For the last 7 years, one paid leave proposal after another has failed to gain enough consensus to pass the Colorado State Legislature. Each and every time, the business community has taken turns explaining how this policy, when put into practice, will lead to negative outcomes.
Proposition 118, Family and Medical Leave Insurance Act, goes even further than previous proposals. This is terrible news for our distressed small independent businesses and the workers they employ.
Advocates have turned to a state-wide ballot proposition. This leaves undecided voters with a heavy task – to evaluate a program that is big and complex.
Many are concerned about the broader implications of a one size fits all policy on this scale. Among those implications, the risks to small businesses and entrepreneurship may be hard to pin down and quantify. That does not make them less real.
How Paid Family and Medical Leave impacts businesses is unclear
Paid leave advocates have a level of confidence in PFML that is difficult to support. The policy is still essentially an ongoing experiment across the five states that are in full operation. We lack an understanding of the impacts of these programs over time.
Growth of the program is likely to be unpredictable.
There are a number of factors that will contribute to the ongoing growth of the program, including a likely expansion of benefits. Rising use of the benefit will lead to increases to the payroll tax and to higher incidences of absenteeism that will challenge business operations.
Prop 118 transfers an employee benefit to the state
Workers and their employers need each other to grow and thrive. It has rarely been an easy partnership. Yet both parties must be allowed to discover a balance in rapidly changing environments. Prop 118 breaks into this process. It leaves businesses with burdens and a loss of agility over their staffing and operations. They must manage challenges that are unique for every business.
Employers will discover the options left to them over time. Where burdens – excess costs and risks – go, will drive the success or failure of the policy’s intent.
How it works
The PFML model extracts this one employee benefit from the private sector and transfers it to a government agency. The program is supported by a tax deduction from workers’ pay. We lack data to understand how many workers already have equivalent benefits from their existing employers. Yet this seeks to extend the mandated government-managed paid leave benefit to all workers across the state.
It would create a new Division of the Colorado Department of Labor and Employment, CDLE. This same department processes claims and the tax on employers for Colorado Unemployment Insurance.
“Businesses can’t afford this,” is oversimplified yet true.
Prop 118 increases operating costs and threatens sustainability through taxation, employment regulation, compliance, and the threat of litigation.
Advocates maintain that all the business has to pay is the employer side of the payroll tax. The employee applies to the Division for approval for wage replacement. That transaction is between the state and the employee with the exception of some regulatory compliance required of the employer.
In theory, relieved of the employee’s wage, the employer should be able to fill that void and maintain operations. This over-simplified view reveals a yawning gap in understanding. How the policy works in theory and how it works in practice are dramatically different depending on the business.
The operations challenge presented by PFML absences:
Some costs are difficult to quantify and track yet are critical to managing and protecting profit margins.
How much does it cost a business that fails to meet customer or client expectations? Can we put a number or value on that?
No one calls “Unreliable Plumbing”
As consumers, we don’t always recognize how high our expectations are. We want reliability. We want safety. We want affordability. And we want it on time.
Delivering all of that is harder than it looks. Making it seamless and easy for the customer is a hard-won victory. Failure to meet expectations – sometimes even just once – can cost a business a lot. It can even destroy what has taken years to build.
Every claim for paid leave is an absence in the workplace.
Absences make it hard to deliver to customers’ expectations. Absences fueled by a government-provided benefit make it harder. The task employers face is how to reduce those risks.
This must begin with understanding these costs of disruption. The challenge is that because they filter through so many different activities in the organization, costs are hard to quantify and track. They are surprisingly significant.
A 2008 survey of businesses set out to assess both the direct and indirect costs. The study was conducted by Mercer in partnership with Kronos Inc, global leaders in workforce management. They concluded that these costs represent an average of 36% of base payroll.
The business community recognizes that Prop 118 will have an unequal impact across industries, regions, and business sizes and types. Among all businesses, those who rely more heavily on labor are more vulnerable to negative consequences. Those that have more complex staffing models may lack agility across positions.
Size matters. Prop 118 imposes one mandated policy on all businesses regardless if they employ 10,000 or 20. Smaller employers are disadvantaged. They stand to lose agility, one of the few tools they have to compete.
