The Costs and Benefits of Paid Leave

Companies that offer generous paid leave policies find that the cost is worth the benefits of retention and engagement.

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Paid leave has become a hot-button issue amid efforts to help solve the gender wage gap. Considering that most workers likely to take advantage of paid leave policies are working mothers — and, to a lesser extent, working fathers — it’s become an important benefit offering among more progressive companies as a way to stem the tide of talent likely to drop out of the workforce once they start a family.

But is the cost ultimately worth the benefit to companies that adopt or can take advantage of government-sponsored policies?

After California introduced its paid family leave initiative in 2004, the vast majority of employers in the state found it was good for their business. According to a June 2014 study by the Obama Administration, more than 90 percent of 253 employers from California surveyed reported either a positive or no effect on profitability, turnover and morale.

California’s policy is far more progressive than the country at large. The U.S Family and Medical Leave Act guarantees 12 weeks of unpaid leave for the birth of a child, medical leave or to care for an immediate family member for companies with 50 or more employees. However, according to the White House report, this covers only about 60 percent of employees, leaving most states or companies themselves to derive their own policies.

While the companies in the White House report say the California policy has been good for business, experts say there are three main reasons more states should consider offering their own expanded paid leave policies.

1. Employee Retention

For some employers, the cost of not offering paid leave is greater than the cost of offering it. “The really big cost, frankly, that’s occurring to employers now, is the cost of not having paid leave, meaning that they lose employees,” said Judith Warner, a senior fellow at Center for American Progress, a nonprofit public policy research firm based in Washington, D.C.

Most important, providing paid leave reduces employee turnover, a major cost to organizations. The cost to replace a worker in a midrange salary, for instance, is about 20 percent of their pay, according to a study from Center for American Progress.

Additionally, paid leave helps to attract top talent. For companies that are in an arms race for talent, generous work-life balance benefits such as paid family leave helps set an organization apart from others.

“Employers know that if they want to be able to attract these people, they have to be able to have the policies that matter to them,” Warner said. Even in countries that have generous leave required policies, many companies there still offer additional time to remain competitive in retaining and attracting the best talent possible.

2. Employee Engagement

Engagement is the idea that people will go above and beyond for the company they work for, according to Andee Harris, chief engagement officer at HighGround, an employee engagement software company based in Chicago. “[Employees will] work hard because they’re internally motivated because they do feel so strongly about the mission and vision of the company,” Harris said.

Paid leave impacts engagement because the benefit helps employees feel they’re being supported by the company, Harris said. That engagement is expressed through hard work, which improves productivity and profitability of the company.

Moreover, while an employee is on leave, others will have to take on their work. Harris said this is a great opportunity for the employees picking up the slack to grow their skills and career. “It gives people an opportunity to expand their role a little bit, take on a little bit additional responsibility, which really ties into the idea of having a growth mindset and being able to think about your next step within the organization,” Harris said.

To prevent employee burnout or resentment of the extra work, business leaders should train the workers and recognize them for doing a great job, Harris said. Leaders should also have open conversations to be sure workers aren’t overwhelmed by the additional work.

Taking on that additional work also helps with succession planning. While someone is out and the other is doing the work, it’s a great trial run for future promotions. This also helps management know what training is necessary in order for the employee to take on more challenging jobs at a later date.

“Given the talent wars that are going on in organizations, any time you have to recruit somebody outside, it’s expensive,” Harris said. “Any time you can promote somebody within your organization, that’s always going to save you money and time.”

3. Economic Implications

Going without paid leave poses a cost to families and the broader economy. Birth and caring for a child are expensive; the financial burden is large for individuals going without pay in those first weeks after birth. This struggle leads to increased stress, making the worker likely to have reduced engagement at work, and many mothers leave the workforce to offset the high cost of child care, Center for American Progress’ Warner said.

“We used to be one of the world’s leaders in terms of women’s labor force participation only 20 years ago, and now we’ve fallen behind,” Warner said. “This lack of participation by women translates into a real loss to our economy, a real loss to our GDP.”

Labor force participation by women in the U.S. stalled starting in 2000, according to the U.S. Department of Labor, and is now below other developed nations. “Paid maternity leave can positively impact working mothers’ wages and employment by encouraging them to return to work and continue their careers,” the article says.

California requires paid leave to certain employees for six weeks, earning 55 percent of their typical weekly earnings up to a certain threshold. This legislation increased weekly hours and pay of working mothers with young children by almost 10 percent. Improved pay and increased labor force participation of women will lead to a boost in the U.S. economy, according to the Labor Department.

California and a handful of other states are requiring paid leave. Depending on the location of a business, they might need to contribute to the cost of providing leave, which is a critique of government-mandated paid leave programs. But Warner advised to look at the bigger picture. “Remember that without public policy, the employers are footing the bill entirely,” she said.

Lauren Dixon is an associate editor of Talent Economy

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