Provided by an insurance company that acts as an intermediary between the patient and health care provider, traditional health insurance plans (also called fee-for-service plans) develop a fee schedule based on the cost of medical services in a specific community. They then incorporate these fees into the costs of insurance coverage. The best-known examples of traditional health insurance plans are the Blue Cross and Blue Shield organizations. Traditional health insurance covers hospital and surgical expenses, physicians’ care, and a substantial portion of expenses for serious illnesses. In 2012, traditional health plans were selected by 17 percent of employees in large companies who had health insurance coverage.39

Traditional health insurance plans have several important features: First, they include a deductible that a policyholder must meet before the plan makes any reimbursements. Second, they require a monthly group rate (also called a premium ) paid to the insurance company. The premium is usually paid partially by the employer and partially by the employee. Third, they provide for coinsurance. The typical coinsurance allocation is 80/20 (80% of the cost is covered by the insurance plan and 20% is picked up by the employee). The deductible, premium, and coinsurance can be adjusted, so the employer’s and employee’s costs of health care insurance vary depending on how the parties agree to allocate the costs. A type of traditional health plan that is gaining in popularity is the high-deductible health plan (HDHP) which is designed to help employers keep the costs of employee health care plans under control. The HDHP has a high deductible of several thousand dollars that employees are required to pay each year before the plan provides any coverage for health care costs. The plan provides health care coverage only for expensive medical procedures and protects employees from going into debt from unexpected medical costs. Employees are expected to pay the full cost of regular recurring health care expenses under the HDHP.

Traditional plans give employees the greatest amount of choice in selecting a physician and a hospital. However, these plans have several disadvantages: First, they often do not cover regular checkups and other preventive services. Second, calculating the deductible and coinsurance allocation requires a significant amount of paperwork. Each time they visit a physician, employees must fill out claims forms and obtain bills with long, itemized lists of services. This can be frustrating for patients and costly to physicians, who often need to hire clerical workers solely to process forms.

A health maintenance organization (HMO) is a health care plan that provides comprehensive medical services for employees and their families at a flat annual fee. People covered by an HMO have unlimited access to medical services, because the HMO is designed to encourage preventive health care to reduce ultimate costs. (The “stitch in time saves nine” analogy applies here.) HMO members pay a monthly premium, plus a small copayment or deductible. Some HMOs have no copayment or deductible. The HMOs’ annual flat fee per member acts as a monetary disincentive to the HMOs’ participatory doctors, who might otherwise be tempted to give patients unnecessary medical tests or casually refer them to expensive medical specialists. In 2012, HMOs were selected by 17 percent of employees in large companies who have health insurance coverage.40

HMOs have two major advantages: First, for a fixed fee, people covered by the HMO receive most of their medical services (including preventive care) without incurring coinsurance or deductibles or having to fill out claims forms. Second, HMOs encourage preventive health care and healthier lifestyles.

The major disadvantage of HMOs is that they restrict people’s ability to select their physicians and the hospitals at which they receive medical services. The HMO may service a limited geographic area, which may restrict who can join the plan. People may be forced to leave their existing doctor and choose one from a list of those who belong to the HMO. In the case of serious illnesses, the specialists consulted must also belong to the HMO, even if there are doctors in the area with better reputations and stronger qualifications. In addition, some consumer groups have criticized HMOs for skimping on patient care to save money on medical costs.

To deal with the problem of patients being denied health care services by administrators under an HMO, federal lawmakers have proposed a “Patient’s Bill of Rights,” which is intended to protect patients from abuses of cost-control policies. Although federal lawmakers continue to debate this issue, 38 states now have laws allowing patients to appeal medical decisions to external review boards that have independent experts. In addition, 10 states, led by Texas, have passed laws giving patients the right to sue HMOs, and 23 more are considering such legislation.41