What those unequal impacts look like for small businesses
Drilling down, among the small independent businesses, those who rely on unskilled or lower-skilled labor are finding their business models harder and harder to sustain1. We should care because these are often the jewels in socially vibrant local communities. They are also critical resources for unskilled job seekers. And not to be ignored, they make available a treasured opportunity for entrepreneurship, one that is more broadly accessible by people of all backgrounds including those with few resources.
They are often in highly competitive markets. Lower barriers to entry, such as easier to attain skill levels and education, generally mean more competitors and fewer opportunities for differentiation.
These conditions often lead to lower profit margins making them more vulnerable to disruptions from competitors small and large, business cycle swings, and government policy risks.
Chief among today’s many regulatory and tax threats to small businesses is that posed by paid family leave.
A NY Business Leaders Survey from 2020 shows over half of the employers who responded say that Paid Family Leave Act has had an adverse impact on their business. This, only a few years after their 2018 implementation of that program.
Expanding the reach of job protection has costs.
Besides the tax and compliance burden, paid leave imposes costs and uncertain risks due to the job-protection provisions of PFML absences. Prop 118 proposes job protection for employees of all firms. This exposes small businesses with fewer than 50 employees to these onerous terms. They have been exempt from the federal job protection law, FMLA, Family and Medical Leave Act. No other state’s paid family leave yet in full operation covers small businesses on this scale.
The power of job protection relies on the looming threat of penalties and litigation. What does that mean for business sustainability and the workers they employ?
The underappreciated business challenges as a result of government-imposed job security.
Job protection prohibits employers from interfering with an employee’s decision to take a leave of absence. That decision is then between the employee and CDLE and guided by the law. It also requires employers to maintain or continue paying the employee’s health insurance benefits.
One critical term of job protection is that the employer is required to reinstate the employee to their previous position or an equivalent role. Small businesses have fewer options to cover the absent worker’s role while they are gone. For many, because of their limited staff size, it means they must hold that position open. Under the terms of Prop 118, that could be up to 16 weeks or nearly 4 months.
They typically must rely on temporary solutions. These limited options include covering the work themselves, spreading it across their existing staff potentially leading to overtime, or hiring temporary workers – an option that may be toocostly2 or unavailable. They must often resort to improvising – mitigating the staffing shortages and subpar productivity as it arises. In addition, some businesses are heavily regulated, limiting their options for staffing due to certifications or ratios.
Ultimately, what job protection means for small firms is a loss of agility and freedom to develop interpersonal trust. Absent the distances that exist in large firms, accountability in a small firm is quite close and immediate. Ironically, these firms would be otherwise least likely to replace workers unless they are under duress. This regulation seems incompatible with the very attributes that make working for a small business a desirable experience.
We keep making it harder to hire and manage staff and employees.
Overlapping federal and state labor laws – and even municipal rules and codes all make it a chaotic but hazardous minefield of do’s and don’ts. For small employers, that means attorneys’ fees and payroll support. Any misstep can lead to an unanticipated expense that could dwarf earnings.
The retreat of small employer businesses or the decline in their formation is drawing alarm. The formation of zero-employee firms is growing at a much faster pace. Is it any wonder?
Prop 118 poses too many risks to small businesses and the communities they serve.
Colorado small businesses have had to make terribly difficult choices in 2020 – with uncertainty nearly a constant. The passage of Prop 118, paid leave, on top of the many other recent regulatory measures, may be the deciding factor for them. Small businesses across the state plea for voters to consider the risks carefully and reject this costly proposal.
1 Warren Meyer, founder and president of Recreation Resource Management wrote an excellent essay that lays out this topic. Published in CATO Regulation, Summer 2018.
2Temporary staffing may be in short supply and is not always affordable. This valuable service is priced at a premium. Costs vary by local market conditions and skill and/or experience levels. They may be as low as 140% or closer to 175% of the gross wages incurred for that position. Higher rates are for technical, short term, or licensed professionals. This short addendum to the Colorado FAMLI Task Force study explains other staffing considerations due to a PFML absence.