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Sick Leave and Sick Bank Buyback | Contract 2029 SEP Education
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Welcome back to The Contract 2029 Survey Education Poll series. I'm your Communications Committee Chair, Matt McCants. My guests today are Kurt Heidemann, your negotiating committee chair. And Resident Benefits Subject Matter Expert and NC Member, Damian Jennette. We are going over the recently surveyed topics of sick leave and a sick bank buyback program.
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Welcome back to the Contract 2029 Survey Education Poll Series. I'm your Communications Committee Chair, Matt McCantz. My guests today are Kurt Heidemann, your negotiating committee chair and resident benefits subject matter expert and NC member Damien Jeanette. And we are going over the recently surveyed topics of sick leave and a sick bank buyback program. Our discussion is largely going to be based on the articles you will see on the Contract 2029 education page of the SWAPA website and in the negotiating points of the SWAPA app. So if you've already checked those articles out, great. And if not, I do suggest you take a look at those before we start polling on these and other benefits and leaves topics starting July 20th. Okay, guys, let's jump right into it with the question of how do we define sick leave in the contract?
SPEAKER_00So currently, sick leave is defined as the result of illness or injury, and that's in section 17 C2C. It needs to be mentioned that that language is very similar to the language that's in the Flight Operations Employee Handbook. And what the blank sheet surveys told us is that a lot of the members want to see that language expanded. Right.
SPEAKER_01And specifically the call out was to have it reflect some language that I think it's safe to say everyone is somewhat familiar with, and that's the I am safe provisions. For those unfamiliar, that's described in chapter eight of the AIM as a personal fitness for flight self-assessment to confirm pilots are free from limiting illness, adverse medication effects, excessive stress, recent residual alcohol use, significant fatigue, and destabilizing emotion before flying.
SPEAKER_00Any words there, guys? Well, I mean, we sign the fitness for duty every time we go fly. So it's it's basically the I'm safe checklist. And that was a pillar of contract 2020 is making sure that we're fit for duty. So the practice reflects the language and vice versa. So I think that aligns with what we were trying to do.
SPEAKER_02I completely agree. Also, something you need to remember too, that there are some rules out there. The I am safe, of course, is from the AIM, but part 67 is, you know, the standards for your medical certificate. And 61.53 also is talking about operational control, the operational rule. So 61.53 talks about the self-grounding rule. And that I am safe checklist is that's what it's used for, is that 61.53 is self-grounding. And so you have that element of it, and then you have the sick leave, which is the CBA. And so those two interact together. But I would say the, you know, every time you sign off on the flight, that's what you're saying is you're good to go under those provisions.
SPEAKER_01Yeah, and I think that's what the membership is trying to bring across is marrying up all that language to say all the same things makes sense in their minds. Okay. Then we saw some interest in exploring the concept of PTO or paid time off instead of calling it sick leave. The thinking here uh that perhaps this removes the stigma of taking sick leave other for something than illness or injury, but changing the label doing something like that is a little bit more complicated in a few different lenses. Is that right?
SPEAKER_02Yeah, when you change that label from just sick bank to PTO and just relabeling it, it does, it could have some triggering effects with the IRS. Because under our current rules, we're a bona fide sick plan. If we were to go to PTO, PTO implies sometimes sick and vacation. And a lot of those PTO plans are paid out at the end of the year. A bunch of those accounting rules take place. Ours is kind of a phantom wage element that once used is executed and then shows up on the income statement. If you just relabel that, then it could have some back-end rules to it.
SPEAKER_01Okay. So it's possible, but not free of risk. And for historical purposes, have we approached the company with something like this idea before?
SPEAKER_00We did. In contract 2020, we we proposed several changes to sick leave that we didn't achieve. I mean, one of them was PTO to convert not everything from sick to PTO, but to have a limited PTO process where a pilot could designate a certain amount of sick to be used as time off, you know, in advance, kind of proactively. We looked at some other uses like sick leave trading. Uh, we had a lot of cases where pilots were on disability and they in the old system, they needed the sick leave to to cover those sick trips. And when they didn't have it, uh they would basically be unpaid. And so we solved that through improving our loss of license plan. But there have been multiple or several different iterations and attempts to improve our sick leave use beyond what it is today.
