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Paid Leave Bills Would Cost Businesses Over $1 Billion Annually

By Erin Shannon
Director, Center for Small Business

Key Findings

  • HB 1313 and HB 2238 would each impose a one-size-fits-all paid leave mandate on employers. Both bills place the burden of paying for the paid sick and paid vacation leave benefits solely on employers.
  • The annual cost to employers in our state for paid sick leave required by HB 1313 would be a staggering $442 million.
  • The cost to employers in our state for paid vacation leave required by HB 2238 would be $684 million every year.
  • Employers could not simply absorb an extra $442 million or an extra $684 million or an extra $1.1 billion per year without a change in work hours, prices, or both. They would be forced to shift costs back to workers by eliminating non-mandated benefits (such as undesignated leave) and by reducing hours, and to consumers in the form of increased prices.

Introduction

This Legislative Memo provides an overview and analysis of two bills, HB 1313 and HB 2238. These proposals would require that employers provide workers with paid sick leave and paid vacation, regardless of cost to employers.

HB 1313 would require employers with five or more employees to pay employees for five, seven or nine days of sick leave per year, depending on the size of the company. This bill passed the House and will now be considered by the Senate.

HB 2238 would require employers with more than 24 employees to offer up to three weeks of paid vacation for employees who work an average of 20 hours per week. This bill did not advance beyond the committee cut-off date and is considered dead for this legislative session.

Based on WPC’s research and analysis, HB 1313 and HB 2238 would significantly increase the cost of doing business in Washington, harming our state’s business climate and putting employers at a competitive disadvantage compared to companies based in other states.

Background

There is no federal requirement that employers provide workers with paid sick or vacation leave. The federal “Family and Medical Leave Act” (FMLA) requires that workers in companies with 50 or more employees receive up to 12 weeks of unpaid leave for specified family and medical reasons. Congress has declined to require paid leave through federal law. The “Healthy Families Act,” (HR 1283/S 631) which would require all businesses with more than 15 workers to provide up to seven days of annual paid sick leave, has failed to pass every year since 2004.

Washington state does not require employers to provide paid sick or vacation leave. In fact, no state requires paid vacation leave, while just one state, Connecticut, mandates paid sick leave.

However, eight cities around the nation, including two cities in Washington, have ordinances mandating paid sick leave.

San Francisco became the first city in the nation to require employers to provide paid sick leave in 2006. In 2008, the District of Columbia and Milwaukee (later nullified by a state preemption law) passed paid sick leave ordinances, followed by the state of Connecticut and the cities of Seattle and Philadelphia (later vetoed by that city’s mayor) in 2011. The cities of Portland, New York, SeaTac and Jersey City adopted paid sick leave laws in 2013, and Newark became the latest city to impose a paid sick leave mandate, in 2014.

In the City of Seattle, employers with more than four employees must pay for five, seven or nine days of paid sick leave to every employee working within city limits. In the City of SeaTac, certain employers in the hospitality and transportation industries must provide one hour of paid sick leave for every 40 hours worked, with an unprecedented lump-sum cash out of unused leave time at the end of each year.

An ordinance similar to Seattle’s is being considered in Tacoma and activists are pushing proposals in two dozen other cities and states.

Efforts to prevent cities and localities from passing such mandates have gained traction, as states have passed preemption laws that make it illegal for localities to impose paid sick leave laws in the future and negate those already in place. Before 2010, Georgia was the only state with a law preventing the adoption of municipal paid sick leave ordinances. In 2011 and 2012 Wisconsin and Louisiana enacted preemption bills, and in 2013 seven more states—Arizona, Florida, Indiana, Kansas, Mississippi, North Carolina and Tennessee—followed suit. At least a dozen other states, including Washington, have considered similar prohibitions.

Policy Analysis

HB 1313 and HB 2238 would each impose a one-size-fits-all paid leave mandate on employers. Both bills place the burden of paying for the paid sick and paid vacation leave benefits solely on employers. However, employers would likely pass some or all of the added costs onto employees, in the form of cut-backs in hours, wages and non-mandated benefits. Consumers would also help bear the cost, in the form of higher prices.

