The Family Leave Act a Financial Burden

In April 1991, Washington, D.C., passed a local law mandating unpaid family and medical leave for employees within the district. Between then and the following December, 83 people took leave at Sibley Memorial Hospital. The majority of these leaves were for maternity purposes. At one point, 14 women from the same unit requested maternity leave at the same time.

Ninety percent of the women taking maternity leave at Sibley remained out for the full 16 weeks of family leave. Many of them added their accumulated paid leave to the time off, extending it to as long as 29 weeks, or more for complicated births. (Rather than having paid sick days, holidays and vacations, Sibley allots each employee paid days leave, based on years of service. The employees accrue hours each week that can be rolled over each year until the employees have a maximum of 13 weeks of unused paid leave on the books.)

To cover the absent employees, Sibley had to pay overtime to other staffers, and premium rates for credentialed temporaries. “When you have 83 people take leave in a little more than 18 months, it gets very expensive,” says Shari Pollard, vice president of HR at Sibley.

One job cost the company $60,600 to cover. A pregnant employee took 12 weeks of paid leave and 16 weeks of unpaid family leave. Because she worked in a position that required extremely specialized skills, the company couldn’t find any qualified replacements in its local area. In addition, most of the people across the country who had the skills needed for the job had permanent positions and weren’t interested in temporary assignments. As a result, getting someone to fill the position during the leave required Sibley to pay for the replacement’s round-trip airfare, pay her $400 a week for housing, rent her a car for the 28 weeks and pay her a salary of $56,000.

Although the company didn’t have to pay the leaving employee her salary for the unpaid portion of her leave, it did have to continue paying for her medical benefits. To top things off, at the end of her leave, the employee informed the hospital that she wouldn’t be returning to work. After the expense of temporarily filling the position, the company now had the expense of recruiting a permanent employee.

In February 1993, President Clinton signed into effect the federal Family and Medical Leave Act (FMLA), mandating 12 weeks of leave for all workers at companies that employ 50 or more people (see “Advice for Coordinating Federal, State and Local Leave Laws”). Will having this law in place cause the Sibley scenario to repeat itself at companies across the nation? There has been much speculation about the financial impact of the act on companies.

In the preamble to the Family and Medical Leave Act’s regulations, the Department of Labor summed up the comments of 400 people who responded to its notice of the act. “Several commenters expressed concern about the law’s impact on their operations,” the publication states. “They indicated, for example, that the FMLA would impact profitability because:

• Of the burden of recruiting, selecting, placing and training temporary workers to fill clerical and labor vacancies at a much lower rate of efficiency
• Managerial employees can’t be replaced by temporary workers
• The employer becomes liable for unemployment costs of temporary workers
• Temporary workers aren’t typically eligible for hospitalization coverage until after 30 days of employment, which increases hospitalization costs
• Temporary workers have more accidents, adding to workers’ compensation costs.” (It’s important to note, however, that none of the people commenting provided any data or cost-specific information to the Department of Labor.)

Several studies indicate that the act will have as tremendous a financial impact on other companies as it has for Sibley. A Society for Human Resource Management (SHRM) study, cited in a February 2, 1993, House of Representatives’ Minority Report, indicates that the costs associated with recruiting new temporary-replacement workers, the training of replacement workers and the lower level of productivity of temporary replacement workers could total $56 million nationally. (This number is based on a U.S. General Accounting Office estimate that approximately 30% of the employees who would take advantage of the FMLA leave would be replaced by temporary workers).

A study conducted by the Small Business Administration in 1990 titled Leave Policies in Small Business, estimated the cost of six weeks of unpaid maternity and infant care leave to be $612 million, nationally, a year. The amount for 12 weeks of leave, as mandated by the FMLA, would be double.

Certainly, many small companies fear the truth of these studies. Beth Moser, HR specialist at ESH Inc. located in Tempe, Arizona, says that she’s afraid that the legislation will have a tremendous financial impact on her company. ESH, which designs and manufactures print and circuit boards, employs 75 people. In many of the departments, only one person works per shift. “We’ve got to cover those departments to keep functioning,” says Moser. “We’ll be forced to either go to a temporary service or bring in floaters who can go from department to department.”

Moser says that the company has had leave policies in place for at least 10 years, allowing employees to take up to six weeks off without pay. Only four employees in 10 years have taken the leave, and they only took a portion of the available time. Even these few, short leaves, Moser says, impacted the company. She anticipates that a greater number of people will take leave now because the FMLA has been so publicized.

Carol Sladek, head of the work-and-family consultancy of Lincolnshire, Illinois-based Hewitt Associates, agrees that more people are likely to take leave as a result of the act, even in companies that have offered leave in the past. “This has been so widely publicized, I think more people will know that they’re entitled to this type of leave,” says Sladek. She says that without the legislation, many companies have offered leave on a case-by-case basis, rather than as a universal right.