A preferred provider organization (PPO) is a health care plan in which an employer or insurance company establishes a network of doctors and hospitals to provide a broad set of medical services for an annual flat fee per participant. The fee is lower than that which doctors and hospitals normally charge their customers for the bundle of services, and the monthly premium is lower than that charged by a traditional plan for the same services. In return for charging a lower fee, the doctors and hospitals who join the PPO network expect to receive a larger volume of patients. Members of the PPO can use it for preventive health care (such as checkups) without paying a doctor’s usual fee for the service. PPOs collect information on the utilization of their health services so that employers can periodically improve the plan’s design and reduce costs. In 2012, PPOs were selected by 63 percent of employees in large companies who have health insurance coverage.42

PPOs combine some of the best features of HMOs (managed health care and a wide array of medical services for a fixed fee) with the flexibility of the traditional health insurance plan. They include provisions that allow their members to go outside the PPO network and use non-PPO doctors and medical facilities. People who select non-PPO doctors and hospitals pay additional fees in the form of deductibles and copayments determined by the PPO. Because PPOs have few of the disadvantages of traditional health insurance plans or HMOs, they are expected to continue growing rapidly.

Some employers go beyond just giving their employees several different choices of health insurance benefit plans, such as between an HMO or a PPO, and provide on-site medical clinics that make it convenient for employees to receive health care right where they work. The Manager’s Notebook, “On-Site Medical Clinics at Companies Reduce Health Care Costs,” explains why Toyota decided to offer on-site health care to its employees at its truck plant in San Antonio, Texas.

MANAGER’S NOTEBOOK On-Site Medical Clinics at Companies Reduce Health Care Costs

Customer-Driven HR

Employees are enthusiastic about the on-site medical center Toyota built at its truck factory in San Antonio, Texas. Louis Aguillon, a line worker, went to the clinic with a nagging back pain and paid just $5 for the visit and saw the doctor for 20 minutes. Aguillon says, “You’re not just a number there.”

Toyota views the medical center as a business investment. It spent $9 million in 2007 to build the facility, but it expects to save many additional millions over the next decade. Managed by Take Care Health Systems, whose business is running clinics, the clinic has helped Toyota slash big-ticket medical items, including referrals to highly paid specialists, emergency room visits, and the use of costly brand-name drugs. In addition, Toyota has seen productivity gains, because workers don’t have to leave the plant for routine medical care.

Toyota’s on-site medical clinic is part of a new trend being driven by the spiraling cost of health insurance benefits. Other companies offering on-site medical care for employees include Nissan Motors, Harrah’s Entertainment, Google, and the Walt Disney Parks and Resorts group. A recent study by benefits-consulting firm Watson Wyatt Worldwide found that 32 percent of all employers with more than 1,000 workers either have an on-site medical center or plan to build one.

At Toyota, the copayment for an employee for a visit to a doctor is $5, versus $15 if the worker visits an outside doctor. At the San Antonio Toyota plant, workers who have signed up to use the on-site clinic often see little reason to seek outside care. The on-site team of three doctors, plus dentists, physical therapists, and others, can take x-rays, treat broken bones, and handle various emergencies. The doctors perform many of these procedures for as little as half of the physician fees that a specialist or local hospital charges. At the San Antonio Toyota plant, 60 percent of the employees signed up to use the on-site medical facility.

Sources:Based on Welch, D. (2008, August 11). The company doctor is back. BusinessWeek, 48–49; LaPenna, A. (2009, March–April). Workplace medical clinics: The employer-redesigned “company doctor.” Journal of Healthcare Management. www.entrepreneur.com .▪▪

Traditionally, health insurance benefits have been offered only to employees and their spouses or dependents. Today, however, employers are being asked to offer the same health insurance benefits to employees’ domestic partners—that is, unmarried heterosexual or homosexual partners.

More than half of Fortune 500 companies offer health benefits for domestic partners, according to the Human Rights Campaign, the nation’s largest gay-advocacy group.43 Among the firms that offer such benefits are some of the most prestigious names in U.S. business: Silicon Graphics, Microsoft, Viacom, Apple Inc., and Warner Bros. Companies that also cover unmarried heterosexual couples include Ben & Jerry’s Homemade, Levi Strauss, and the Federal National Mortgage Association (Fannie Mae).

