Paid Parental Leave Should Be a Standard HR Policy. Yet, It’s Rarely Offered at All.
High Utilization, Higher Consequences
Speaking with corporate leaders, HR leaders, and benefits brokers, many view paid parental leave as a fringe policy yet include short-term disability as a core benefit. Why is that, when by far the #1 reason for claims under short-term disability insurance is pregnancy? It’s easily a third of claims and the number one reason many companies offer it in the first place. Additionally, for almost every pregnancy claim, there’s a partner that also needs paid time off, an uncovered doubling of the incident rate related to pregnancy.
Viewing paid parental leave as a non-core policy understates the frequency of employees having children and fundamentally understates the impact having a new child has on a productive employee, along with overall morale, loyalty, and company expenses. While hugely transformational to parents’ lives, the vast majority of companies’ parental leave policies treat having a new child as if birth or adoption were a one-time procedure with no ongoing ramifications after a few months let alone for a lifetime — or as if it were a short-term disability…. Almost every company needs to readdress how it responds to employees having new children because the insufficient paid time off and lack of resources for new parents ultimately accrues significant costs and consequences to each and every company. Currently, companies directly, albeit, unwittingly reduce performance and hinder career progression across 40 to 50% of their workforces on average through their approach to new as well as young parents.
90% of Employees Have or Will Have Kids…What Ancillary Policy Has Such Utilization?
According to the Social Security Administration, only a quarter of Americans will ever have a short-term disability. Most incidents will occur after 60 years old. On the other hand, nearly 90% of Americans have or want children. Most will have two before they’re 40. Thus, the likelihood of an employee having a new child is 6 to 10 times greater than a short-term injury or illness, and 100% of that risk is during their working years. Nearly 50% of companies offer short-term disability insurance with 42% of Americans covered while under 20% have access to company-paid parental leave, which has a median length of just 3 weeks.
We suspect such penetration of insurance for a low-risk incident but a lack of paid parental leave is a holdover from years ago. When fewer women worked in senior positions and fathers took a less active role in the caregiving of their new children, paid parental leave had less value for companies. Now, with a renewed focus on diversity and inclusion, more equitable caregiving burdens, and greater representation of women in senior leadership, the negative repercussions of not offering paid parental leave or relying on short-term disability as a proxy for paid maternity leave have become glaringly apparent.
Figure 1: The expected annual cost of not offering short-term disability insurance vs. not offering generous paid parental leave.
Poor Parental Leave Experiences Drive New Moms to Quit or Reduce Their Commitment to Work
Not only do employees need to take parental leave at far higher rates than they’d ever use any other ancillary policy, but they need to take months off to properly transition through the early phase of this life-changing event. The inability to even take sufficient time to properly adjust physically, emotionally, psychologically, even logistically drives at least one-third of new moms to quit their jobs within a year of having a child while those who do return, return less able to commit to work.
Research by the National Bureau of Economic Research has found that women who have children and return to work reduce their work hours by an average of 20% the first year after having a child. As a proxy for productivity, their earnings drop and remain 30% lower than if they never had a child. However, fathers experience little to no impact on hours or earnings. So, having children doesn’t inherently mean employees need to quit or have their careers derailed. The transition from worker to working parent just needs better management.
America currently loses over half a billion work hours every year due to new moms deprioritizing work after having a child; that figure doesn’t even include the work hours lost from the hundreds of thousands of new mothers that quit and leave the workforce altogether. Furthermore, as time progresses, moms that returned but took a step back from work receive fewer promotions compared to their male colleagues, contributing less than their potential. Companies directly bear the brunt of such repercussions and have a direct financial incentive to improve outcomes.
Why is this, though? Why do women experience such negative ramifications from motherhood, while fatherhood has a much more limited impact on men’s careers?
Companies lack the skills and resources to effectively handle the unique challenges of a productive employee having a new child. The lack of paid maternity leave of at least 12 weeks across the board, compounded by the lack of equal paid paternity leave forces mothers to take on the majority of the caregiving burden for longer than may be necessary, hindering their ability to effectively balance competing priorities and properly adjust to their new life. Yet, even if they had enough paid time off, most new parents lack the support tools to effectively manage the emotional, psychological, and logistical needs of welcoming a new child. The same way employers can’t merely offer reimbursement for dental expenses and expect an effective dental benefit, paid parental leave takes additional support, administration, and management to drive the most value.
Figure 2: New mothers are forced to take a step back from work due to companies’ inability to support their unique and critical needs, financial or otherwise, hurting their earnings and contributions to companies.
The most forward-thinking large enterprises not only offer paid maternity and paternity of 16 weeks or more but offer targeted coaching support to new parents and customized return-to-work plans. Comprehensive paid parental leave helps them retain over 90% of new moms vs. an average of 67%.
Furthermore, the National Bureau of Economic Research also found that, unsurprisingly, more family-friendly companies attract more young moms. On the flip side, family un-friendly companies, e.g. ones with poor paid parental leave programs, lose their employees to more family-friendly companies. Exit interviews may not capture that younger or prospective parents quit directly because of the family un-friendliness of the company, but the broader metadata does!
Counterintuitively, companies can reduce cash expenses related to turnover and salaries over the long term by providing more family and parent-friendly programs, policies, and support because parents value family support more than pecuniary rewards. The data shows employers can offer “less competitive” salaries and still see improved retention amongst sub-45-year olds.
Figure 3: Companies with family-friendly policies and programs attract and retain young mothers at higher rates, reducing costs and increasing company competitiveness.
Incentivizes Loyalty Amongst Younger Employees
Compounding the direct ROI from retaining new and current mothers alike, the ability to receive paid time off for an extended period of time after having a new child creates a direct financial incentive for an employee to stay with their employer for years longer. Younger employees that plan to have children will therefore stay with an employer specifically to take advantage of a generous paid parental leave policy. Companies receive years more tenure out of the generations derided for job hopping, markedly cutting turnover costs while maintaining output. With an expected cost of 50% of pay to replace an employee, retaining new moms and prospective parents saves hundreds of thousands of dollars per year even for smaller companies.
Paid Maternity & Paternity Leave has One of the Highest ROIs of Any HR Policy
The vast, vast majority of companies still have not done enough to provide for their new parents during one of the most critical junctures in their careers. A paid parental leave policy of 3 weeks does not suffice during such a critical time. Because 90% of employees will have children, the vast majority of companies will both lose young mothers and witness a significant drop in output from those that stay if they don’t integrate comprehensive paid maternity and paternity leave and new parent assistance and support. With its proven ability to retain and keep women on their career tracks, comprehensive paid parental leave programs drive short and long-term value that far exceeds the cost. As such, companies need to reevaluate their rewards programs and prioritize paid parental leave policies over current standard offerings or continue to lose productive, high-value employees.
Figure 4: Cost of not offering short-term disability insurance or paid parental leave vs. 12 weeks at 75% of pay via Parento.