Sick Leave Pay: What It Means for Employers

What it means in practice

Sick leave pay raises three questions: whether an illness absence is paid at all, how much each hour of leave pays, and how that payment is treated for overtime, salary rules and taxes. For a private employer without government contracts, the first answer comes from company policy, a union contract or a state or local law; the others come from federal regulations and state rules that do not always agree.

The federal baseline. The Department of Labor's sick leave page says there are currently no federal legal requirements for paid sick leave. Its FLSA questions page says the Fair Labor Standards Act (FLSA) does not require payment for time not worked, such as vacations, sick leave or holidays, and that these benefits are matters of agreement between the employer and the employee or the employee's representative. Many employers offer sick pay inside a broader paid time off (PTO) bank, and the way hours are earned is covered on the accruals page.

How the FMLA fits. The DOL sick leave page notes that the Family and Medical Leave Act provides up to 12 weeks of unpaid leave for certain medical situations for the employee or an immediate family member, for employees who have worked for the employer at least 12 months, worked at least 1,250 hours in the previous 12 months and work at a location with at least 50 employees within 75 miles. Under 29 CFR 825.207, an employee may choose, or the employer may require, to substitute accrued paid leave for unpaid FMLA leave, meaning the paid leave runs at the same time and the employee is paid under the employer's normal policy. Paid sick leave used for a condition that is not a serious health condition does not count against the FMLA entitlement. See FMLA and disability leave.

Federal contractors under Executive Order 13706. Executive Order 13706, signed September 7, 2015, requires covered federal contractors to provide up to seven days of paid sick leave a year. DOL Fact Sheet #84 (January 2025) says it applies to new contracts and replacements resulting from solicitations issued on or after January 1, 2017. Under 29 CFR 13.3, it covers Davis-Bacon construction, Service Contract Act, concessions and certain federal property contracts, but not contracts to manufacture or furnish supplies or equipment. Employees exempt from FLSA overtime are covered too. Status, checked November 2026: DOL WHD still publishes its EO 13706 guidance, the eCFR still carries Part 13, Executive Order 14236 (March 14, 2025) revoked the contractor minimum wage order, Executive Order 14026, without listing EO 13706, and in February 2026 DOL asked OMB to renew its contractor paid sick leave information collection.

What contractors must pay. Under 29 CFR 13.5, a contractor must provide an employee using paid sick leave the same regular pay and benefits the employee would have received had the employee worked, and "regular pay" means payments included in the regular rate under 29 CFR part 778. Leave may be used for the employee's own illness, injury or medical care, caring for a family member or someone in an equivalent close relationship, and needs related to domestic violence, sexual assault or stalking. Leave is counted in increments of no more than 1 hour, and a contractor may not require an employee to find a replacement worker. A contractor may require a health care provider's certification only for absences of 3 or more consecutive full workdays, with at least 30 days to provide it. Unused leave carries over, must be reinstated on rehire within 12 months, and need not be cashed out at separation.

Example 1: contractor accrual. As a hypothetical, a service contract employee works 75 hours on a covered contract in one pay period. Under 29 CFR 13.5(a)(1)(ii) the contractor credits 2 hours of paid sick leave (60 of the 75 hours) and carries the remaining 15 hours forward. If the employee works 45 covered hours the next pay period in the same accrual year, the 15 carried hours plus 45 new hours make 60, so the employee earns 2 more hours.

Overtime and the regular rate. Under 29 CFR 778.218, payments for occasional periods when the employee is not at work because of vacation, holiday, illness or a similar cause, in amounts approximately equal to the employee's normal earnings for a similar period, are not compensation for hours of employment. They may be excluded from the regular rate under section 7(e)(2) of the FLSA, and for the same reason no part of them may be credited toward overtime due. A payout for unused leave is treated the same way under 29 CFR 778.219. For how the regular rate drives overtime, see overtime.

Example 2: sick pay and overtime. Hypothetically, a non-exempt employee earns $18 an hour, works 42 hours in a workweek and takes 4 hours of paid sick leave on another day for a medical appointment. Straight time for hours worked is $756 (42 x $18). The regular rate stays $18 because the $72 of sick pay (4 x $18) is excluded, so the overtime premium for the 2 hours over 40 is $18 (2 x $9). The employee is owed $846 in all, and the $72 of sick pay cannot be used to cover the $18 premium.

