AZ Prop 206 and accounting for unused vacation, sick pay

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prop 206, Arizona, sick pay, vacation payIn November 2016, Prop 206, the Fair Wages and Healthy Families Act was approved. The Act established a new state minimum wage effective January 1, 2017 and entitled employees to accrued earned paid sick time beginning July 1, 2017. This newly required accrued sick time may have an impact on your year-end accruals.

A few of the highlights from Prop 206 relating to sick time are:

  • Employers with 15 or more employees must accrue a minimum of one hour of earned paid sick time for every 30 hours worked, with a max of 40 hours of earned paid sick time per year for each employee.
  • If an employer has a paid leave policy that provides an amount of paid leave that meets or exceeds Arizona’s earned paid sick time minimum requirements, the employer is not required to provide additional earned paid sick time.
  • Employees’ unearned paid sick time does carry over to the next year (40 hours max for employees with over 15 employees)
  • The employer is not required to pay an employee for accrued but unused earned paid sick time at termination.

FASB ASC 710-10-25 provides guidance on compensated absences and notes certain criteria which, if met, require an accrual at period end. These criteria include:

  • The employer’s obligation relating the employee’s right to receive compensation for future absences is attributable to employees’ services already rendered
  • The obligation relates to rights that vest or accumulate
    • Vested rights are those that the employer has an obligation to pay even if an employee terminates.
    • “Accumulate” means that the employee may carry unused vacation forward to subsequent periods.
  • Payment of the compensation is probable.
  • The amount can be reasonably estimated.

Special attention should be made to the second point which notes either the obligation has to be vested or accumulated. With the new proposition we are now required to accumulate the unused sick pay, thus, meeting this criterion.

However, there is an exception. The guidance also notes that an accrual is not required for nonvesting sick-pay benefits if the sick pay is accrued for separately from vacation time (i.e. not a combined paid-time off policy).

In conclusion, even though unused sick time is required to be carried over to the following year under the new Arizona regulations, as long as it is not paid to the employee upon termination, this does not need to be included as part of the company’s accrual for vacation pay. If the company already has a paid-time off policy which will now encompass the new sick time requirement, it would need to be accrued for if it meets the four criteria noted above.

Joseph Bang, CPA