SPEAKER_01Gotcha. So that covers a bit on what the blank sheet surveys yielded when it comes to the definition of sick leave. So let's do a quick history lesson here on the accrual and use of that sick leave. And what what this amounts to is a gradual increase in accrual rate and a cap on the sick bank. The model accruing one sick trip for every 10 TFP started in 1981, and we reached our bank cap of 1600 TFP in 1994. I'd say one other note here is that in contract 2016, we had accrual on SIC Bank based on straight pay. And in contract 2020, we were able to secure accrual on overrides, but not premium pay. But these amounts in the accrual weren't arbitrary. So, guys, why don't you point the folks to the line that ties this together with our disability plans?
SPEAKER_00I'd say big picture prior to this contract, and even today, the company doesn't offer a short-term disability plan other than sick. So that's what this was. And Damien can get into the details, but our old disability plan had a much longer elimination period before those benefits kicked in. So you had to have more sick to cover you longer. And then as far as the gradual increase in the banks, that's just a natural progression of back in 81, nobody had 1,600 sick trips because we were all too new and young with 10 years of an airline. As the seniority and of the pilot group got older and the sick banks grew, there was an appetite to continue to expand the sick banks to capture the value so that pilots weren't capped. So that was sort of why that happened over time. But I'm sure Damien, you want to just tell them a little bit more about how they interacted?
SPEAKER_02Back in the day, of course, you had the uh artificial last day paid. So that was your sick bank divided by 95 with a minimum of six months. So if you had more sick bank than that, it would take you out. It could take you a year and a half, right? Or about a year and a half or so. So it was kind of this accordion piece to that. And even using 95 as the artificial last day paid calculation, you could get it down to 47 and a half, but and prolong it out. But with the new changes that we have, 60 days, now it kind of stacks on top, right? So now you would have your loss of license as your primary benefit, and then sick would be the next layer that would be thrown in that. And then I would even say that vacation is now thrown on top of that because in previous contract, once you were out on uh disability for the first year, uh basically your second year, you had no more vacation like we have today.
SPEAKER_00I will add at this point, since we're talking about disability, I do think that that brings to light why we had a swap a short-term and long-term disability plan, why we brought it on. And it also explains a little bit why it's less lucrative or less important than it was years ago, since the uh changes to our disability plan have made those not valuable, but less valuable or less essential than they were under the old plan.
SPEAKER_01Yeah, I agree. And as you guys pointed out, all these things are interrelated and tied together. And if you hadn't had the chance to take a look at the previous week's SCP benefits education material, we we draw literally some pictures about how all these things work together and are and are related. But that's us and how our systems work. So let's talk about how this compares with the rest of the industry. Now, in the articles, we provided a handy-dandy chart that goes over the rest of the big four, as well as FedEx and UPS. And I'd say the biggest takeaway was that we're the only one that has a variable accrual rate when you're earning more sick time the more you fly. And the rest are on fixed amount structures. Can you guys break down that stuff into an apples to apples comparison uh as close as you can, anyway?
SPEAKER_02So when looking at the big four, you know, Southwest being one of those, ours has the accrual, the 10% uh that goes in the bank. It's variable, just like you mentioned, goes to a max bank of 1,600 TFP. If you work at a normalized schedule, you know, that could take you 13 years or so to reach the maximum bank, assuming that you use no sick bank. American and United, they have a similar accrual system, but they're much lower in their accrual rates. But they do have a bank and it goes up to a maximum bank. American, they do five hours per month. So in reality, that's what, 60, 60 block hours a year and pay that you could accrual. United is a little bit more. They do six uh hours per bid period of active employment. So if you're on a leave, you don't get to six. And the American bank goes up to a thousand. The United Bank goes to 1,300. And then Delta has an allotment system. And so it depends uh on your longevity there on how much you have. It goes up to 270 hours is the max. I think that's in year 20, you get 270, but it doesn't roll over like the other three banks do. The only other thing I will caveat to this is American and United, they have a ESB, an extended SIC bank that's part of this whole system. Whereas, you know, Southwest, we have one big bank. You can use it for sick. If you're on disability, you can use that sick as the provision in there is that top-up provision so that you can use it. American United, they have the ESB, which has a little bit of a top-up element, but it's not as generous as ours. What I mean by that is, you know, we get to use a vacation, uh, or if you burn one sick TFP a month, you can get the vacation accrual. That's not so at the other airlines. But they all have slightly different flavors. But uh, I would say that outside of Delta, we're we're pretty aligned with with how those systems work.