Research shows that health care costs for gay partners and unmarried heterosexual couples are often lower than those for married couples. Moreover, many homosexual employees do not sign up for the benefits because they want to keep their sexual orientation private. Employers can protect themselves against abuse by asking eligible employees to file affidavits of “spousal equivalency” showing a history of living together and sharing assets. The question of pitting heterosexual employees against gay and lesbian employees may become moot because the growing threat of discrimination lawsuits may force employers to offer coverage to all domestic partners in the near future.44

In 2004, a new type of medical plan, called a health savings account (HSA) , became available to employees. An HSA lets individuals save money for health care expenses with pretax dollars. Employers offer the accounts in conjunction with a qualified health plan that has a high deductible—at least $1,250 for single coverage and $2,500 for a family, to a maximum in 2014 of $3,300 for singles and $6,550 for families.45 The account’s earnings are not taxed, nor are withdrawals taxed that are used to pay for qualified medical expenses. HSAs allow unspent money to be rolled over from one year to the next, potentially building up a tax-free stash of money. In exchange for higher deductibles, premiums on HSAs are lower than on other health insurance policies, making them attractive for relatively healthy families that do not need a lot of routine care and preventive services.

The theory behind the HSA concept is that the more of one’s own money a customer of medical services spends, the more likely that person will make financially responsible decisions, such as skipping a visit to an emergency room for a minor problem or choosing a generic rather than a brand-name drug.46

The annual cost of premiums for employee health insurance coverage in 2012 was $5,615 for single coverage and $15,745 for family coverage, according to a survey by the Kaiser Family Foundation.47 Employee contributions cover on average about 18 percent of the cost of a premium for single coverage and 24 percent of a premium for family coverage. The employer covers the rest of the health insurance premium costs. A company’s HR benefits manager can control health care costs by designing (and modifying) health insurance plans carefully and by developing programs that encourage employees to adopt healthier lifestyles. Specifically, HR staff can:

• ▪ Develop a self-funding arrangement for health insurance A company is self-funding when it puts the money it would otherwise pay in insurance premiums into a fund to pay employee health care expenses. Under this type of plan, the employer has an incentive to assume some responsibility for employees’ health. Self-funding plans can be designed to capture administrative efficiencies that translate into lower costs for the same services provided by a traditional health insurance plan.48

• ▪ Coordinate health insurance plans for families with two working spouses HR staff can encourage spouses who have duplicate coverage under two different insurance plans to establish a cost-sharing arrangement. Many companies, such as General Electric, require employees whose working spouses decline their own employers’ health insurance to pay a significantly higher premium than nonworking spouses or those who cannot get insurance elsewhere.49

  

• ▪ Develop a wellness program for employees A wellness program assesses employees’ risk of serious illness (for example, heart disease or cancer) and then teaches them how to reduce that risk by changing some of their habits (such as diet, exercise, and avoidance of harmful substances such as alcohol, tobacco, and caffeine).50 Adolph Coors Company, the Colorado-based beer producer, has a wellness program composed of six areas: health hazard appraisal, exercise, smoking cessation, nutrition and weight loss, physical and cardiovascular rehabilitation, and stress and anger management. It has been estimated that Coors’ wellness program returns $3.37 to the company for each dollar spent on it.51

• ▪ Offer high-deductible health plans for employees A high-deductible health plan (HDHP) is a way that employers can manage the costs of employee health care plans. An HDHP has a high deductible, which requires that each employee pay for the first few thousand dollars of medical costs each year (the plan pays only when an employee has a major medical problem). An HDHP is sometimes referred to as a catastrophic health plan because it can be used only when there is a serious medical event. An HDHP can be linked to a health savings account, which also has high deductibles in the plan design. The idea behind the HDHP is that people make smarter, less wasteful health care decisions when they have a larger financial stake in their own health care. Due to the high deductibles, these health care plans are less costly for employers, and employees’ premiums cost less, too.52 The Affordable Health Care Act places some limits on the use of HDHP plans because it specifies that health plans must pay on an annual basis at least 60 percent of allowed medical expenses and limit out-of-pocket spending at $6,350 for individuals and $12,700 for families.

