My question is that, when one user changes the worklist item status to sleep, should all the other users worklist item status change to sleep? I have observed that it is not the case. Only the user that chaned the status has the worklist item status as sleep and all the others as available.
I also observed that when the item is still in sleep status I can submit the worklist item with out any problems. Is this expected?
Yes, this is expected behaviour - each user has ONLY got control over his/her OWN worklist item i.e. setting his/her worklist item's status to Sleep, will NOT affect the other user's worklist items in any way.

My next question is once we set the sleep time, is there a way to modify it or do we have to wait until it expires?
You can not change the 'wakeup' time through code but you can 'wake up' the item through the K2ROM API. Have a look at the K2ROM.WorklistItem.Sleep method in the Help file.

Regards,
Ockert