HB 1313: Establishing Minimum Standards for Sick and Safe Leave from Employment

HB 1313 would impose rules for sick and safe leave for employees. Patterned after Seattle’s paid sick leave ordinance, the bill would require that workers receive paid sick and “safe” leave that could be used to care for themselves or a family member who is ill or injured, as well as for a worker or a family member who is a victim of domestic violence, sexual assault or stalking.

HB 1313 would create three categories (or “tiers”) of employers based on firm size:

  • A worker in a business with between five and 49 employees would accrue at least one hour of leave for every 40 hours worked, up to 40 hours per year.
  • A worker in a business with between 50 and 249 employees would accrue at least one hour of leave for every 40 hours worked, up to 56 hours per year.
  • A worker in a business with 250 or more employees would accrue at least one hour for every 30 hours worked, up to 72 hours per year.

HB 2238: Addressing Paid Vacation Leave

HB 2238 would require employers to provide employees with paid vacation leave. Employers with 25 or more employees would be forced to provide paid vacation leave to workers who work an average of 20 or more hours per week.

The leave would begin accruing after the first six months of employment:

  • 40 hours would accrue for the subsequent 12-month period.
  • 60 hours would accrue for the subsequent 12-month period.
  • 80 hours would accrue for each subsequent 12-month period.
  • After five years of employment, 120 hours would accrue for each 12 months of employment.

The cost of government-imposed mandates

Mandating any employee benefit comes with a cost for business, especially small employers. Since no state requires employers to provide paid vacation leave, no research exists that examines real-world impacts that proposals like HB 2238 would have on businesses. However, since paid sick leave laws have been implemented in several local jurisdictions and one state, the evidence suggests that HB 1313 would cause hardship for employers, as well as employees and consumers.

A recent survey by the Employment Policies Institute (EPI) on Seattle’s paid sick leave ordinance found that the new policy is already increasing the cost of doing business in the city. The survey examined service industry employers, such as restaurant and retail businesses. More than 56 percent of these employers said the new mandate would increase their cost of doing business, with over one quarter saying the cost increase would be “big.”

Proponents of paid sick leave argue employers will offset increased costs through reduced employee turnover. But the EPI survey shows two-thirds of Seattle employers who have started providing mandated paid sick leave do not believe the law will reduce turnover, and one third of Seattle employers think the law will increase unscheduled absences among employees taking paid days off even though they are not sick.

A survey by the Urban Institute in San Francisco found few employers reported reduced employee turnover as a result of that city’s paid sick leave law. As one business owner pointed out in that survey, if every employer is required to provide paid sick leave, turnover becomes a moot point because that benefit is no longer an incentive for an employee to remain with one employer over another. Workers receive the mandated benefit anyway, so there’s no added reason to stay with one employer.

Overall, the paid sick leave mandate has increased costs. In Seattle, employers report that in response to the new paid sick leave mandate they have taken one of the following cost-cutting measures:

  • 15.7 percent of employers raised prices on consumers.
  • 18.3 percent of employers reduced hours and staff, reducing employment and take home pay for workers.
  • 17.3 percent increased the cost to employees of current benefits or eliminated benefits they used to offer, again increasing the burden of the mandate on workers.

These survey results are not unusual. Surveys in San Francisco and Connecticut, which both mandate paid sick leave, reveal similar results. A survey of San Francisco employees by the Institute for Women’s Policy Research found nearly 30 percent of the lowest-wage employees were laid off or given reduced hours after passage of that city’s paid sick leave mandate.

The Urban Institute survey similarly found some San Francisco employers had cut back employee bonuses, vacation time and part-time help to absorb the new costs. In Connecticut, employers reported that state’s paid sick leave law forced them to raise prices, reduce hours, wages and benefits, and sometimes eliminate jobs. Others said they would likely hire fewer people in the future.

Cost Analysis

According to the Bureau of Labor Statistics (BLS), the average cost to an employer for paid sick leave is 25 cents per hour per employee. The average cost for paid vacation is a steeper $1.02 per hour.

Taken in isolation, an extra 25 cents per hour, and even an extra $1.02 per hour, may seem small. Looking at the numbers in aggregate, however, shows that seemingly negligible costs add up quickly.