The Manager’s Notebook, “Wellness Practices Improve Employee Health and Lower Company Health Care Costs,” gives some idea of the diversity of wellness practices that companies are using to improve their employees’ health and reduce health care costs.

MANAGER’S NOTEBOOK Wellness Practices Improve Employee Health and Lower Company Health Care Costs

Ethics/Social Responsibility

Here are some examples of practices used by companies to support employee wellness in the workplace:

• ▪ Give employees more flexible work schedules so they can exercise regularly At Bandwidth, a communications technology company, employees are given longer lunch periods so they can exercise at the gym. The company also encourages physical activity by sponsoring sports teams.

• ▪ Provide healthy food for employees to eat Scripps Hospitals installed self-service kiosks stocked with healthy food, including complete meals. The company also partially subsidizes the cost of the healthy food, making it a more attractive option for employees.

• ▪ Offer financial incentives to employees who participate in wellness activities Nationwide Financial pays its employees close to $300 for completing health-risk assessments and following through on requirements for improvement. Nationwide’s focus on wellness has contributed to reductions in health care benefit costs at the company.

• ▪ Appeal to employees’ sense of competition Manufacturing company Ashcroft set up a fitness program that focuses on friendly competition. Employees form teams or compete individually in programs developed by GlobalFit. After one year, 68 percent of the company’s employees voluntarily participated in the competitions.

Sources:Based on Lucas, S. (2013, May 6). Wellness programs that work for small businesses. Inc., www.inc.com ; Mannino, B. (2012, June 14). Wellness programs finally catching on with companies. Fox Business. www.foxbusiness.com ; Lorenz, M. (2010, July 8). 7 habits of highly successful corporate wellness programs. The Hiring Site. www.thehiringsite.careerbuilder.com .▪▪

The major law governing the administration of retirement benefits in the United States is the Employee Retirement Income Security Act (ERISA) . Passed in 1974, ERISA protects employees’ retirement benefits from mismanagement.54 The key provisions of ERISA cover who is eligible for retirement benefits, vesting, and funding requirements.

• ▪ Eligibility for retirement benefits ERISA requires that the minimum age for participation in a retirement plan cannot be greater than 21. However, employers may restrict participation in the retirement plan to employees who have completed one year of service with the company.

• ▪ Vesting A guarantee that accrued retirement benefits will be given to retirement plan participants when they retire or leave the employer is called vesting . Under current ERISA rules, employee vesting rules must conform to one of two schedules: (1) full vesting after three years of service; or (2) 20 percent vesting after two years of service and a further 20 percent vesting each year thereafter, until the employee is fully vested at six years of service. Employers are allowed to vest employees faster than this if they wish. Vesting pertains only to employer contributions to the retirement plan. Any contributions the employee has made to the plan are always the employee’s property, along with any earnings that have accumulated on those contributions. These employee-provided funds, and any employer contributions that are vested, are said to be portable —that is, they stay with the employee as he or she moves from one company to another.

• ▪ Funding requirements and obligations In addition to establishing guidelines for a retirement plan’s minimum funding requirements, ERISA requires that retirement plan administrators act prudently in making investments with participants’ funds. Plans that do not meet ERISA funding standards are subject to financial penalties from the Internal Revenue Service.

To protect employees from an employer’s possible failure to meet its retirement obligations, ERISA requires employers to pay for plan termination insurance, which guarantees the payment of retirement benefits to employees even if the plan terminates (either because of poor investment decisions or because the company has gone out of business) before they retire. Termination insurance for defined benefit plans (discussed next) is provided by the Pension Benefit Guaranty Corporation (PBGC) , a government agency.