SPEAKER_00You know, to summarize it, I think that you're looking at at United and American basically giving one day of sick a month, if you if you do the math, you know, five or six hours a month. So that's a day of flying at a typical carrier. With our 10%, it gives us the opportunity to go higher. Just like everything else at this airline, we're we're designing the systems to reward productivity and and higher productivity gives more sick bank. So you can see the the incentive there. And it also makes sense because if you're out on the line flying, exposing yourself to airports and hotels and crew vans and and cockpits all over the country in the middle of the winter, you're probably going to get sicker more often the more flying that you do. So it feeds on itself and it makes sense.
SPEAKER_01Yeah, that all checks out. And again, I'll I'll reference everybody back to this article where we have a chart that breaks all this down so you can kind of see it uh line by line, uh, how we all match up. And and like you guys pointed out, there's a little bit different flavor everywhere. And it just kind of depends on how the airline runs and the systems that you work under. All right, so that's a good discussion on how sick leave is earned and how big that bank can get and why. So let's talk about how it gets used and sick leave utilization. Again, I'll point folks to the previous articles and podcasts and the benefits and leave section that goes into the nuts and bolts of income replacement and disability and six role in that. But let's talk about some recent discussions on utilization rates. Now, obviously, these rates influence staffing and reserve requirements, just to name a few. But I I think the gist of our discussion in this article is that the two-year look back is a pretty narrow lens on a topic that's affected by so many things. So let's just talk about a couple of them that stem from contract 2020 and the industry as a whole.
SPEAKER_00Our sick bank didn't change in the last contract, but everything around it did. So we already talked a little bit about disability. When I got here, and for many, many years that I was here at Southwest, the rule of thumb was you needed 600 sick TFP in your bank minimum. That would be what would get you to disability with the average last day paid and and everything else, the math that went into that six-month elimination period. Under contract 2020, the one we're under today, it's a 60-day elimination period. So that alone reduces the necessity of hitting that 600 TFP. Now, that's not to say we shouldn't get it, and there's not value in having a large sick bank, but the value is reduced. Some other things that have happened in my short time here at Southwest, you know, we had age 60, went to 65. I'm getting older, I can promise you that I am getting less healthy as I as I age. And so I think that that's a natural evolution of an aging work group having more older pilots, you are naturally going to use increased SIC bank. And I do think we see that in the data.
SPEAKER_02The only thing I'll add to this is when you look at your SIC bank, remember it is it's a wage element, but there's a time component here too, right? So if you start getting into uh SIC bank buybacks or something of that nature, it depends on how much you need, right? So if somebody is 60 years of age, they may not need as much to get them to age 65 in that bridge because of the disability and then the top-up component of that, right? But somebody that's a little bit younger is going to need a farther stretch. And I give an example, not that the, you know, the retiree medical plan, right? You can give 10 TFP for one month of coverage. I'm not saying that's a great mechanism, but just to use it as a uh an example here, if somebody is 55 and they want to retire early, they need 1,200 TFP, right? Because it's 120 months till age 65. So that's kind of the same thing here. It's helpful for you to have a larger bank the younger you are, but the closer you get down to the retirement side, uh, that's when it should be shrinking or can be shrunk.
SPEAKER_01Okay, great. So what I'm hearing is that with all that considered, there might be an efficiency play here somehow. And as it turns out, I'm not the first one to have such an idea, which brings us to another hot topic in the blank sheet surveys, a sick bank buyback program. So if you're not familiar, the broad concept of a sick bank buyback is pretty straightforward regardless of the industry. In simple terms, it allows employees to convert unused sick leave into compensation or other benefits, typically under some defined conditions, right? And it's the opposite of use it or lose it. And the specific structure and value depend heavily on what's negotiated or company policy. So some of our peers have these kinds of structures, and we've laid out what we see at American, FedEx, and UPS in the articles on this topic for you to take a look at. But I want to focus more on the bigger picture of a Sick Bank buyback and what the membership needs to think about. So, guys, what does that thought experiment look like?
