On Tuesday evening, the D.C. City Council passed one of the most generous parental leave packages in the United States. Unless D.C. Mayor Muriel Bowser vetoes the plan, the pending law will impose significant burdens on small business and organizations in Washington D.C., limiting opportunities for the workers it was intended to benefit.
The new legislation would entitle full and part-time workers to eight weeks of paid parental leave after the birth of a newborn or adoption of a child. The bill also allows for six weeks paid leave for a worker to take care of an ill family member. Employees earning more than 1.5 times the minimum wage can expect to receive nearly 90% of the normal wages, capped at $1,000 per week during the leave period. Current laws, such as the Family and Maternal Leave Act and Pregnancy Discrimination Act, require businesses and organizations to provide unpaid leave and not to discriminate against an employee based on “pregnancy, birth, or related medical condition.” While these new policies might sound appealing to workers and seem to be fortifying existing law, there are potential pitfalls.
This paid leave will be administered through a new office to be set up by D.C.’s mayor, initially funded at $20 million, and will be financed through a 0.62% payroll tax increase, estimated to raise $250 million in new tax receipts per year starting in 2019. As Nobel Prize-winning economist Milton Friedman noted numerous times, a payroll tax is simply a tax on labor and taxing labor means seeing fewer jobs. Even marginally increasing the payroll tax, which at a minimum stands at 15.3% for Social Security and Medicare funding, only exacerbates the problem and discourages hiring new employees or expanding one’s business or nonprofit.
Starting in 2020, the paid leave benefit will be provided to all non-governmental employees in the District (though self-employed individuals can opt out) and workers for companies located in the District who spend at least half of their work time in the city. According to the Small Business Administration, in 2015, Washington, D.C. had around 66,514 small businesses that provided 229,425 jobs. Additionally, D.C. is home to 13,456 non-profit organizations which include religious charities, poverty alleviation groups, policy think-tanks, lobbying organizations, and labor unions. D.C.’s new parental leave law will negatively impact these sectors of D.C.’s economy.
Many small business and non-profits may be unable to afford the financial and productivity burdens imposed through the plan. Employers would be forced to choose between hiring a replacement worker (who would also immediately become eligible for the paid leave benefit) or operating short-handed, increasing the workload on the remaining staff. This law would force small business and non-profits to engage in employment activities that will not only hinder their ability to function, but also their capacity to meet the needs and desires of their customers or donors.
Employers also have a third option that appears D.C.’s lawmakers have not considered. Washington D.C. competes with Maryland and Virginia for small businesses and non-profit organizations. Increasing the payroll tax -- coupled with D.C.’s plan to increase the minimum wage to $15 per hour by 2020 -- could drive employers to more business and tax-friendly locations just a few miles away. The surrounding jurisdictions have lower overall tax rates and lower current and projected future minimum wages than D.C., thus making them attractive places for relocation, resulting in fewer employment opportunities within the District and lower tax receipts for its government.
The better alternative to this mandated paid parental leave plan is to allow the free market to develop and evolve solutions. Business and organizations by their very nature must respond to changes in demand if they are to survive. If there is a demand among workers for better parental leave packages, then businesses will do the best they can to provide such benefits in order to maintain employees and positive public appearance. Businesses like Spotify, IKEA, and Netflix have already responded to such demand and offer parental leave packages without any government mandate or direction.
Small business and organizations may not be able to afford extensive parental leave packages, but many can offer a combinations of benefits in accordance with their financial resources. These combination packages can be composed of flexible work schedules, the ability to working from home, temporary paid leave, unpaid leave, or a number of different options. These plans and their implementation can be negotiated among employee and employer and be crafted to benefit both the employee and the small business or organization.
Rather than having government force business into providing benefits they cannot afford and driving away local jobs in the process, allow the free market to respond to the calls for parental leave and craft solutions that are narrowly tailored to specific circumstances. If Washington, D.C. wants to keep jobs and not encourage business to look elsewhere, then politicians need to better analyse their policies and consider the unintended consequences of their plans.