A defined benefit plan , also called a pension, is a retirement plan that promises to pay a fixed dollar amount of retirement income based on a formula that takes into account the average of the employee’s last three to five years’ earnings before retirement. The amount of annual income provided by defined benefit plans increases with the years of service to the employer. For example, based on a final five-year preretirement average salary of $50,000, Eastman Kodak’s pension plan pays a retired employee with 30 years of service $20,523 per year at age 65. Merck, the pharmaceutical giant, pays an employee with the same salary and 30 years of service $24,000 per year at age 65.55

Under a defined benefit plan, the employer assumes all the risk of providing the promised income to the retiree and is likely to make all of the financial contributions to the plan. Defined benefit plans are most appropriate for firms that want to provide a secure and predictable retirement income for employees. Michigan-based Dow Chemical is one such company.56 Such plans are less appropriate for firms that stress risk taking and want employees to share in the risk and responsibility of managing their retirement assets.

Most companies that use defined benefit plans for retirement provide the maximum retirement income only after an employee has spent an entire career of 30 to 35 years with the company. Those who change jobs by moving to different companies are penalized with much lower retirement incomes. Employees currently entering the labor market expect to change jobs and employers several times. Defined benefit plans are less attractive to these employees, because few will spend an entire career at one company. Consequently, there has been a decline in the number of companies offering defined benefit plans for their employees’ retirement.57

A defined contribution plan is a retirement plan in which the employer promises to contribute a specific amount of funds into the plan for each participant. For example, a defined contribution plan may require the employer to contribute 6 percent of the employee’s salary into the plan each pay period. Some defined contribution plans also allow or require employees to make additional contributions to the plan. The retirement income that the participants receive depends on the success of the plan’s investments and therefore cannot be known in advance.58 Companies that value employee risk taking and participation are likely to offer defined contribution plans. Under these plans, employees and employers share both risk and responsibility for retirement benefits. Employees may need to decide how to allocate their retirement funds from different investment choices that represent various levels of risk. Because they require fewer obligations from employers than defined benefit plans, most of the new retirement plans established in recent years have been defined contribution plans.

There is a dark side to this trend toward defined contribution plans. Whereas highly educated and highly paid employees may benefit from such risk-taking arrangements, defined contribution plans are likely to be devastating for low-wage workers, according to a report by the Senate Labor and Human Resources Committee. By the year 2020, more than 50 million U.S. men and women will be of retirement age, but many will not be able to retire because, as low-wage earners, they could not afford to invest in the defined contribution plans established by their employers. Many of these low-wage workers are women.59

Figure 12.6 summarizes the most common defined contribution retirement plans: the 401(k) plan, the individual retirement account (IRA), the simplified employee pension (SEP), and the profit-sharing Keogh. These plans all have tax benefits that can prove very valuable in the long run.

401(k) Plan

To understand the features and benefits of a 401(k) plan (as well as other tax-deferred retirement plans), consider the following situation. Suppose you want to save $100 per month for your retirement, you are in the 28 percent federal income tax bracket, and the money you invest will earn 8 percent per year. If you save the money out of your salary and put it into a personal savings account, the $1,200 that you set aside each year would, in effect, be reduced to $864 because of taxes (Figure 12.7). With one year’s interest, that $864 would grow to $891. Each year the investment earnings would also be taxed at the 28 percent rate. If you continue to set aside $1,200 each year in a personal account, your retirement fund would grow to $67,514 in 30 years.

With tax-deferred retirement plans like the 401(k), the money you save each month is not taxed. Therefore, each year you are saving the full $1,200 you put into your retirement account. In addition, the earnings on your investment are not taxed. After the first year, the value of your account would be $1,251 (compared to $864 under the personal account scenario). After 30 years, the value would grow to $141,761, more than twice the size of the personal account. When you retire and draw the funds, your withdrawals will be taxed at your retirement tax rate.