SPEAKER_00Well, like you said, there's several different flavors of a sick leave buyback. And honestly, we've explored with the company a few of those different paths. It can be structured that's helpful for both sides, but it isn't a simple plan because there's competing interests, honestly. You know, we get paid for our unused sick time, and we've looked at it as annual cash payments, end of career cash payments, layered buy downs. We've also looked at it as possible retirement pay, uh, whether it would go into the non-qual plans right back before we had a market base, but now that we have a market-based cash balance plan, that would be another option that we could capture value. And there are pros and cons to both. I think one of the big issues that we have, and we have to talk to the membership about, is the same issue that we have with profit sharing every year. You know, right now it goes into our qualified funds if there's room, and everybody that's what happens, and and we don't have a choice on that. Whatever we do with a sick leave buyback, if we were to entertain one, is probably going to be fairly uniform across the pilot group. And there are people that don't want more retirement money. They want their money now. Sure. And other people really see why do I want to pay all this extra tax on it? So there's a lot of competing interests, and I think that's what this conversation needs to be between now and when we do our follow-on polling.
SPEAKER_01So, Damien, Kurt, this came through a little bit in the blanks, and on hearing from you guys is depending upon the member, what you would want to do with such a program. It's all over the place, right? So as far as you know, setting expectations go, we're we're going to take all that into consideration. And optionality definitely seemed to be one of the things that was important to the membership, but all the options is not probable with something like this. Is that is that what I'm hearing right?
SPEAKER_00I think it's safe to say that the more complex a system is that we invent or create, it's harder to get Southwest Airlines to buy into. And because there are there are tax consequences, there are legal ramifications, that adds to the complexity and likelihood of anything being approved. So the simpler, the better for getting it across the finish line. That's one of those type of things where, you know, perfect is the enemy of the good.
SPEAKER_02Yeah, and and just to add a little bit more color to that, you know, let's say we did a market-based cash balance plan scheme, if you will, there's going to be a PLR private letter ruling, just like we still have an outstanding private letter ruling out for the 415C excess cash to go into there. The other thing would be if there's some kind of tax or internal revenue code interpretation that the company isn't solid on, they're going to want a PLR for that or some kind of interpretation by the Treasury. So there's always going to be those little issues there. I mean, since we were looking back previously at United, American Delta, you know, Delta doesn't have a any kind of buyback system. United doesn't really. I would definitely say that American does, but it's very niche. So they can receive a little bit of it as a cash element at retirement, or it can be a certain amount go into their retiree health account and there's limitations to it. I think there's a $200,000 level to that. They do it that way because it's been defined and there's a set amount that can go into it. So out of the big four, there's only one that technically has any kind of buyback system. You can structure it, but the more complex it gets, you know, the more wary Southwest is going to be and want some tax advice from the Treasury Department. Yeah.
SPEAKER_01And Damien, you get visibly excited when we talk about taxes. So can you get a little bit more into the weeds about this where the money goes ability? You spoke to it a little bit, but you know, we talk about potentials for delivering these into a retirement account. And then the frequency is also probably something we should talk about here, too, whether it's at the very end of your career that it saved up for or happens once a year or when you need it. What are some of the ups and downs of the timing of this in the tax structure?
SPEAKER_02Yeah. So uh good question. The the easiest form, the by far the easiest, is just a cash payment at retirement because then you get NEC on it. Technically, you would get market-based cash balance on it, depending upon the levels that was paid out. If it was done through the market-based cash balance plan, you can do that, but you do need to meter it in. Uh, it really doesn't need to be a very large tranche at the very end. So I know that kind of contradicts what I just said about the at retirement, but that's because it would be the expectation would be there'd be a certain level that would go in. Not all 1600 would be cashed out because that would have to be a plan design mechanism to that. So back to the original cash balance plan, it'd be good if you can meter that in. So if you reach certain thresholds, it would be determinable that it could go into the account, or otherwise a retiree health account would be one option. And then the other one would just be the cash payout at the end, which would be similar to Alaska because you get uh NEC on it at retirement, but it's at a certain threshold that has to exceed a tiered layered system, as Kurt talked about before.
