The economic costs of expanding the Family and Medical Leave Act to small business: Well-Intended public policy may have some unintended consequences

Business Economics, April, 2002 by Bruce D. Phillips

The federal Family and Medical Leave Act (FMLA) became effective in April 1995 for firms with more than fifty employees. Since then Congress has considered expanding the FMLA to cover small businesses. NFIB's new Regulatory Impact Model (RIM) is used to study the effects of expanding the FMLA to firms with less than fifty employees. This paper focuses on estimation of three kinds of costs for small business that would be caused by an expansion of the FMLA: labor costs, management costs and various fees. The results of the analysis suggest that an expanded version of the FMLA would have serious, negative effects on the small business sector.

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When Congress passed the Family and Medical Leave Act (FMLA) in 1993 and it became effective in April 1995, businesses with fewer than fifty employees were exempt. Since then, members of Congress have proposed expanding the 1993 FMLA to cover firms with twenty-five to forty-nine workers. Eventually all firms may be covered. Alternative state-based proposals to expand the FMLA--to include both paid leave and all employers--would impose major costs on small business owners. This paper discusses how the NFIB's new Regulatory Impact Model (RIM) is being used to measure these additional costs.

In past NFIB surveys of members, spanning a period of five years, virtually ninety percent of small business owners have consistently opposed expansion of coverage to unpaid family leave in the original FMLA. It is reasonable to expect at least this much opposition to paid family and medical leave in any form. In addition, fifty to sixty-five percent of small establishments already have family and medical leave (FML) programs in place for such conditions as illness of key employees, new-born care, and serious health conditions of children (Cantor, et al., 2001).

The derivation of the various costs discussed below relies on legal and economic studies that describe the effects of the 1993 FMLA on larger business. In the original formulation of the FMLA, (1) workers could apply for twelve weeks of unpaid leave if:

a) they worked at least 1250 hours for a firm in the previous year (this is equivalent to about 24.5 hours per week);

b) they had a serious medical condition, as documented by a physician;

c) they experienced the birth or adoption of a child, needed to care for an elderly parent or a sick child or spouse;

d) they applied at least forty-eight hours in advance, if possible, before starting a period of unpaid leave.

How Has The FMLA Worked Thus Far? (2)

There were two reports to Congress on the implementation of the FMLA, in 1996 and 2000 (U.S. Department of Labor, 1995, Executive Summary and Ch. 6). The original FMLA applied to firms with fifty or more employees at all covered sites, even if more than one location was involved. Most of the reported initial costs associated with the FMLA were fairly small. Waldfogel (2001) found that 41.9 percent of employees at covered establishments were initially unaware of the law. (3) In 1995, according to the first Congressional report, 85.1 percent of employers reported that they could easily comply with the FMLA. However, Waldfogel found that by 2000, as knowledge of the law increased, the percentage of employers reporting that the FMLA was easy to comply with declined from 85.1 percent to 63.6 percent.

Problems arose when employees chose to use family and medical leave in very small increments and improperly communicated such needs to their supervisors: termination was sometimes the result. Because almost all larger companies have carefully written personnel manuals and a team of attorneys, many of these "wrongful termination" cases were won by employers (Hymowitz and Harold, 2000).

In addition, by 2000, employers covered by the FMLA complained about additional record-keeping (thirty-eight percent), the coordination of state and federal leave policies (forty percent), coordinating the FMLA with other federal laws (thirty-five percent), and coordination of FMLA with the firms' other leave policies (thirty-five percent) (Cantor et al., 2001, Ch. 6, Table 6.4).

The studies also found that the median amount of unpaid leave taken by FMLA users remained at about ten days between 1995 and 2000 (U.S. Department of Labor, 1995 and Waldfogel, 2001). Some employees at the bottom of the wage scale wanted to take more time off, but could not afford to. The largest users of family leave were employees concerned with their own health and married women with children. In addition, the percentage taking leave to care for an ill spouse or ill parent significantly increased between 1995 and 2000 (Waldfogel, 2001, p. 20).

Of even greater potential importance to small business, seventeen percent of covered employers reported negative effects on productivity and nineteen percent reported negative effects on absences in 2000 as a result of the FMLA. About ten percent reported declines in profitability (Cantor et al., 2001, Ch.6, Table 6.5).

The original FMLA required that employers provide eight pieces of information in writing to an employee who requests FML These are: