The Conundrum of Coordination: Navigating Paid Family Leave
By Terry Smith
American Benefits Consulting
By Erica Vanni
American Benefits Consulting
Responding to a tight U.S. labor market and changing workforce demographics, more employers are offering paid, job-protected leave for new parents or to care for ill family members.
According to the 2018 Business Impact of Paid Leave Pulse Survey 1 conducted by DMEC, 38% of employers voluntarily offer paid family leave where not required by law or go over and above what is mandated by law. These programs generate positive feedback from employees, enhancing the company’s value proposition for recruiting and retention. But now these employers must administer and coordinate private plans parallel to those being enacted at the state or local level.
In the absence of a federal law, several states and municipalities have passed legislation requiring paid leave benefits for employees working in the state or municipality. California, New Jersey, New York, Rhode Island, and San Francisco currently require some form of paid family and/or medical leave with additional programs paying benefits in Washington, Massachusetts, and Washington, D.C. beginning in 2020 and 2021.
We have also seen a flurry of pending legislation for various paid family leave programs in more than 20 states. These local laws vary in eligibility, family member definition, wage replacement, duration, and covered leave types, as well as in cost, funding, and administrative options. The complexities of coordinating private company-sponsored plans with multiple local laws is driving increased support for a federal program that would preempt state and municipal laws.
A legislative logjam exists at the federal level. Following the State of the Union address, Republicans are promising to devote fresh energy to paid family leave legislation, an area that has seen much effort by Democrats already.
Lawmakers and organizations have backed proposals such as the Family and Medical Insurance Leave Act (FAMILY Act; S. 337/H.R. 947), which would provide a national wage insurance program for family caregiving activities and leave for an employee’s own serious health condition. In 2017, Congress passed H.R.1 to provide potential tax credits to encourage employers to implement and offer paid family leave programs. Over the last five years, we have seen a dramatic increase in these types of benefits, especially among larger employers.
Before designing a plan, employers must consider many factors to ensure the program meets their overall business objectives. These objectives may include:
- Attraction and retention of employees
- Alignment with the company’s overall value proposition
- Industry competition
- Standardizing a benefit across the workforce regardless of location and program costs
Understanding these factors will drive the way program components are configured: eligibility, income replacement level, duration of benefits, and flexibility of the overall offering.
With the increase in state and local paid leave laws, how can employers integrate their in-house benefits with state and local mandated paid leave? Unfortunately, there is no easy answer to this question. An employer can design its plan based on the richest legislation, but this may lead to significant cost.
How will this work? Will an employee receive the company-sponsored plan as well as the state plan? We constantly face this question from employers as legislation usually does not consider the robust plans companies may already have in place. Employers must therefore decide if their private plan will run concurrently or consecutively to the state-mandated plans. Most employers choose to run the plans concurrently to avoid significant periods of absence, which can affect business productivity.
This seemingly simple design decision has substantial challenges. Some state plans allow leave time increments of one day, and others, of one week; however, most employer plans require leave to be taken in larger blocks or exhausted in a continuous leave to protect the plan. The company plan would have to be amended across the board to match the lowest state leave time increments or to allow shorter leave increments to employees in states with mandated plans. In an alternative approach, many large national companies have amended their plans to require forfeiture of the company-sponsored plan if it is not used in the designed manner, which then limits employees to taking the available state plan. Design changes such as these complicate program administration and communication to managers and plan participants.
Let’s say your organization has designed a market-competitive plan that meets company objectives; now what? Since company-sponsored plans are self-funded, employers have more flexibility in deciding on the administration of the program. While some administer these in-house, employers often outsource administration to their leave of absence vendor. This also allows for coordination of any applicable family medical leaves with paid parental or family leave through a single claim filing. Unfortunately, the administration options for state-mandated plans may not support this level of employer discretion. While some states allow flexibility in the administration vendor and funding, others require claims to be filed directly with the state. As such, it is critical to understand and document the administrative guidelines for all plans so employees can efficiently navigate the claims process.
Because return on investment is often a critical factor for employers implementing these programs, the projected program cost is often an important factor. The value of retention may be hard to quantify; however, employers can project claim cost and statutory offsets, as well as lost productivity and replacement workers. To project the financial implication for an employer, the analysis should include demographics, historical birth rates, short-term disability experience, and claims under the Family and Medical Leave Act (FMLA). Potential administrative costs should be reviewed as well to understand the total cost of the plan.
An employer-sponsored plan is always self-funded; however, a separate analysis may be necessary to determine the appropriate funding under state-mandated plans. In California, New York, New Jersey, and Washington (2020), employers have the option to file for a self-funded plan, purchase an insured plan, or opt into the state plan. These options vary and are not always available in each state. To understand the best option, employers should evaluate the application process and viability for approval by the state, projected claims cost, and impact on the employee experience. Unlike private plans, state-mandated plans set employee contribution rates to cover part or all of the cost of the state-mandated paid family leave benefit. This is another critical element in the decision process, as an unfavorable projected loss ratio could sway an employer to buy an insured plan or participate in the state plan. Some employers have made initial decisions about which plan to adopt but will revisit their choices after they have more claims experience.
While program design and administration are growing more complex, implementation and communication may be even more challenging in some aspects, especially for large, decentralized employers. These programs affect many stakeholders, including employees, supervisors, field human resources (HR) managers, corporate HR managers, payroll managers, and HR information systems managers, and all of these stakeholders require program guidance. This guidance can be provided using a variety of methods, including:
- Well-written leave program descriptions, including employee FAQs
- Field manager “toolkits” that include program descriptions, administration forms, process flows, and manager FAQs
- Informational videos aimed at employees and managers that cover program eligibility, benefits, usage rules, coordination with other leave programs (such as FMLA), administrative requirements, forms and how to access them, vendor contact information, and where to go for additional information
- Periodic webinars on various aspects of program administration
- Periodic onsite training for field HR managers
Well-documented, up-to-date communication materials are essential for program success, especially for employers that experience high turnover or that charge field HR managers with the responsibility to manage these programs on a decentralized basis.
As private parental and family leave programs gain popularity and more states mandate programs, program design, administration, and communications will become increasingly complex. Many employers seek assistance from their consulting vendors. DMEC affords employers a tremendous opportunity to share ideas on program strategies and effectively address these complexities when designing a best-in-class program.
- DMEC. 2018 DMEC Business Impact of Paid Leave Pulse Survey Results White Paper. Retrieved from http://dmec.org/2018/12/18/2018-dmec-business-impact-of-paid-leave-pulse-survey-results/.