California SB 1661 - Big Business Burdens For Small Business Owners

Under current State and Federal law (Family and Medical Leave Act), businesses are required to give up to 12 weeks of unpaid leave per year to an employee to care for a sick or pregnant family member. The caveat to these laws is that they apply only to businesses of 50 or more employees. Under SB 1661, which was signed by Governor Gray Davis on September 23rd, all businesses, regardless of size, are required to give up to six weeks of paid leave per year to allow an employee to care for a sick or pregnant relative, spouse, or other domestic partner.

Payment of wages to workers taking time off under the bill will be through the State Disability Insurance (SDI) program via a new segregated fund called the Family Temporary Disability Insurance fund (FTDI). The effect of this is an increase in the SDI deductions out of employees’ paychecks to fund the program, which amounts to a direct tax on employers and employees alike. The bill also requires new state-imposed administrative fees on some larger businesses as well as the appurtenant increases in accounting costs for employers.

Two of the lesser-recognized, but nonetheless adverse, consequences of this bill are the opportunities for abuses it creates and the unknown costs to the SDI coffers. Supporters and opponents alike cannot agree on the amount of increase that will be required in SDI deductions to fund the program. The bill’s author, State Senator Sheila Kuehl (D-Santa Monica), estimates such increased cost to be only $34 annually per employee. The California Chamber of Commerce has pegged the first year tab at $104 per worker. Other estimates vary from $70 up to $210 annually. If claims exceed reasonable estimates, State Disability Insurance deductions could increase to offset fund shortfalls.

The regulatory mechanisms for ensuring that abuses do not occur are rather sparse. Initial eligibility to receive benefits need only be established by a doctor’s certificate stating the need for the employee to take the time off to provide the care to the family member, such care including psychological comfort, and arranging third party care. The scope of medical conditions of family members which qualify for leave are defined not only as the type of conditions requiring in-patient hospital treatment and recovery but also conditions requiring continuing treatment or continuing supervision by a health care provider. How many common, non-life threatening, non-debilitating conditions fall under such a broad definition? That will ultimately be for the regulatory agency to decide as ambiguities spur abuses that then spurs reform. Enforcement of the program, including verifying eligibility, will be through the State Employment Development Department. None of the increased SDI deductions have been slated to pay for enforcement mechanisms or investigations of abuses.

Another business-adverse aspect of the program is that employees are eligible to take benefits immediately, depending on the status of their SDI benefits from previous jobs (SDI benefits are cumulative and portable from job to job). Thus, a new hire could take a six-week leave of absence after his first day on the job. For small businesses, who may have only 1 to 5 employees, the burden of such a scenario is obvious, especially those that rely on workers with specialized skills. Not only must the business find a specialized worker to replace the absent employee, but must make arrangements for the termination or retention of that specialized worker after the absent employee returns from the leave, should the employer decide to keep the absent employee. For emerging businesses, which often rely on the skills of unique individuals to hedge the operating costs and increase revenues during the crucial first year, the loss of such an employee can be devastating to the emergence of the business.

The bill will take effect on January 1, 2004. Claims may be made for benefits starting on July 1, 2004.