The California Legislature has recently adopted a paid family and medical leave program, in the form of "Family Temporary Disability Insurance" (FTDI). Signed into law by the Governor on September 23, 2002, FTDI provides "disability compensation" for up to six weeks for employees who need to take time off for family and medical needs. The Bill (Senate Bill 1661) passed by a final vote of 46 to 31 in the Assembly and 21 to 11 in the Senate. While this is the first such legislation in the nation, twenty-seven states have had similar or related bills under consideration during the last two years.
Such paid leave is the beginning of a trend, not an isolated occurrence, based on underlying social and economic forces, as well as recognition that 127 countries, including most of the European Union, provide some form of paid leave to working parents. Many countries have also passed similar laws that provide compensation to employees who need to take time off from work for other family emergencies. The United States is one of the last developed countries in the world that does not provide some form of compensation during a leave of absence for working parents. Nonetheless, FTDI creates significant challenges for covered employers, employees, and for legal and Human Resource departments. Below is an explanation of the key features of FTDI, some frequently asked questions, and a practical implementation guide.

What the New Legislation Provides

FTDI has the following key provisions:

• Six Weeks of Paid Leave: Effective July 1, 2004, FTDI provides up to six weeks of paid leave within any 12-month period, replacing approximately 55 percent of an employee's wages while he or she is on leave, up to a maximum of $728 a week in 2004 and $840 a week in 2005.
• Employee Funded: Effective January 1, 2004, employees are to begin contributing to the FTDI fund to build up an initial six-month reserve for expected claims. Employees may begin taking FTDI leave beginning on July 1, 2004. Initially the contribution rate has been projected to average $27 per year per employee; however, required employee contributions can be adjusted administratively up to a maximum of 1.5 percent as provided for in the Unemployment Insurance Code.
• Applies to Employers With One or More Employees Who Are Covered by SDI (or Equivalent Voluntary Plan): Rather than just employers subject to the federal Family and Medical Leave Act (FMLA) or the California Family Rights Act (CFRA) (50 employees or more), FTDI applies to employers who have employees covered by State Disability Insurance or an approved voluntary plan. This is consistent with the required contribution of all California employees; however, no employee can receive more benefits than he or she earned in wages during the base period for calculating benefits (generally, the 12 months prior to the quarter in which the claim is made).
• Covers Family Care Needs: A paid leave is available to care for a new child (birth, adoption, or foster care) or a seriously ill family member, which includes a parent, child, spouse, or domestic partner (FMLA and CFRA do not mandate leave to care for a domestic partner).
• Minimum Qualification Requirements: Qualifying for the paid leave does not require any minimum number of hours (1,250 hours in the prior 12 months under FMLA and CFRA), minimum length of service (12 months under FMLA and CFRA) before an employee qualifies for the leave, or minimum number of employees at the work site (50 or more employees at or within 75 miles of the employee's work site under FMLA and CFRA).
• Application Requirements and Procedures Similar to Current State Disability Insurance (SDI): An employee applies for FTDI benefits in the same manner as SDI benefits; moreover, anyone receiving SDI, unemployment insurance, or welfare payments cannot also receive FTDI benefits. The Director of Employment Development will establish filing requirements including a required certificate of medical eligibility of the serious health condition of the family member (this includes diagnostic code, commencement date, probable duration, and estimated amount of time the physician or practitioner believes the employee is needed, and a statement that the serious health condition warrants the care of the employee).
• Seven-Day Waiting Period: FTDI requires an employee to wait seven consecutive days before receiving benefits.
• Use of Vacation Pay: Allows an employer to require that an employee use a maximum of two weeks of vacation time before the employee receives FTDI benefits (one week is to be used to cover the seven-day waiting period).
• No Independently Guaranteed Reemployment: The new statutory provisions do not guarantee an employee who takes a FTDI leave an automatic right to reinstatement when the employee's leave is not covered by FMLA or CFRA; applicable reemployment requirements come from FMLA, CFRA, other applicable statutes, or public policy.
• Employer Notice Requirements: Employers are required to provide notice of the availability of FTDI benefits and leave to all new employees who are hired on or after January 1, 2004, and to all employees taking a leave beginning on or after July 1, 2004.

These provisions are in many ways more complex than they may seem in this list. Several significant funding and administrative issues will likely need to be further addressed as part of FTDI's 2004 implementation. Littler will issue updates on these developments as they occur.

Frequently Asked Questions

Since FTDI cannot be taken before July 1, 2004, is there any urgency in learning about and preparing to implement FTDI?

Yes. FTDI has attracted national attention and based on early news reports, is poorly understood. Everyone from CEOs to those on unemployment insurance have questions to ask. Employers are already short on time to make all the changes and decisions necessary to be ready for employee deductions starting January 1, 2004, and actual use of benefits starting July 1, 2004. The implementation of FTDI will require changes in employer policies, handbooks, workplace notices, and potentially the entire benefit programs offered to employees. In the practical guide for implementation several of these early steps are listed and explained.