Plan	Available to	Appropriate for	Maximum Contributions	Tax Break on Contributions/ Earnings
401(k)	Employees of for-profit businesses	Everyone who qualifies	15 percent of salary up to $17,500 in 2014	Yes/Yes
IRA	Anyone with earned income	Those without company pension plans or who have put the maximum into their company plan	100 percent of salary up to $5,500, $11,000 if joint with spouse	Sometimes/Yes
SEP	The self-employed and employees of small businesses	Self-employed person who is a sole proprietor	25 percent of gross self-employment income or $52,000, whichever is less	Yes/Yes
Profit-Sharing Keogh	The self-employed and employees of unincorporated small businesses	Small-business owner who is funding a plan for self and employees	Same as SEP	Yes/Yes

Anyone who works for a for-profit business is eligible to participate in a 401(k) plan.60 Most companies that establish 401(k) plans will match 25 to 100 percent of employee contributions up to 6 percent of the employee’s salary.61 In 2014, the maximum employee annual contribution that could be made to a 401(k) plan was 15 percent of salary up to a limit of $17,500. Employees in not-for-profit companies can also save for retirement with a 403(b) retirement plan, which has the same features as the 401(k) plan. The 403(b) plan lets employees in not-for-profit organizations take advantage of the same retirement savings opportunities as those offered to employees in the for-profit sector who are eligible to participate with a 401(k) plan.

The 401(k) plan’s matching feature makes it attractive to both employers and employees. Employees benefit by accumulating tax-deferred retirement funds; employers benefit by reducing their risk, because there is no payment required when the employee leaves or retires. Usually, employees are free to decide individually how they wish to invest their funds. The basic choice is between an investment strategy with a high potential return, but the risk of a low or even a negative return, and a strategy with low risk and a low-to-moderate return. Investing in the stock market is an example of the first investment strategy; investing in a savings account is an example of the second.

One controversial aspect of 401(k) plans is a practice that permits many large companies to provide their matching contribution to an employee’s 401(k) contribution in the form of company stock. For example, Procter & Gamble, Pfizer, General Electric, and McDonald’s use company stock for matching an employee’s 401(k) contribution.62 An employee who has a large portion of her retirement savings in the stock of one company puts her retirement investment at considerable risk. This risk became apparent in 2001 with the bankruptcy of Enron, a large energy company, and the subsequent collapse of its stock price that wiped out the retirement savings of thousands of Enron employees.63 Even worse, Enron restricted employees from selling their stock until they were close to retirement age.

In 2006, the Pension Protection Act was enacted, which gives employees greater flexibility to diversify out of the company stock in their 401(k) plan and into less risky investments, such as mutual funds. Employers must now allow workers to cash out their company stock within three years to diversify their 401(k) investments, and many firms now allow their employees to transfer out at any time.64

A recent development in the use of 401(k) plans is an automatic enrollment feature that has been adopted by 59 percent of companies that use the plans, according to Hewitt Associates, a benefits consulting firm. This feature is designed to increase enrollment among the 25 percent of employees who do not sign up for their company 401(k) plan because they may be overwhelmed with benefits decisions when they start their jobs. With automatic enrollment, employees are enrolled in a 401(k) plan at the time they are hired, and they are given an opt-out choice that they can use if they do not want to participate. When Alon USA, a Texas oil refiner, instituted automatic enrollment into its 401(k) plan, the employee participation level increased from 40 to 80 percent of the workforce.65

Basic term life insurance pays a benefit to the survivors of a deceased employee. The typical benefit is one or two times the employee’s annual income. For example, both Citicorp and AT&T offer their employees life insurance that will pay one year’s salary to their survivors. In most cases, company-provided term life insurance policies cover workers only while they are employed by the organization. Companies with a flexible benefits policy may allow employees to purchase insurance beyond the basic level. An employee with a nonworking spouse, for example, may need a benefit of three to five years’ salary to provide for his or her survivors. Approximately 78 percent of medium and large businesses provide a life insurance benefit to full-time employees.