There are 2,669,256 employees who work for companies with five or more employees in our state. Nationally, 39 percent of private-sector workers do not receive paid sick leave. So just over one million workers in Washington state would benefit from the paid sick leave bill.

Assuming those workers work the national average of 1,700 hours per year, the annual cost to employers in our state for paid sick leave would be a staggering $442 million.

There are 1,713,831 workers in Washington businesses with 25 or more employees. Nationally, 23 percent of private-sector workers do not receive paid vacation, so approximately 394,181 Washington workers might reasonably benefit from the paid vacation mandate. Assuming the national average of 1,700 hours worked per year, the cost to employers in our state for paid vacation leave would be $684 million every year.

Together, HB 1313 and HB 2388 would increase the cost of doing business in Washington state by more than $1.1 billion per year.

Employers could not simply absorb an extra $442 million or an extra $684 million or an extra $1.1 billion per year without a change in work hour, prices, or both. They would be forced to shift costs back to workers, by eliminating non-mandated benefits (such as undesignated leave) and by reducing hours, and to consumers, in the form of increased prices.

After Jersey City, New Jersey imposed a paid sick leave mandate last year, an employer in that city reported she may reduce employee bonuses to make up for the cost of paying employees who are out sick.

The reason paid leave mandates are rare

There is a reason only one other state, Connecticut, mandates paid sick leave, and why no state mandates paid vacation. It is because such one-size-fits-all mandates remove much-needed flexibility for employers and workers and significantly increase the cost of doing business. Officials in most states are reluctant to increase costs on their job creators, especially when economies, employment and working families are still lagging from the Great Recession.

Policymakers in Washington should be especially wary; the state’s new business start rate has declined while the failure rate continues to increase. In 2010, Washington ranked 9th in business starts and 11th in closures. In 2011 (the most recent year available), Washington slipped to 12th for new business starts and rose to 7th in business closures. Investors and entrepreneurs are opening fewer businesses in Washington, and more businesses are failing as compared to other states.

Other states are performing better at fostering a positive business climate than Washington on the heels of the recession. Imposing hundreds of millions of dollars per year in higher labor costs on the state’s job creators would do little to reverse this disturbing trend, and would likely make it worse.

Conclusion

Paid leave mandates do not appear as line items in state budgets, but they are not free. They impose new burdens that increase the cost of doing business. Employers would be forced to pay the wages of the worker who has used a paid leave day, while paying another worker to fill in for the absent worker. Alternatively, the employer could let the work of the employee on leave go unfinished and sacrifice service, productivity and sales (while still paying the absent worker’s salary). Either way, higher costs and greater inefficiency are forced on the employer.

Some employers, especially the larger corporations, may be able to absorb the increased cost. But many employers, especially those running small businesses—mainstreet shops, neighborhood restaurants, small manufacturers—often operate on a narrow profit margin. They often have no other choice other than passing new costs on to consumers, or on to the very workers the mandates are supposed to help.

Increasing costs on businesses, workers and consumers is not the way to spur the economy and create jobs. Rising in-state costs makes shopping on the internet much more attractive to consumers, making it all the more difficult for mainstreet retailers to stay in business.

Washington Policy Center has long recommended rejecting efforts to replicate Seattle’s paid sick leave mandate at the state level. The best way to keep workers healthy and productive is through voluntary measures based on the specific needs of a business and its employees.

Small businesses agree; at WPC’s 2011 Statewide Small Business Conference, small business owners and policymakers from around the state gathered to discuss ways to improve the small business climate. Conference attendees voted to recommend the state not impose a paid sick leave mandate, with an additional recommendation to prevent local governments from imposing such mandates. It goes without saying these businesses would similarly oppose legislation mandating paid vacation.

The one-size-fits-all approach of HB 1313 and HB 2388 would be detrimental to the economy as a whole, increasing costs for employers and consumers, while reducing job opportunities, wages and hours for workers. Such mandates would make our already struggling business climate even less attractive to local and to out-of-state investment, and would increase the competition neighborhood businesses face from internet sales.

>> Click here to read this Legislative Memo online and to download a PDF

**Nothing here should be construed as an attempt to aid or hinder the passage of any legislation before any legislative body.

Washington Policy Center
Improving lives through market solutions

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