For small employers with fewer than 50 employees can FTDI be ignored since there is no requirement to reemploy those who take this leave?

No. One of the greatest impacts of this new paid leave is on smaller employers. Eligibility for FTDI is based on the employees' past contributions to the disability insurance fund, not the size of the employer. The overwhelming majority of employees in smaller California companies and organizations will be eligible for this leave. At the same time employers with fewer than fifty (50) employees will not be mandated by CFRA or the FMLA to offer reemployment. However, this is not the end of the inquiry. If a smaller employer prohibited the taking of FTDI and/or terminated an employee for accessing this state benefit, it is likely that the employee would at least claim a termination in violation of public policy. On the other hand, a small employer dependent on the services of a key employee might be forced to hire a full-time replacement for someone gone for six weeks using FTDI. If hiring a temporary replacement would create an undue hardship on the small employer, the FTDI statute's lack of required reemployment would likely outweigh any public policy argument protecting the employee seeking the paid leave. Drawing a line between the above two situations will often be very difficult. The bottom line is to recognize that the mere absence of a reemployment requirement does not give the employer a veto right over the taking of FTDI leave.

If an employer is covered by the FMLA and CFRA and complies with those statutes, does the FTDI offer any greater rights other than creating a claim for up to six weeks of pay from the state-administered disability insurance fund?

Yes. Newer employees may not have been employed long enough to be eligible for FMLA or CFRA leave rights. However, these same employees could easily have the right to six weeks of pay under FTDI because of qualifying quarters worked for another California employer. Additionally FTDI covers domestic partners while CFRA and FMLA does not. While new employees and those with domestic partners would not be guaranteed reemployment from a family care leave, he or she can use the FTDI benefit. In the case of one taking care of a domestic partner, adverse employment action could be argued to violate the FEHA's ban of discrimination based on actual or perceived sexual orientation. As a practical matter the employer will minimize risk by evaluating reemployment using the same undue hardship standard available under FMLA and CFRA.

Is FTDI actually a new leave independent from the FMLA and CFRA?

No. However, as a practical matter it is helpful to think of FTDI as a separate leave running concurrently with CFRA and FMLA. Technically, FTDI is a benefits program for "workers who take time off work to care for a seriously ill child, spouse, parent, domestic partner, or to bond with a new child." However, this benefit has little meaning if an employee can never use it. Treating FTDI as a six-week potential leave may help establish consistent standards for its use, recognizing that by statute it runs concurrently with FMLA and CFRA leave. This avoids a situation where an employee might take twelve weeks of unpaid family care leave and then request six additional weeks of paid leave under FTDI. The Legislature mandated that the leaves must be taken concurrently.

Do employers outside of California need to know about FTDI?

Yes. Clearly if a non-California based employer has employees in California or has employees elsewhere contributing to California SDI, knowledge of FTDI is essential. Also other states are likely to adopt forms of FTDI, and it may benefit larger national employers to create policies that will integrate with paid family leave if and when such leave becomes available.

Will FTDI affect an employer's attendance requirements?

Yes. Most employers have reconciled their attendance requirements to make them consistent with FMLA and CFRA leave. To the extent that FTDI is running concurrently, it will not adversely affect any properly written and applied attendance requirements. However, when FTDI exists independently there could be a conflict. Our practical recommendation is to treat time taken as FTDI leave the same as CFRA leave for attendance requirement purposes. We recognize that this may not be legally required, but it avoids having to draw delicate legal distinctions prior to having court or administrative guidance on the full impact of the new legislation.

Does FTDI integrate with worker's compensation, SDI, and federal and state disability statutes?

Yes. If an employee is receiving worker's compensation, SDI, welfare, or private insurance payments in lieu of such benefits, they are not eligible to claim FTDI covering the same period.

Can the employer integrate paid sick leave benefits with FTDI to fully compensate an employee taking family care leave?

Yes. FTDI does not integrate with other state-provided compensation intended to replace lost income. However, many employer programs have integrated non-state-mandated programs with SDI. It is expected that an employer could pay the additional 45 percent of an employee's wage during such a leave. This should only be done after a careful review of the employer's programs by a qualified benefits specialist.

If an employer is currently using a voluntary program in lieu of SDI, can such a program be used in lieu of FTDI?

Yes. FTDI specifically provides that an approved voluntary plan may be used. The requirements for approval by the Director of Employment Development are essentially the same as for SDI. Such plans must be approved by a majority of the employees of the employer in California or employed in a separate establishment of the employer in California. It is expected that the existing large voluntary plans substituting for SDI will announce whether they will also undertake coverage for FTDI.

Will the cost of FTDI actually be an average yearly cost of $27 per employee?

