The Business Case For Paid Leave; how a paid family & medical leave plan would help employers
America is one of only 8 countries in the world that doesn’t mandate paid family or medical leave.
This has become one of the most referenced statistics as the topic of paid leave has taken center stage while the ongoing pandemic continues to force women out of the workforce.
The existing Family and Medical Leave Act (FMLA) guarantees 12 weeks of unpaid family and medical leave, but restrictions around who qualifies leave 46% of US workers at risk of losing their jobs if they need to take time out to care for themselves or a loved one.
This also means that nearly 1 in 4 moms in the US return to work only 10 days after giving birth.
Access to paid leave is even more rare: As it stands today, just 20% of private sector workers in the U.S. have designated paid family leave to care for a new child or a seriously ill loved one at their jobs. About 40% of workers have short term disability insurance through their jobs, which birthing parents can use to cover the medical leave they need for childbirth and recovery. Within these low overall access rates, there are dramatic disparities -- among the highest wage workers, 38% have access to paid family leave (and access has increased by 20 percentage points over the last decade), whereas among the lowest wage workers, just 5% have access to paid family leave (and access has increased just 2 percentage points over the last decade).
Back in April, President Biden announced his American Families Plan; $1.8 trillion to provide support for working families and caregivers.
The plan, alongside other factors, calls for a federal paid leave benefit guaranteeing all workers with a qualifying condition up to 12 weeks of paid family and medical leave, expanded access to universal childcare for 3 and 4 year olds, and a promise that families making up to 1.5 times the median household income in their state won’t have to spend more than 7% of their income on childcare
A major argument for why we need paid family and medical leave is that increasing labor force participation is very likely to lift the economic growth rate, especially for women. Women’s current labor force participation is as low now as it was in the late 1980s, and, although COVID played a large part in that, the U.S. had fallen behind its economic competitors well before the pandemic.
A recent McKinsey report estimates that “implementing policies such as paid leave prior to the pandemic’s end could add $2.4 trillion to the U.S. GDP and create near gender parity in the U.S. labor force by 2030.”
Congress continues to debate the logistics of how to structure such a program. Naturally, questions arise as to who will pay for this, and while there is bipartisan support for paid leave, there are huge divides on how to fund it.
The public feels differently, with vast majorities of voters nationally and in battleground states willing to fund it through general revenues, tax hikes on corporations, taxes on the wealthy and even paying higher taxes themselves.
Republicans often push for extended tax credits for businesses or the leverage of insurance to help pay for leave. As it stands today, about 40% of workers have short term disability insurance through their jobs, which birthing parents can use to cover the medical leave they need for childbirth and recovery. Biden’s proposal would make paid family leave and paid medical leave available to everyone - filling gaps for tens of millions of workers who are not provided paid leave or short term disability insurance through their jobs. Biden’s plan would pay benefits directly to workers. With Biden’s proposal, the cost of the paid leave benefit would come from general revenues in the U.S. Treasury.
A number of states have enacted public paid family and medical leave funds, which provides benefits to all workers no matter where they work, their job or what their employer chooses to provide. These programs are funded through small payroll deductions, which are paid by workers, employers or both. The benefits of these programs for workers and their families, employers and taxpayers are numerous and clear - and a well-designed national paid leave program would produce similar or better results.
Contrary to arguments made by opponents and fears articulated prior to the passage of paid leave funds in states, evidence shows that small businesses and all businesses feel favorably about these programs and few report challenges. A recent study in New York found that their paid family leave policy had no adverse effects for employers in terms of employee productivity or attendance. Besides the retention of employees, paid parental leave has numerous benefits for a company and its employees, including improving worker loyalty, morale, and productivity.
Another state paving the way is California, which allows for eight weeks of parental or family leave and up to 52 weeks for personal medical needs. The program has increased the average income of new mothers by $3,407 and reduced their risk of dropping below the poverty line by 10.2%.
Eleven states, including D.C. and Puerto Rico*, seem to agree and have implemented paid leave policies to supplement FMLA. These policies vary broadly depending on the state and the beneficiary’s income, but they fill gaps left by the private sector or harmonize with an employer’s paid leave (or lack thereof) benefit.