About one-third of 20-year-old workers today will become disabled before they hit retirement age at 67, according to the Social Security Administration. The primary cause of disability is chronic disease—cardiovascular problems, musculoskeletal issues, and cancer are the leading diagnoses—rather than work-related accidents, according to a study for the Life and Health Insurance Foundation for Education.70 These employees need replacement income to cover the earnings lost while they are recovering from an illness or accident or, if they are permanently disabled, for the rest of their lives. Workers’ compensation does not provide disability income for people who have had off-duty accidents, and Social Security provides only a modest level of disability income to cover the most basic needs.

An extended period of disability can exhaust a person’s financial resources fairly quickly. Besides regular living expenses, many people who are disabled face medical bills and other expenses, such as the cost of rehabilitation to recover from a disability. Many rehabilitation services are not covered by health insurance.71

Long-term disability insurance provides replacement income to disabled employees who cannot perform their essential job duties. An employee is eligible to receive disability benefits after being disabled for six months or more. These benefits range from 50 to 67 percent of the employee’s salary.72 For example, Xerox provides 60 percent replacement income under its long-term disability insurance plan, whereas IBM provides 67 percent.73 Employees who are disabled for less than six months are likely to receive replacement income under a sick leave policy (discussed later in this chapter). Employees can also purchase short-term disability insurance, which provides coverage until the long-term coverage takes over.

With Social Security benefits added to long-term disability insurance benefits, an employee’s total replacement income is likely to be 70 to 80 percent of his or her salary. Long-term disability insurance plans usually take Social Security into account and are designed so that disabled employees do not receive more than 80 percent of their salary from these combined sources—the theory being that a higher percentage might be a disincentive to return to work. Approximately 45 percent of medium and large companies offer long-term disability insurance benefits to their workers (see Figure 12.2).

Sick leave provides full pay for each day that an employee experiences a short-term illness or disability that interferes with his or her ability to perform the job. Employees are often rewarded with greater amounts of sick leave in return for long-term service to the company. According to the U.S. Bureau of Labor Statistics, employers with sick leave benefits provide an average of 15 days of sick leave for employees with one year of full-time service to the company. Many employers allow employees to accumulate unused sick leave over time. For example, an employee with 10 years on the job may accumulate 150 sick days if he or she has not used any sick time (10 years × 15 days per year of sick leave = 150 days). This accumulated coverage would be more than enough to give the employee full replacement income for the first six months of a serious illness, after which long-term disability coverage takes over.

Some companies allow retiring employees to collect pay for accumulated unused sick leave and vacation time. For example, when John Young retired as the CEO of Hewlett-Packard, he collected $937,225 in lieu of unused sick pay and vacation leave accumulated during his 34 years with the company.75

An HR benefits specialist must monitor and control sick leave benefits to prevent employees from using sick leave to take care of personal business or to reward themselves with a “mental health day” off from work. A survey from Kronos, a workplace productivity consulting firm, reported that 57 percent of U.S. salaried employees take sick days when they are not really sick.76 The HR department should consider instituting the following policies:

• ▪ Set up a “wellness pay” incentive program that monetarily rewards employees who do not use any sick days. Wellness programs may also encourage employees to adopt healthier lifestyles and file for fewer health benefits. For example, Quaker Oats provides bonuses of as much as $500 for employees who exercise, shun smoking, and wear seat belts.77

• ▪ Establish flexible work hours so that employees can take care of some personal business during the week, thereby decreasing their need to use sick days for this reason.

• ▪ Reward employees with a lump sum that represents their unused sick days when they leave or retire from the organization. Alternatively, give employees the chance to accrue vacation days as a percentage of unused sick leave.

• ▪ Allow employees to take one or two personal days each year. This helps to discourage employees from regarding sick days as time off to which they are entitled even if they do not get sick. A poll conducted by job Web site CareerBuilder indicated that 29 percent of employees took a sick day in the most recent year, even though they were not actually sick.78

• ▪ Establish a paid time off (PTO) bank, which is a policy that pools time off in a bank of days that employees use for vacation, sick leave, personal days, and floating holidays. PTO programs allow employees to choose how they will use their time off without feeling the pressure to justify their absence to the boss. With PTOs, employees can take time off for any reason as long as it is scheduled with supervisors. Time off can also be used for unplanned reasons such as sickness and emergencies.79