SPEAKER_01Yeah, Damien, we have so many different retirement vehicles out there right now. Kind of get lost in those sometimes. Can you speak to how the Sick Bank buyback could potentially play in the market-based cash balance plan a little bit more?
SPEAKER_02Yeah, for the market-based cash balance plan for the high earners, the one element that is kind of hiding from the taxation would be the 1.45%, which sounds like a small uh amount, but if you're grabbing at a very large chunk, there's 1.45% of savings there on the company side. Because you remember on Medicare, you pay 1.45%, and then the company pays 1.45%. So that going into the market based cash balance plan is actually shielded from both parties. Both parties wouldn't have to pay that piece. And additionally, you know, when you make more than $200,000, there's a 0.9% for the pilot. Uh, that would also be shielded from there. If the individual actually made less than the associate. Security wage base this year was 184,500, I believe. If you actually made less than that, it would be shielding from that 6.2% also. So there's lots of opportunities there from the market-based cash balance plan perspective.
SPEAKER_01Okay, Damien, there were a lot of numbers thrown in there. Is the gist of your discussion that this as a potential additive to the market-based cash balance plan just kind of fit in the broader discussion of this being somewhat a mutually beneficial vehicle for both the company and the pilots? Yes, absolutely. It's mutually beneficial, yes.
SPEAKER_00And to point out again, it's mutually beneficial on the economic side. No matter what the vehicle is, the sick leave buyback program could be beneficial to both sides from an operational standpoint, too.
SPEAKER_01And Kurt, one last one about this topic for you. Is this something that's tenable? Uh has this come up before in previous negotiations? Can you speak to that a little bit?
SPEAKER_00You know, I did say earlier that we we had we had tried on it before. We've had some pretty close opportunities to get it, but we weren't able to. The company has asked for things that at the time were not palatable to our pilot group, changes in accrual rates. Some of the buyback rules were burdensome. So we we never got to a deal. But I will say this we do have a sick leave buyback, and that's happening on a case-by-case basis right now. Whether you like it or not, whether the company likes it or not, there are times where the accrual is less than the usage. And so our pilots are capturing that value. The company is paying that money. And so it would be beneficial to both parties if we were able to come up with a program with a structured buyback that would allow our pilots to capture that money in a long-term plan, meanwhile, protecting the company and the operation from undesirable schedule changes, sick calls that are disruptive to our pilots, to the company, and to our passengers.
SPEAKER_01All right, let's tie all this together because if it wasn't clear in these discussions and in the articles, this stuff is all interrelated, right? The definition of the potential effects of going to PTO, the accrual rate, the bank size, how that affects your disability situation, and how a SIBank buyback could adjust all those aim points. So, guys, how does the membership approach thinking about this going into the polling?
SPEAKER_00Remember, this is a negotiation. So it's not just we want a buyback, period. The company wants some structure around it. So there's going to be discussions of accrual rates. There's going to be discussions of caps. There's going to be discussions about when to pay out, whether it's early in the career, what form that takes, if it's at the end of the career. And all of those change what the potential value is for our members, for the usage rates, for what the company realizes and what ends up on the balance sheet and what ends up in the income statement. And that depends. And the company has different needs and different interests. So we have to balance all of those, but we have to take the membership's input on all those. So if you have a smaller caps with more frequent or annual or on-demand buybacks, you can spread those payments out. And that's good for our pilots. It helps avoid the tax cliff at retirement and it helps the company as well. But it also may or may not reach the value that you might get if you postpone it to the end. In either way, no matter what we do, we have to make sure that whatever the process is and whatever the buyback structure looks like if we get one, that it supports today's disability and income replacement needs.
SPEAKER_01We'd like to thank Kurt and Damien for stopping by and educating the membership on all the touches that Sick Leave has on our benefits plans and the potential new vehicle that is the Sick Bank buyback. As we said before, your polling will determine the directions we take in contract 2029. This is your contract. And this round of polling opens on July 20th.