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

As of July 2001, legislators in twenty-seven states had introduced paid family leave bills. Most of these state bills have not yet passed. However, as of 1999, two states--Vermont and Oregon--already had comprehensive unpaid family and medical leave laws which apply to firms of ten to twenty-five employees. Twelve states have narrower leave laws that apply to employers of fewer than fifty employees. Many of these refer to maternity leave only. (8) Eight additional states require leave for participation in children's educational activities. Vermont and Massachusetts require leave for the emergency needs of a child, spouse, or elderly relative (9) (National Partnership, 1999). And twenty additional states have held hearings on family leave bills. (10) These bills differ widely, providing either twelve weeks of paid or unpaid leave--often only for maternity reasons.

How would the state FML bills be financed? Some states propose increases in payroll (UI) taxes to pay for these programs, after allowing employees to use available sick leave. Still others suggest employer-funded "temporary disability policies" that would provide benefits (up to a maximum) during a period of leave. Some of the estimated costs of the temporary disability bills have ranged from $0.88 per covered employee per week in California to a payroll tax contribution of two cents per hour from employers and employees in Hawaii. Many other states have not yet provided direct cost estimates as of the end of the 2001 legislative session (National Partnership, 2001).

To better understand the effects of these proposals on the small business sector, NFIB's RIM was employed to calculate the costs of an expanded FML program on small business owners.

Preparing to Use RIM to Study an Expansion of the FMLA

The proposal modeled is a twelve-week period of paid family and medical leave. Some leave takers would be paid their salaries/wages, but most state proposals cap compensation at a level near the current level of unemployment compensation. (11) It would include the same notification requirements of the federal FMLA described above and include the requirement of employer-paid health insurance (if the firm offers it) during the period of paid leave. As in the federal statue, it would also require small employers to designate which employees in their businesses are "key" or critical employees and require "fitness for duty" letters before an employee can return to work.

The requirements of the RIM and the evidence from previous studies of compliance with the FMLA of 1993 indicate that for analytic purposes the economy is divided into four categories of firms. (12) The four categories, presented in Table 1, use two classes of industry and two of firm size. Industries are combined as shown below based upon the observed "compliance rates" thus far with the FMLA. "Compliance rate" refers to the actual percentage of small employers that fully inform their employees of their rights under the federal FMLA and proposed state expansions. (13) They also follow all applicable provisions of the current FMLA regulations, and any expansions. These groups are: