For US employers, offering parental leave – where one or both parents are allowed to take extended time off to tend for a new child – can be a tricky issue.
Not so in the UK, Japan, Germany, France and most other rich countries around the world, where parents – including fathers in some cases – can take significant time off after a child is born, with part of their compensation being covered by the government.
The US has no such benefit. Federal law mandates employers to allow their employees to take up to 12 weeks of unpaid leave under the Family and Medical Leave Act and it seems very unlikely that a national paid leave requirement will become legislation anytime soon. However, some states have picked up the ball.
According to the National Conference of State Legislatures, 11 states – California, Colorado, Connecticut, Delaware, Massachusetts, Maryland, New Jersey, New York, Oregon, Rhode Island and Washington – and the District of Columbia currently offer paid family and medical leave, all of which are funded through employee-paid payroll taxes, and some of which are also partially funded by employer-paid payroll taxes.
With the lack of government assistance, have US employers stepped up to provide this important benefit? Unfortunately, the opposite is happening.
A recent study of approximately 3,000 employers by the Society for Human Resource Management, reported in the Wall Street Journal, found that the share of employers offering paid maternity leave beyond what is required by law dropped to 35% this past year, which is down from 53% in 2020. The share of employers giving paid paternity time off fell to 27% in 2022, from 44% in 2020. Rising costs and a desire to return to pre-pandemic norms are some of the reasons cited for this trend.
For business owners, parental leave is costly and disruptive. Some companies – like HPE, Etsy, Dropbox, Netflix and Lululemon Athletica – offer six months or more of paid leave for both primary and secondary caregivers. But these are large companies. It’s more difficult for many small businesses to lose a key employee for an extended period of time.
For employees, however, parental leave can be a very important benefit because the time off is potentially needed to adjust to a significant personal change. Having to shoulder the responsibilities of a job during those first few weeks or months after birth can be very difficult.
This is a tricky issue, particularly for a small business with fewer resources than a larger organization. And there are tricky questions to answer. Is it biased to offer paid leave to new parents? What about those who don’t or can’t have children? Is it fair to tell a new mother or father that you need them to be responsible for at least some of their work duties from home, now that we know remote working is valid option? How long can a small business owner keep a job open without operations being significantly affected? How long can we afford to cut a paycheck every week when no work is being done?
Tricky, but not insurmountable. Based on what I’ve seen from my smartest clients, here are a few thoughts that may help answer these questions.
First, if a small business has fewer than 50 employees, it doesn’t need to comply with the Family and Medical Leave Act. But, thanks to the Section 45S employer credit – a relatively little-known tax rule that was extended through 2025 – if a business allows an employee to take the time off and continues to pay at least half of their wages, the company can receive a tax credit for up to 25% of the wages paid. So that could help with the cost.
Speaking of tax benefits, an employer can deduct up to $5,000 a year in contributions to an employee’s flexible spending account (FSA), which can be used for childcare and is not taxable to the employee. There are limitations to this deduction and time should be invested – and professionals consulted – for both the business owner and employee to better understand how the personal childcare tax credit works and how it can potentially be used in addition to the FSA so their employees can maximize those benefits too.
You will also need to make some tough decisions that address some of the concerns over bias and working from home. I believe a business should include parental leave as part of its company’s paid time off plan in order to avoid any claims of bias from other employees who do not or did not have children. But be aware that this is potentially controversial and could have an impact on retaining and recruiting workers.
The good news is that one of the many benefits of being a small employer is that you can be flexible and do not have to adhere to a rigid corporate policy. You can figure out an arrangement that works best for both you and your workers. Use that flexibility to your advantage.
Yes, paid time off should be given to a new parent, regardless of your company’s size. It’s not only the right thing to do, it’s also a necessary benefit to offer in this time of tight labor markets. Done the right way, even a small business can manage this.