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

It is not known if the use of temps would increase proportionately if the FMLA is expanded to include paid leave, but the most conservative assumption is that there would be no proportionate expansion of temps. Instead, about sixty-two percent of small employers increase employee hours rather than use temps during periods of labor shortages. Presumably, where temps are not used, employees and owners of small firms would work longer hours (NFIB, 2001).

Overtime wages for non-temporary workers. Substituting the longer hours of existing employees for workers taking leave under FMLA would cause wage costs (including overtime compensation and bonuses) to expand. These costs would apply to the three-quarters of the small business owners who do not use temps--but who expand hours-to comply with periods of leave caused by expanded scope of the FMLA.

Workers in small firms also often work longer hours than workers in larger firms, especially in retail and service firms. Many recent news articles have also been concerned about the mandatory overtime imposed by many business owners in firms of all sizes. Therefore, it is probably reasonable to assume expanded paid overtime hours if a baby UI-paid leave program is instituted.

At an estimated average payroll cost of $13 per hour in small firms, (16) we assume it will cost $20 per hour for overtime to cover for FMLA-caused absences. If overtime wages apply to all four firm categories in Table 1, the number of likely impacted firms is .75 x 215,000 = 161,000 small employers that pay overtime. (17) The additional labor cost is then $20 per hour ($160 per day) x 60 days (twelve weeks of FMLA-covered leave) = $9,600 per employer for each employee on extended FMLA leave. (18) (This assumes that the overtime compensates hour-for-hour FMLA-covered leave. Instead, overtime workers might work harder, and some work might be deferred or not be done at all, leading to less than hour-for-hour replacement. However, there are no data available to support or refute this hypothesis.)

For larger firms, for RIM purposes, we assume that these costs of temporary clerical workers also apply. While larger firms may make greater use of temporary workers, this hypothesis requires further research, and increases in overtime hours among larger firms to compensate for longer hours is also probably reasonable. (19) To simplify the assumptions for the RIM, the percentage of firms using temporary workers and paying overtime to workers is assumed identical. However, we assume a higher overtime wage rate in larger firms.

In firm categories 1 and 2 listed in Table 1 (consisting of larger firms with more than twenty employees) the average payroll cost per clerical employee was about $16 per hour, with an assumed overtime rate of $24 per hour. These data would be included in RIM runs discussed below.

Employer health benefit cost increases. By federal law, business owners must maintain the health insurance of employees who choose to take FMLA leave. This is also likely to be true of state baby UI proposals as well, if they apply to small firms. These health insurance requirements add to employer costs.