Also, without the legislation, companies weren’t required to continue paying for employees’ benefits while they were on leave. Now they’re required to continue benefit coverage under the same terms as before the leave. “If an employee goes on leave and isn’t being paid, it’s pretty difficult for him or her to come up with insurance premiums for a few months,” says Sladek. Having the insurance paid during this time may encourage more people to take leave.

Beverly King, HR director for the Los Angeles Department of Water and Power, has similar predictions. She says that with the burden of paying for benefits gone, more people will take leave. Already, the company has seen an average of 600 women a year (5% of its work force) taking maternity leave. Before the FMLA, however, these women were responsible for covering their own insurance costs. Now, the company must pick up the tab. King estimates the impact of the continuation of benefit coverage to be $1.5 million. “People do take leave, they always have taken leave,” says King. “However, they have never taken leave with a continuation of benefits—they paid the benefits themselves. Now, that cost is transferred to the company.”

In a February 1, 1993, report titled Family and Medical Leave Cost Estimate, the General Accounting Office (GAO) estimated the cost of continuing insurance coverage for employees on leave to companies nationally to be $674 million annually. However, the GAO foresees the cost of insurance coverage as the only added cost the FMLA will incur. Based on the results of a survey on the usage of parental leave, the GAO found that there’s no measurable net cost to businesses associated with replacing workers. Most absences are handled by reallocating work among the remaining work force.

Kathleen M. Williams, HR manager of New Jersey Superior Court, has found this estimate to be true. New Jersey has had a state leave act for several years. The law mandates employers who have 75 or more employees to provide 12 weeks of leave every 24 months for births, adoptions and illnesses of children, parents and spouses. It requires that group health insurance coverage be continued for state employees.

Although Williams says that the leave has been used extensively by superior court employees, it’s had no financial impact on the business. “It’s been our practice not to fill positions with temporaries,” says Williams, unless it’s a position such as court reporter that requires a person present. In the majority of cases, Williams uses the rest of the work force to get the job done. Even when the company must hire a temporary, the company can pay him or her up to the amount the leaving employee would be making without causing a financial burden. As far as benefits are concerned, Williams says the company would be paying them for the leaving employee anyway.

The financial impact of the FMLA will vary from business to business.
So, will or won’t the FMLA have a financial impact on businesses? The answer seems to be: It depends on the company. Many factors influence how much impact the act might have. Sibley Hospital, at which the state leave act has had tremendous financial impact, is victim to a great number of the factors.

The health-care industry is predominantly female-oriented. Studies have shown that the majority of leave taken in companies is maternity leave. Therefore, companies that employ a majority of females will see a greater number of people taking leave than male-dominated companies, even though the law stipulates that males are entitled to the same leave as women for the birth of a child. (A June 1993 poll commissioned by The Bureau of National Affairs Inc. found that only 7% of working men would take 12 weeks of unpaid leave for the birth or adoption of a child, compared with 43% of working women.)

Combined with the fact that Sibley’s work force is predominantly female is the fact that those females are in upper-middle-class families. The majority of the women taking the full amount of leave time are in professional positions, and many are married to professional men. “Most of our employees who use leave for maternity purposes have spouses who are working, and [the women] can afford to be off work for an extended period of time,” says Pollard. “People who are in other areas and receive lower rates of pay might not be able to afford to be off.”

Ted Pippin, director of HR for Providence Hospital in Washington, D.C., confirms this. He serves as vice president of a local health-care chapter that represents 62 hospitals in the metropolitan area. Of those 62, only Sibley has had a large influx of people taking leave for the maximum amount of time. At Pippin’s hospital, which employs 2,000 people, only 35 workers have taken leave in the two years that the Washington, D.C., law has been in effect, and most of them took less than the full amount of time. “What we’ve found is that because it’s unpaid leave, a majority of the people can’t afford to stay away from work for that period of time,” says Pippin.

Although Providence has fewer people who take leave than Sibley, Pippin says that it too experiences a financial impact when people who have specialized skills and who are in short supply take leave. This is a factor that people in other industries are concerned about as well. Matt Lynch is executive director for Build Rehabilitation in San Fernando, California, a public charity that trains and then finds jobs for adults with disabilities. It has had leave policies for approximately 10 years, but, just like Providence Hospital, few people take it because they can’t afford the time off without pay. In addition, a recent analysis of the work force at Build Rehabilitation indicated that although 90% of the females employed there (which total 65% of the work force) are of child-bearing age, the majority of them are single. Lynch says that the company hasn’t been put yet in the position of having to hire temporaries to cover for employees taking leave. It also hasn’t yet had an employee who’s in a specialized-skills job take an extended leave. Lynch is concerned about the impact that it would have if it happens. “There are certain jobs that only can be done by the individual who has had extensive training and experience,” says Lynch.

