the program before going public.These HR "champions" can go a long way toward making the program successful.

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