Paid Family Leave Law Raising Questions

Funding, Job Security, Taxes at Issue

By HOWARD FINE

Staff Reporter

As the nation’s first paid family leave law takes effect on July 1, California employers are bracing for an expected surge in worker leave requests, while state officials are worried that not enough employees know about the new program.

At stake in how many workers wind up using the family leave option is the solvency of the disability insurance fund or SDI as it appears on payroll stubs that also pays out claims to pregnant and ill workers.

Business groups, many of which had lobbied against the family leave legislation, warn that a flood of leave claims could overwhelm the disability insurance fund, much as hikes in benefit levels helped tip the state’s unemployment insurance fund toward insolvency last year. Already, there have been anecdotal reports of new mothers delaying their leaves until after July 1, when they can get paid.

“We’re very concerned that the fund could go broke within the first six months,” said Sara Lee, spokeswoman for the California Chamber of Commerce, which had opposed the measure.

“That would bring yet another crisis to a state-run fund, just at the time when we’re trying to send a message that we’re bringing the state’s business climate under control.”

The state disability fund did go broke once already, back during the recession of the early 1990s. It had to be bailed out with a loan from the state’s general fund, and shored up with tightened eligibility standards and a crackdown on fraud and abuse.

But state officials and family leave proponents say that the chances of this happening again are remote, and that they have taken precautions to reduce the likelihood of the fund being swamped. The new law instituted a small surcharge on employee contributions that have been coming in since the first of the year, giving it a six-month buildup of surplus funds that’s expected to total about $175 million.

What’s more, the state’s Employment Development Department has the ability to adjust the SDI payroll tax rate at the start of each year, depending on the financial status of the fund. The tax rate is now at 1.18 percent of annual wages up to $69,000.

“We have some flexibility here, so we don’t think we’re going to run out of money,” said EDD spokeswoman Suzanne Schroeder.

Fund surplus

Under the groundbreaking law passed in 2002, workers can take up to six weeks of paid leave in a 12-month period to care for newborn children or seriously ill relatives. The pay, ranging from $50 to $728 per week, is funded through employee contributions to the state’s disability insurance fund.

Last year, the EDD projected that up to 310,000 workers would use the paid leave program during its first 12 months, drawing $380 million from the SDI fund. That fund currently is running an annual surplus of about $200 million; when combined with the $350 million the payroll surcharge is expected to bring in, that should provide enough of a cushion, Schroeder said.

But if claims are double or triple the EDD projection, it’s conceivable that the fund could run dry before January 1, 2005.

“We’re hearing from our client companies that pregnant women and new mothers are scheduling their leaves after July 1 so they can get paid for their leave,” said Jim Kuns, a consultant with the Employers Group, a Los Angeles-based human relations consulting organization. “It’s creating a scheduling problem at some companies.”

But Schroeder said that as of June 7, only 76 paid leave claims had been filed with the EDD. Under the family leave law, a worker seeking paid leave must file a claim with the department, much like filing for an unemployment claim.

Indeed, paid leave proponents worry that not enough workers are aware of the program. A survey late last year of California adults conducted by the Institute of Industrial Relations at UCLA found that only 22 percent realized they would soon be eligible for paid family leave.

“My greatest concern is I don’t think people really understand they will have the ability to take paid leave to care for a sick relative or a baby,” said state Sen. Sheila Kuehl, D-Santa Monica, who authored the legislation. “When I talk to groups about this law, people have stunned looks on their faces that it’s even available.”

In the coming weeks, the EDD will be placing ads about the program in various media and a news conference is scheduled for June 29 to raise awareness of the program.

Job insecurity

The publicity is also designed to clear up some confusion and uncertainty about the law.

The biggest issue is whether the job of a worker on leave must be held for them when they return. Laws long on the books protect workers’ jobs at companies with 50 or more employees. But an employer with fewer than 50 employees does not have to hold the position. As a concession to the difficulties small companies face trying to keep their operations going while a worker is out on leave, the paid family leave law does not change this.

“Some employees at small companies will be surprised to learn that their jobs are not protected if they take the paid leave,” said Jennifer Richard, a legislative aide to Kuehl.

Some advocates of paid leave benefits believe this could prove a deterrent to some wanting to take advantage of the new law. “The lack of a job guarantee is definitely a concern,” said Netsy Fierstein, executive director of the Labor Project for Working Families, an advocacy non-profit that often works in partnership with labor unions.

Even so, for workers who have no choice but to leave work to deal with a family emergency, getting paid will in many cases avert cleaning out savings.

“When you think of the human misery of people trying to decide whether to leave their 89-year-old mother home alone or lose their job because they can’t afford to get their pay docked when they take a leave, this is a much better way to handle this,” Kuehl said.

There’s one other point of uncertainty: whether the paid leave benefits will be taxable. Current federal tax code stipulates that unemployment benefits are taxed, while disability benefits are not.

The IRS earlier this year issued a ruling that it considered paid leave benefits taxable, according to Schroeder, noting that the EDD is in discussions with the IRS trying to get the ruling reversed.

“This is quite unexpected,” said Ruth Milkman, director of the Institute of Industrial Relations at the University of California Los Angeles. “The IRS has taken the attitude that this is more like unemployment insurance than disability insurance. That certainly wasn’t the intent of the legislation. If it holds up, it would reduce the value of the paid leave benefit considerably.

Workplace Rules

Highlights of California’s paid family leave law, taking effect July 1.

Who Is Eligible: Employees of all private

companies and some government agencies

Coverage: Immediate relatives needing medical care or birth/adoption of a new child

Maximum Leave: Six weeks within a 12-month period

Waiting Period: Seven days before benefits kick in

Benefits Rate: About 55 percent of earnings,

ranging from $50 to $728 per week

Employee Contribution: Rate is 0.08 percent

of taxable wage limit of $68,829 for 2004 and $79,418 for 2005

Job Protection: Yes for workers at companies

with 50 or more employees; no for those with fewer than 50

Source: State Employment Development Department