Outside of these states, businesses that want to provide paid leave for their workers must bear the costs on their own. Currently, the minority of businesses that choose to provide high-quality paid family and medical leave bear the cost of paying for leave for their employees, and it can be expensive to pay for leave, especially for small and medium sized enterprises.
The calculator below shows why a national paid leave policy would be beneficial to businesses - whether they are currently providing paid leave, currently operate in states with paid leave or are among the majority of businesses that would like to provide paid leave to their workers but do not currently do so.
Using the different policies for each of the states and territories, we built a calculator that compares the business cost of paying for leave without any government subsidy vs. the cost of paying for paid family and medical leave with public investments
With the calculator we aim to show you two scenarios. The first is the current state of affairs, given your company size and turnover rate, the calculator outputs your paid leave cost (if your state does not offer any subsidy). The second scenario calculates your turnover rate, with 8% increased retention among employees who take family leave due to paid leave benefits we saw in California, and outputs both your new turnover rate and the difference after accounting for government subsidized paid family leave cost. We hope this information will help your company get a fuller picture of the cost of paid leave, and help visualize why a federally funded program is so important for employees and employers.
The states & territories that provide government subsidy are: California, Colorado, Connecticut, District of Columbia, Hawaii, Massachusetts, New Jersey, New York, Oregon, Rhode Island, and Washington. Puerto Rico requires that employers provide paid leave, but does not offer subsidy. Each of these states has a different structure to their subsidy, so try out all of them to see how costs would change for your business based on different types of programs.
Example
We’ve modeled out what the subsidized cost would be for an employer with 250 employees, with a 45% low/30% medium/25% high salary band distribution, who is covering the difference after subsidy so that their employees receive 100% of their employee’s wages. We’ve shown costs across all eleven states & territories that offer a subsidy, as well as the employer’s would-be cost for the states that don’t. We’ve also included the reduction in turnover costs for each of those states, based on the 8% reduction in turnover that California has seen for family caregivers taking leave since implementing their paid leave policy.
Methodology
Turnover Cost
Estimated costs for replacing an employee range from 30% of annual salary for an entry-level role to 400% of salary for a senior role. But where do these numbers come from and how can you estimate the cost of turnover at your company? We chose to break these costs down into 3 categories: productivity loss, hiring cost, and new hire training cost. (The turnover calculations were aided by the calculator created by Sparkbay, an HR solutions company.)
Productivity loss
This cost accounts for other employees covering the role while the role is vacant, equated to 30% of the employee’s daily salary, multiplied by the days of vacancy.
Hiring cost
This section dives into the cost details of acquiring a new hire, including the hiring manager’s hourly rate, hours to screen resumes and conduct interviews, and advertising costs.
Training costs
This cost encompasses both the manager’s time to train a new employee, and the lost productivity of the new employee while they get adjusted to the new job and learn the ropes.
Percentage of workers taking leave
To estimate how many employees take family leave from a company, we looked at the number of workers that have taken FMLA in years past. In 2017, 20 million Americans took FMLA leave, accounting for 13% of the workforce taking family leave per year.
There is potential for an increase of uptake if paid leave is offered, especially for low-income families, in which case more than 13% of Americans may take leave each year. However, as there is not much data available yet, we did not account for that potential upside in this calculator.
Default Turnover rate
According to LinkedIn, the worldwide average of turnover is 10.9% per year. If you’re not sure what your company’s turnover rate is, we will use this worldwide average for the calculator.
Paid Leave Cost
Paid leave costs vary company to company, and policies for Americans vary state by state. Most employers’ policies elect to cover a percentage of paid leave over a certain period of time. In our calculations, we ask what percentage of an employee’s salary the company would cover over a certain time frame to calculate the salary cost for employers. We then add in individual state leave policies, where the state would cover a certain percentage of the employee’s salary during their leave period. The calculator then adjusts the cost for the company with the state benefit deducted and the “wages saved” is the difference between what an employer would pay if they covered 100% of salary without subsidy, and the reduced amount they would pay if an employee receives direct federal paid leave benefit from the state.
Acknowledgments
We couldn’t have built this calculator or written this paper without the incredible support and feedback of Vicki Shabo of Better Life Lab at New America, Anwesha Majumder of TimesUp, and Annie Sartor and Jordyn Avila of PL+US