Exempt employees. The salary basis rule in 29 CFR 541.602 says an exempt employee must receive the full salary for any week in which the employee performs any work. One exception allows deductions for absences of one or more full days caused by sickness or disability if the deduction is made under a bona fide plan, policy or practice of providing compensation for loss of salary caused by sickness or disability. Deductions for such full-day absences may also be made before the employee qualifies under the plan and after the leave allowance is used up. A partial-day sickness absence cannot be deducted outside unpaid FMLA leave. Deductions may use the daily or hourly salary equivalent.

Example 3: exempt employee who runs out of sick days. Hypothetically, an exempt employee paid $1,200 a week on a five-day schedule has used all paid sick days under the employer's written sick leave plan, then misses three full days and one half day in a week for illness; the absence is not FMLA leave. The daily equivalent is $240. The employer may deduct for the three full days, $720, but not for the half day, so the employee receives $480 for the week.

Taxes on sick pay. IRS Publication 15-A (for use in 2026) defines sick pay as any amount paid under a plan because of an employee's temporary absence due to injury, sickness or disability, whether paid by the employer or a third party such as an insurance company. Sick pay is usually subject to social security, Medicare and FUTA taxes. Sick pay paid by the employer or its agent is subject to mandatory federal income tax withholding based on the employee's Form W-4; a third party that is not the employer's agent withholds income tax only if the employee files Form W-4S. Employer-paid sick pay is reported on the Form W-2 under the same rules as regular wages. Publication 15 (2026) lists payments for accumulated sick leave as supplemental wages.

Where states differ: California. California, Washington and Minnesota are examples, not a complete list. The California Labor Commissioner's paid sick leave FAQ (updated December 31, 2025) says employers must generally provide at least 40 hours or five days of paid sick leave a year, whichever is more, to employees who work at least 30 days for the same employer within a year in California, with use allowed after a 90-day employment period. For non-exempt employees, sick leave is paid at the regular non-overtime hourly rate, calculated either as the regular non-overtime rate for the workweek in which leave is used (total non-overtime compensation divided by non-overtime hours worked) or as total compensation for the prior 90 days, excluding overtime premium pay, divided by non-overtime hours worked in the full pay periods of those 90 days. Exempt employees are paid the same way the employer pays other paid leave. Payment is due no later than the payday for the next regular payroll period. The balance must appear on the pay stub or a same-day document. See California labor laws.

Where states differ: Washington. The Washington Department of Labor and Industries says employers must provide at least 1 hour of paid sick leave for every 40 hours worked, regardless of full-time, part-time, temporary or seasonal status, and must pay the employee's normal hourly compensation for sick leave hours used. Sick leave must be paid in the same pay period it was used, unless the employer requires verification for absences exceeding three days, which requires a written policy. Balances of 40 hours or less carry over, employers may not require an employee to cover a shift before taking leave, and balances generally need not be cashed out at separation, although certain construction workers must be paid their balance.

Where states differ: Minnesota. The Minnesota Department of Labor and Industry says employees anticipated to work at least 80 hours a year in Minnesota earn 1 hour of earned sick and safe time per 30 hours worked, up to at least 48 hours a year, with total accrual cappable at 80 hours. Leave is paid at the base rate: the hourly rate for the shift missed, or the guaranteed salary, and at least minimum wage for commission or piece-rate employees. The base rate excludes commissions, shift differentials, overtime, weekend or holiday premiums, bonuses and tips, and no overtime rate is owed even if the missed shift would have been overtime.

Example 4: the same absence under two state rules. Hypothetically, an employee paid $20 an hour works 32 hours in a workweek, earns $96 in shift differential pay and takes 8 hours of sick leave. Under California's workweek method, non-overtime compensation of $736 divided by 32 hours gives $23.00, so the 8 hours pay $184. Under Minnesota's base rate, which excludes shift differentials, the 8 hours pay $160 (8 x $20).

Recordkeeping. Federal contractors must keep EO 13706 records, including leave requests, leave used and the pay and benefits provided for each use, for at least 3 years after the contract (29 CFR 13.25). California requires records of sick leave earned and used for three years. Publication 15 says to keep employment tax records for at least 4 years, including periods employees were paid while absent due to sickness or injury and the amount and weekly rate of those payments.

Questions employers ask. Must unused sick leave be paid at termination? Not under EO 13706, California's or Minnesota's law, or Washington's law outside certain construction workers, unless a policy or agreement provides it; combined PTO and vacation pay plans can follow different rules. Does sick pay count toward overtime? Under the FLSA it is excluded from the regular rate (29 CFR 778.218), and Minnesota says no overtime rate is owed for ESST hours. Does COVID-era paid sick leave still apply? Publication 15 (2026) says the credit for qualified sick and family leave wages is limited to leave taken after March 31, 2020, and before October 1, 2021, and is now claimed on Form 941-X.

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