A company’s benefits and decisions about those benefits can affect the amount of impact the FMLA will have on the bottom line as well. For example, the law requires that companies continue paying only for medical benefits while a person takes leave. If employees are at least partially responsible for life insurance and disability benefits as well, they may elect not to pay these premiums while on leave. What happens when those employees return to work? Will they have to requalify for the same level of benefits that they were receiving before the leave? Can the company require the employees to pass a medical exam? “The ability to restore someone to exactly where he or she was before taking leave may require some changes in one of two things,” says Karen Ross, an associate at the New York City-based law firm Schulte Roth & Zabel, and formerly a director of benefits at GTE. Either changes need to be made to the employer’s benefits plan or the employer will need to pay the premiums for the employee so that there’s no lapse of coverage. Ross says that companies need to look at their current policies and decide whether to continue the payments.

Gerald Uslander, an attorney in the Washington, D.C., office of William M. Mercer, agrees with Ross that employers need to evaluate their benefits packages carefully. “Is it more trouble than it’s worth to stop coverage or to dock pay [for insurance premiums] while an employee is on leave?” Uslander asks. “An employer may be forced to continue benefits during the leave to satisfy reinstatement requirements.”

Preventative measures lessen negative effects.
Although the potential does exist for the FMLA to negatively affect the bottom line in particular companies, there are things that can be done to discourage it. Many companies that have had to deal with state-leave laws have found cross-training to be an effective way to minimize the use and expense of temporary workers. Williams says that cross-training has been imperative for her to abide by the New Jersey Superior Court’s policy of hiring a minimal amount of temporaries.

The court operates under a team concept, so cross-training is part of its procedures. Every member of each team must know how to perform every process. “When someone goes out on family leave, although there’s a hole [in the team], most of the time we can maintain [operations] for that period of time,” says Williams. Employees are able not only to fill in for each other but for department heads as well.

A.L. (Al) Smith, vice president of human resources for Natco in Tulsa, Oklahoma, has an HR staff of five. They’re all cross-trained. “I have everyone learn one anothers’ jobs so that they can fill in for one another,” says Smith. Just recently, Smith’s benefits administrator went on maternity leave. Rather than looking for a temporary worker who had the specialized skills to handle the administrator’s job, Smith moved his secretary into her job and hired a temporary secretary. This minimized the expense, ensured greater efficiency and empowered the secretary with greater responsibilities, raising her morale.

In addition, Smith brought all of the benefits administrators from the company’s operating units to Tulsa and trained them to handle certain aspects of benefits administration from the operations. This would assist the secretary in covering the leaving employee’s job.

The V.P. says that although the tank company doesn’t have a formal policy for cross-training, it’s general practice. Certain positions, he says, need to have backup. So the company provides backup by training others for the job.

What’s been just as vital as cross-training for Smith is communicating the importance of cooperation to Natco’s work force, which consists of fewer than 500 people. Smith has found that working out alternative solutions to unpaid leave helps both the company and the employees. For instance, one woman needed to take several months off between the end of last year and the beginning of this year. Smith arranged for her to work on a consultant basis at home. He kept her on the payroll. The woman was able to continue receiving paychecks, and Natco got its work done.

Lynch works with his employees at Build Rehabilitation in a similar way, which has enabled him to avoid hiring temporaries for employees who take leave. “The company works with employees to use them on a part-time basis [during their leave] so that they can still get paid something and we can more easily keep the job open for them,” says Lynch.

The executive director explains that many of the jobs at the company require at least a year’s training for workers to acquire specific skills. Most of the people in these jobs recognize the fact that Build is a public charity and that the staff, totaling fewer than 200 people, including the disabled workers, must work together as a team. “They have a camaraderie with their fellow employees and realize that they would be hurting everybody else if they were gone for 12 weeks,” says Lynch. Most employees who do take leave call in every day, if possible, to help their co-workers perform their jobs.

Pollard used a similar system with employees at Sibley who required leave before Washington, D.C., enacted the local leave act. When a large number of women in the hospital’s critical-care unit requested maternity leave during the same period of time, Pollard suggested that they work together to come up with a plan. “We told them, ‘Look, this is how many people we can have gone at one time,’” says Pollard. The women worked out schedules of when they absolutely had to be gone, and some volunteered to work part-time for a portion of their leave. They even made arrangements to care for each others’ children while they came to work. “They worked it out as a team so that we could continue to provide care for our patients,” says Pollard.

Since the local leave act, however, Pollard says that the company hasn’t been able to convince workers to make these types of arrangements. She says that the employees know that the company is required to give them the requested leave and that they have the right to take it. They say that they believe that it’s the company’s problem, not theirs, to cover their positions while they are gone. Pollard explains that many of the women are in professional positions and work because of a career commitment rather than for economic reasons.

The makeup of Sibley’s work force has made it a prime target for family-leave takers and the ensuing expense. For other companies, family-leave policies have been insignificant to their bottom line. Only time will tell what the financial impact of the FMLA will be on corporate America. It seems likely that the effect won’t be as bad as many anticipate, especially if companies prepare for it. “The bottom line,” says Natco’s Smith, “is how employee-oriented is your company? What’s the moral obligation of management? How do managers feel about employees? If you’re an employee-oriented company, you’ve probably already been taking care of your employees, and [the FMLA] won’t make any difference.”

Personnel Journal, September 1993, Vol. 72, No. 9, pp. 48-57.