Kroger Co. is eliminating some Covid-19 benefits for unvaccinated employees, a move to encourage inoculations as the Biden administration’s vaccine mandate faces legal challenges.

The Cincinnati-based grocery chain told employees last week that it will no longer provide two weeks of paid emergency leave for unvaccinated employees who contract Covid-19, unless local jurisdictions require otherwise. Kroger will also add a $50 monthly surcharge to company health plans for unvaccinated managers and other nonunion employees, according...

Kroger Co. is eliminating some Covid-19 benefits for unvaccinated employees, a move to encourage inoculations as the Biden administration’s vaccine mandate faces legal challenges.

The Cincinnati-based grocery chain told employees last week that it will no longer provide two weeks of paid emergency leave for unvaccinated employees who contract Covid-19, unless local jurisdictions require otherwise. Kroger will also add a $50 monthly surcharge to company health plans for unvaccinated managers and other nonunion employees, according to a memo viewed by The Wall Street Journal. Both policies are effective Jan. 1, the memo said.

Kroger, one of the biggest employers in the U.S. with almost half a million full-time and part-time employees, is tightening pandemic-related policies for workers as U.S. businesses face continued uncertainty over federal vaccination mandates. Rules issued by the Occupational Safety and Health Administration in November require employers with 100 or more workers to ensure employees are vaccinated or take weekly Covid-19 tests by Jan. 4.

Whether those rules, which were targeted by lawsuits across the country, will take effect is uncertain. Last week, a U.S. court blocked the plan to mandate vaccines for federal contractors. General Electric Co. and others have since suspended vaccine requirements for employees. A federal appeals court in Cincinnati is considering whether to reinstate the administration’s rules for employers.

Kroger’s monthly surcharge applies to salaried employees, and doesn’t apply to hourly employees enrolled in the company’s health plan, or those represented by labor unions. About 66% of its workforce is unionized.

Kroger joins an increasing number of employers adding surcharges for unvaccinated employees. Delta Air Lines Inc. in August added a $200 monthly surcharge to its healthcare plan to alleviate the financial burden stemming from the pandemic. The carrier said it saw early signs of success, with the number of employees receiving their first Covid-19 shot tripling from the typical daily rate.

The board of Nevada Public Employees’ Benefits Program voted this month to add surcharges for state employees, retirees and their dependents who are unvaccinated. Employees and retirees under the state’s health plan are subject to a $55 monthly surcharge, under policies set to go into effect in July, and dependents are subject to a $175 monthly surcharge. More than 4,000 out of 23,000 state employees remain unvaccinated, said Laura Rich, executive officer of the state’s public employees benefits program.

The program’s board decided that the financial costs of tests and hospitalizations should be shifted to people who refuse to be vaccinated, Ms. Rich said, adding that the board views the surcharge to be the only method available to encourage vaccinations.

Supermarkets rely on hundreds of thousands of front-line workers, but most haven't enforced a vaccine or test mandate or changed their policies. Industry executives have said they are hesitant about making big changes, fearing workers may quit if required to get vaccinated or tested weekly. They have also said costs continue to rise for labor and transportation.

A Kroger spokeswoman said the company is modifying policies to encourage safe behaviors as it prepares to navigate the next phase of the pandemic, and that the changes are designed to create a healthier workplace and workforce. She said the company considered feedback from employees and customers to guide its policies, and that Kroger will continue to encourage sick employees to stay home and seek the support of a physician if they contract the coronavirus. Unvaccinated employees can take paid time off or apply for unpaid leave, she said. Kroger has been motivating staffers to get vaccinated with a $100 payment.

Kroger’s Covid-19 policy changes don’t apply to employees with approved medical or religious accommodations, according to the memo. The company said in the memo that it continues to prepare and develop responses to OSHA’s Covid-19 vaccine requirement.

Speakers at the WSJ CEO Council Summit weigh to what extent the government should be able to require Covid-19 vaccinations. The Wall Street Journal Interactive Edition

Taking away paid Covid-19 sick leave is risky because many hourly wage workers likely don’t have the savings to stay at home, said Molly Kinder,

a fellow at the Brookings Institution’s Metropolitan Policy Program, which describes itself as nonpartisan. She said infected employees who needed income could go to work and endanger other employees and customers.

“We are almost two years into the pandemic, but we are not out of the woods,” Ms. Kinder said, given the spread of the Omicron variant.

The retail industry has faced monthslong labor shortages. Some store workers have quit because they switched industries or were worried about spreading or contracting Covid-19 in public settings, industry executives have said. Others have stayed out of the job market because of child-care duties or savings they accumulated during the pandemic.

Many grocery chains have been offering payments to encourage vaccinations. Companies have also kept plastic barriers at cash registers, are encouraging social distancing, and are sanitizing stores more frequently than they did before the pandemic. Most have ended hazard pay for workers in stores and warehouses. Mask policies for employees remain across many supermarket chains, though some stores have struggled to manage customers who show up without face coverings or refuse to wear them properly.

Adding a surcharge can be an effective way to encourage vaccinations because people are risk-averse when facing losses, said Helen Leis, a partner at consulting firm Oliver Wyman Inc. who advises companies on pandemic responses. At the same time, she said, the penalty has to be large enough to get employees’ attention.

“Folks who are choosing not to be vaccinated are very dedicated to their decisions,” Ms. Leis said.

Write to Jaewon Kang at jaewon.kang@wsj.com