Looming Federal Paid Leave Legislation Raises Important Questions for Employers Over Funding

May 07, 2021

With Congress mulling multiple paid family leave legislative proposals and a federal paid leave program seemingly on the horizon, questions remain regarding the best approach to how such a program—likely to be a UI-type insurance program—would be funded: through a payroll tax or general revenue?  Whichever option is chosen could have a major impact on existing employer paid leave programs.

The Building an Economy for Families Act, introduced by House Ways and Means Committee Chairman Richard Neal (D-MA), and President Biden’s American Families Plan joined the FAMILY Act (H.R. 804), introduced by Rep. Rosa DeLauro (D-CT) and Sen. Kirsten Gillibrand (D-NY), as the current leading legislative proposals for a federal paid family leave program. 

Payroll tax or general revenue?  While the American Families Plan has yet to articulate how its federal paid family leave program would be funded, the Neal bill and the FAMILY Act provide significantly different funding approaches.

  • The FAMILY Act would be funded through a payroll tax with contributions from both employers and employees, mirroring many state-level approaches to paid family leave.  Many multistate employers are already subjected to such payroll taxes in states with paid family leave programs. 

  • The Neal bill, however, would eschew any new tax on employers, with benefits and administrative costs instead being paid out of general revenue.  Additionally, it would provide reimbursements for employers with existing paid family leave programs, provided certain qualifying conditions are met.  This raises questions about its long-term viability—the proposal appears to rely on potential increased corporate taxes that could cover funding shortfalls.

The FAMILY Act's payroll tax may be more predictable, with few complaints from those companies that have experienced them in those few states that now have paid leave insurance programs.  The Neal bill would allow existing state programs to be maintained separately if those states choose to do so.  Employers in those states would not be eligible for reimbursements for their existing programs.

Outlook:  Enactment of a federal paid leave law in the relatively near future appears likely.  In the meantime, we are hearing that Chairman Neal's bill is increasingly gaining favor among House Democrats as the vehicle for paid family leave legislation instead of the FAMILY Act.  This may reflect the concerns raised among many Democrats about looking to employees to help fund the program.  Questions remain for employers over which funding approach is preferable.