  

Employers provide paid vacations to give their employees time away from the stresses and strains of the daily work routine. Vacation time allows employees to recharge themselves physically and emotionally and can lead to improved job performance.80 Many companies reward long-term service to the company with more vacation time. For example, Hewlett-Packard employees with one year of service are eligible for 15 days’ vacation; after 30 years of service, they are entitled to 30 days. A new development in paid time-off benefits is an unlimited paid vacation policy that some companies are using in the hopes of lowering employee stress and reducing disruptive turnover. Unlimited paid vacation policies trust employees to take paid vacation days when they need to take time off from work. The company benefits by reducing the need to keep records of paid vacation time allocations. Companies in Silicon Valley, California, such as Netflix and Zynga, as well as software startup Evernote, have adopted unlimited vacation policies to help in the recruiting of engineering talent.81

Figure 12.8 is an international comparison of the average annual number of paid vacation days that employees receive from their companies. U.S. employees average about 10 days (two weeks) of paid vacation. This is the same as in Japan, but far less than in most European Union nations. For example, French workers receive 35 days (seven weeks) and British workers receive 25 days (five weeks) of paid vacation. Many European countries have laws stipulating the number of paid vacation days that workers must receive, but the United States has no such laws.

Some U.S. businesses are starting to offer employees sabbatical leave, which is an extended vacation with pay. Sabbaticals, which can be considered a vacation with a purpose, help employees improve their skills or provide a service to the community. Sabbaticals are very common for college and university faculty, for whom they are a tradition. In the business world, where they are much newer, they are most likely to be found in the high-tech industries, where employee skills become obsolete rapidly and need to be renewed. At Intel, for example, engineers and technical employees who have worked for the company for seven years are entitled to an eight-week paid sabbatical in addition to their annual paid vacation. Employees have used these sabbaticals to continue their education, teach in public schools or colleges, or do volunteer work for nonprofit organizations.82 At Intel, some 4,350 workers, or about one in every 20 full-time employees, take sabbaticals in a given year. According to the Society for Human Resource Management, 23 percent of businesses in the United States offer either paid or unpaid sabbaticals to employees. Another company that has adopted a sabbatical program for employees is McDonald’s. At McDonald’s, full-time employees receive eight weeks of paid time off every 10 years, in addition to vacation.83

Although not typically thought of as a benefit, the severance pay given to laid-off employees is also a form of paid time off. The type of severance pay offered varies widely. Some organizations offer one month’s pay for each year the employee has worked for them, often capped at one year’s salary. Severance pay is provided to cushion the shock of termination and to finance the employee’s search for a new position.

In the United States, the Family and Medical Leave Act (FMLA) provides up to 12 weeks of unpaid leave for employees who become parents of a newborn child, but only two states, California and New Jersey, have enacted laws that provide up to six weeks of paid parental leave for employees. The paid parental leave law in California covers 55 percent of weekly pay, and in New Jersey it covers 67 percent of weekly pay.84 Outside the United States, many countries have enacted laws that require paid parental leave for employees. Sweden provides working parents up to 16 months of paid leave per child at 80 percent of pay, the cost being shared between the employer and the state. Germany provides up to 14 months of paid parental leave at 65 percent of pay, and Japan provides 14 weeks of paid parental leave at 60 percent of pay.85

Many employers give their employees paid holidays or pay extra to employees who are required or volunteer to work on holidays. In the United States, employers provide an average of 10 paid holidays per year to employees. Other countries provide similar or more paid holidays, with an average of 10 paid holidays in the United Kingdom, 13 in Brazil, 14 in Japan, and 11 in France.86 Although they are not required to, many employers also provide paid leave for jury duty. In manufacturing environments where employees work on tight time schedules, many employers provide (either voluntarily or through a union contract) time for employees to eat, clean up, and get dressed. Some union contracts (particularly those in railroad and other transportation firms) also stipulate that employees will be paid if they are scheduled for work even though no work is available.