This week the Industrial Commission of Arizona (ICA) supplemented its proposed rules interpreting Arizona’s new paid sick time (PST) law under the Fair Wages and Healthy Families Act (the Act). Among other noteworthy changes, the supplement provides some much-needed clarity on how the Act affects employers’ existing PTO policies. It also simplifies compliance for employers electing to front load at least 40 hours of PST or equivalent paid time off (24 hours for small employers). Employers have until August 8 to submit written comments on the proposed supplemental rules.

Clarification on “Equivalent Paid Time Off”

The ICA confirmed that employers do not need to separately track, record, or provide PST if they give employees equivalent paid time off. The supplemental proposed rules define “equivalent paid time off” as “paid time provided under a paid leave policy, such as a paid time off policy, that makes available an amount of paid leave sufficient to meet the accrual requirements of the Act that may be used for the same purposes and under the same conditions as earned paid sick time.” The ICA repeatedly referenced that new terminology throughout the supplemental proposed rules, clearing up much of the confusion surrounding how the Act affects employers with equivalent PTO policies.

For example, the Act requires employers to record the amount of PST available to and received by each employee during that year to date. It was previously unclear if employers who provide equivalent paid time off were nevertheless required to separately track and record PST. The ICA’s supplement clarifies that employers can simply track and record equivalent paid time off.

Likewise, it was previously unclear if employers who provide equivalent paid time off were nevertheless required to carve out and reserve a minimum number of hours for employees to use for the Act’s specified PST purposes, which include an employee or family member’s medical needs, public health emergencies, exposure to communicable disease, domestic violence, sexual violence, abuse, or stalking. The ICA’s supplement clarifies that employers with equivalent PTO policies do not need to reserve a block of time for PST purposes. Rather, when an employee receives pay under an equivalent paid time off policy for PST purposes or other purposes, the employer may treat it as PST pay.

Clarification on Front Loading PST

The supplemental proposed rules incentivize employers to front load 40 hours of immediately-available PST or equivalent paid time off to each employee (24 hours for small employers). According to the ICA, employers who do that will be exempt from the Act’s carryover and additional accrual requirements. For example, let’s say an employer front loads 40 hours of immediately-available PST to each employee on January 1, 2018. At year’s end, that employer will not need to cash out or carry over its employees’ unused PST hours. Instead, on January 1, 2019, the employer will simply need to front load 40 new and immediately-available hours to each employee.

Importantly, the exemption only applies to employers who front load at least 40 (or 24) hours to every single employee. The Act gives employers an alternative option to front load PST on an individualized basis in the amount an employee is expected to accrue that year, which may be less than 40 (or 24) hours for some employees. But, according to the ICA, those front-loading employers are not exempt from the Act’s carryover and additional accrual requirements.

Calculating the “Same Hourly Rate”

We previously explained how the ICA’s original proposed rules provided detailed guidance on how to calculate the “same hourly rate” for employees who earn wages based on something other than a straight hourly rate. Those calculations remain largely the same under the supplemental proposed rules, except for the following:

  • The ICA changed the method of calculating the “same hourly rate” for salaried employees. The ICA clarified that an employer does not need to provide additional PST pay if a salaried employee’s use of PST does not reduce his/her regular salary that pay period. When using PST will reduce the employee’s regular salary, the proposed rules provide two methods to calculate the “same hourly rate,” in order of priority: (1) all wages earned during each pay period covered by the salary divided by the agreed-upon work hours during each pay period, if previously established; or (2) all wages earned during each workweek covered by the salary in the current year divided by 40 hours.
  • The first four proposed calculations for employees paid on a commission, piece-rate, or fee-for-service basis remain the same, but the ICA added a fifth option: the hourly average of all compensation earned in the previous year based on hours actually worked or a 40-hour workweek.

How Should Employers Proceed at This Late Date?

Because the PST law goes into effect on July 1, many Arizona employers have already created and implemented PST policies and practices without the benefit of this additional clarification from the ICA. Those employers should keep in mind that the ICA’s proposed rules are not final, and may change again before they go into effect. As long as an employer’s existing PST plan complies with the Act, the employer can and probably should proceed as planned for the time being. But, all Arizona employers should closely monitor the ICA’s ongoing rulemaking process and consider updating their PST policies and practices when the rules go into effect.