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Home My WebLink About06 Vacation Buyback and Vacation UseMEETING DATE: PREPARED BY: REQUEST: Recommendation MEETING DATE 1 I • V?) ' 2-0Z1 0 CONTINUED TO November 18, 2021 Pi PASSES TO 2ND READING \Z ' 1U ' L I STAFF REPORT CITY OF PALM DESERT FINANCE DEPARTMENT Janet M. Moore, Director of Finance Adopt Ordinance No. 1372 amending section 2.52.705(F), "Accrued Vacation Time Buy -Back", of the Palm Desert Municipal Code to include a requirement that employees make an irrevocable election if they wish to buy back up to eighty (80) hours of their vacation time per calendar year, prior to accrual; and amending section 2.52.305(F), "Probationary Employees" to allow probationary employees use of accrued leave while on probationary status. That the City Council waive further reading and pass to second reading Ordinance No. 1372 amending section 2.52.705(F), "Accrued Vacation Time Buy -Back", of the Palm Desert Municipal Code to include a requirement that employees make an irrevocable election if they wish to buy back up to eighty (80) hours of vacation time per calendar year, prior to accrual and further amending section 2.52.305(F), "Probationary Employees" to allow probationary employees to use accrued leave while on probationary status. Executive Summary Section 2.52.705(F) of the Palm Desert Municipal Code currently allows City employees to buy back up to forty (40) hours of accrued vacation leave once per calendar year for monetary compensation under certain circumstances. In order to ensure that this practice does not cause all employees that are eligible to be taxed on a "constructive receipt" basis, the Internal Revenue Service requires that substantial restrictions or limitations be placed upon employees' ability to request a buy-back. The proposed amendment includes these restrictions and/or limitations. This is a Meet and Confer item and the City has met and conferred in good faith with the Palm Desert Employees Organization (PDEO) in accordance with the Meyers-Milias- Brown Act and the City's Employer -Employee Relations Ordinance. Section 2.52.305(F) of the Palm Desert Municipal Code defines probationary employees as those employees who are newly hired and subject to six-month probationary period. Currently, probationary employees are eligible to be paid for recognized holidays and they accrue vacation, sick, and floating holiday benefits but are ineligible to use those benefits until they complete their probationary period. Absences during the probationary period are unpaid. The proposed amendment removes this restriction. Background Information Section 2.52.705(F) of the Palm Desert Municipal Code ("PDMC") permits regular full- and half- time City employees with one hundred and twenty (120) hours of accrued vacation time to request monetary compensation for up to a maximum of forty (40) hours of their accrued vacation time per calendar year. Aside from this provision, City employees are not allowed to cash out their accrued vacation hours except at separation from employment. If employees have an unrestricted or unlimited option to cash out any portion of their already accrued vacation hours prior to separation from employment, then the Internal Revenue Service November 18, 2021 — Staff Report Adoption of Ordinance No. 1372 on Buy -Back of Accrued Vacation Time and Probationary Employees Access to Paid Leave Page 2 of 2 ("IRS") may regard the portion eligible for buy-back as constructively received income and a taxable event'. If employees are instead required to make an irrevocable election to buy back vacation hours in the preceding calendar year prior to accrual ("Election Year"), and to earn, request, and receive payment for the hours in the year of accrual ("Payout Year"), then the IRS will not regard this as a constructive receipt of income since the employees made the election before they accrued the vacation hours. While the PDMC currently limits the amount of a buy-back, it does not require that an election be made prior to the accrual of vacation hours. The proposed revisions to PDMC section 2.52.705(F), detailed in Exhibit "A", would allow an increase in the number of hours of accrued vacation time that employees can buy back each calendar year, and place the following "substantial restrictions or limitations" upon their ability to cash them out: 1. In the preceding calendar year ("Election Year"), employees must make an irrevocable election to buy back their vacation hours that will accrue in the next calendar year ("Payout Year"), up to the maximum number of hours that City policy allows. 2. During the Payout Year, employees must submit a written request for a buy-back. 3. If an employee makes an irrevocable election but fails to submit a written request for payment by December 1 of the Payout Year, then the City will process the buy-back request and pay the employees prior to December 31 of the Payout Year. 4. If an employee terminates prior to requesting a buy-back in the Payout Year, the employee will be paid for accrued vacation at termination the same as if they had not made an election in the "Election Year'. The current condition for a minimum number of hours (120) would be modified as part of the irrevocable requirement as follows: Employees with at least eighty (80) hours of accrued vacation leave on December 1 may buy back up to forty (40) hours of future accrued vacation leave and employees with at least one hundred and twenty (120) hours may buy back up to eighty (80) hours of future accrued vacation leave. If the City does not adopt these changes, including the restrictions and limitations, then employees may be taxed on the cash value of the current allowed amount of forty (40) accrued vacation hours that are subject to buy-back each calendar year, even if they have not used them or cashed them out. Since June 1, 2021, the City has hired 15 new employees and continues to recruit for vacant positions. The current restriction on the use of accrued leave in section 2.52.305(F) of the Palm Desert Municipal Code inhibits recruitment and restricts the development of a positive organizational culture. Further, with the expiration of the Families First Coronavirus Response Act (FFCRA) leave provisions on December 31, 2020 and the COVID-19 supplemental paid sick leave under SB 95 on September 30, 2021, there is no provision by which a probationary 1 Section 451-2(a) of Title 26 Code of Federal Regulations Part 1 defines "constructive receipt of income" as income, not received in cash, that a taxpayer has constructively received in the tax year that it is: (1) credited to their account; (2) set apart for them; (3) made available so that it may be drawn upon at any time; or (4) could have been drawn upon if a notice of intention to withdraw had been given. Income is not constructively received, however, if substantial restrictions or limitations are placed upon the taxpayer's control of its receipt. November 18, 2021 — Staff Report Adoption of Ordinance No. 1372 on Buy -Back of Accrued Vacation Time and Probationary Employees Access to Paid Leave Page 2 of 2 employee can receive paid leave if they are required to quarantine due to a COVID-19 exposure and/or contract COVID-19. The proposed amendment removes this restriction and provides probationary employees access to paid leave through the accruals they are otherwise earning. Fiscal Analysis The City has reserved the value of compensated balances in a separate fund. By increasing the amount of vacation time that employees can cash -out during a year and decreasing the threshold of accrued vacation leave to be eligible, the City's accrued liabilities for compensated leaves, at the end of each fiscal year, may be lower. This may also lower the City's cost of payouts when an employee leaves the City. There is no fiscal impact on the use of paid leave by probationary employees as it is limited to the use of a benefit they are already earning and does not create a new leave accrual. LEGAL REVIEW RWH Robert W. Hargreaves City Attorney DEPT. REVIEW Par et ?%?ooze, Janet M. Moore Director of Finance City Manager, L. Todd Hileman: L.. Todd Hilevu,Gtt , FINANCIAL REVIEW Yavvet?4/. ?%?ooze, Janet M. Moore Director of Finance ATTACHMENTS: 1. Exhibit "A" -- Amendments to PDMC section 2.52.705(F) 2. Exhibit "B" -- Ordinance No. 1372 ASST. CITY MGR. .Andy Firestine Andy Firestine Assistant City Manager