No. Currently the estimate on the cost of FTDI equates to an average yearly cost of $27 per employee. While anything is possible, this cost estimate seems to be based on very conservative assumptions regarding the usage of FTDI. Very early discussions with a cross-section of California employers suggest that usage of FMLA and CFRA leave could increase tenfold. Indeed, in passing FTDI the Legislature recognized that it was the lack of paid leave that resulted in a majority of workers not taking family care leave. Currently estimates place such usage as low as 1 or 2 percent of employees. Additionally it is likely that current employer paid family leave will be integrated with FTDI adding to the expected claims. Independent of any abuses of the leave, far heavier use is expected than has been built into the current funding assumptions.

Should employers plan for the integration of FTDI with an employee's rights to use sick leave for family care or care of a domestic partner?

Yes. California law requires that employees be given the option of using up to half the sick leave accrued in a year for attending to the illness of the employee's children, spouse, parents, domestic partner, or the children of the domestic partner. If FTDI is allowed to work in the same manner as SDI, the employee may be able to claim sick leave for the first seven days and then use sick leave to supplement FTDI payments. Under this circumstance the employee may be able to maximize pay during such periods. Employers may find such programs to their advantage in that it might actually reduce the use of sick leave if the combination of FTDI and sick leave provide greater pay than can be reasonably used by the employee. Alternatively, employers may not want to encourage a greater absence of their employees. Meanwhile, employers may be required by California's kincare nondiscrimination provisions to make a portion of paid sick leave available even if taken to supplement FTDI. The integration of employer-paid sick leave and FTDI will be one of the immediate priorities of employers and their benefits counsel.

Is FTDI available for an employee who is merely wanted for "psychological comfort" by a family member who has a serious health condition?

Yes. One of the requirements for FTDI is a statement that the serious health condition warrants the participation of the employee to provide care. The Legislature confirmed that "providing psychological comfort" is an acceptable basis for warranting care. Also arranging "third party" care and direct care by the employee qualify as justifying the employees' participation.

If an employee has another family member ready and available to render care, can the employee be refused FTDI?

Yes. The statute makes this specific exception; however, "warranting care" based on psychological comfort might make it difficult to prove that another family member would have been able to offer the same or comparable "psychological comfort."

Is the definition of a serious medical condition the same as the one used in CFRA?

Yes. The definition used in both statutes reads:

[A]n illness, injury, impairment, or physical or mental condition that involves either of the following:

(A) Inpatient care in a hospital, hospice, or residential health care facility.

(B) Continuing treatment or continuing supervision by a health care provider.

Developing a Practical FTDI Implementation Plan

As the above questions and answers reflect, the complexity of FTDI, the difficulty of its integration with other statutes, and its ambiguities all promise to make learning about FTDI an ongoing project. It is not too early to start making decisions associated with FTDI and planning for its implementation as a payroll deduction commencing January 1, 2004, and as a benefit six months later.

• Evaluating the Expected Impact of FTDI on Your Business
  Employers should evaluate what impact this new law will have upon its current business. Will the company's ability to operate efficiently be hindered by employees taking this leave? How will the company strike a balance between valuing its employees' need to take leaves and its need to operate in a cost-effective manner? Will the company have to take new or additional steps to implement and administer FTDI leaves and benefits? Will maximizing the availability of this benefit to employees promote employee productivity? How should the company educate its managers, supervisors, and employees as to the intricacies of the new law? Answering these questions will help an employer determine the impact of FTDI.
• Making the Critical Vacation Usage Decision
  One of the most important decisions for any organization is whether to require employees to use vacation prior to becoming eligible for FTDI. Under the statute employers can require employees to use up to two weeks of paid vacation before FTDI. One of the vacation weeks will meet the seven-day waiting period for FTDI, so that FTDI benefits would be available immediately after the vacation time is used. Why is the required use of paid vacation such a critical decision? Most employees do not want to use vacation for any purpose other than vacation. If it is used for family care leave, it is likely that very little true vacation time will remain. Accordingly, requiring the taking of two weeks of vacation is likely to substantially reduce the use of FTDI leave, except in the most serious situations.
  The critical decision for the employer is to weigh the value of easier access to paid family leave against the negative economic consequences of having workers miss potentially several weeks of work per year. This decision involves issues ranging from employee satisfaction and productivity to the potential for unionization. The reality is that family leave is seldom used, and accordingly it has little impact on business. When this leave becomes paid, its use will dramatically increase and businesses will feel the impact. Each employer is given the opportunity under FTDI to open the door to this self-funded paid leave or to discourage entry by mandating that vacation time must first be taken. A possible compromise for many employers will be to require one week of vacation since the seven-day waiting period is required for FTDI. This provides some disincentive to take FTDI.
• Integration of FTDI Benefits With Other Benefits
  Under the Act, employees who are eligible to receive SDI benefits during a leave are not eligible to also receive FTDI benefits for that leave. Although an employer and employee may not use SDI to supplement FTDI benefits so that an employee receives the equivalent of 100 percent of his or her pay, the Act is silent as to the employer's ability to apply other paid benefits such as sick leave, vacation, or paid time off to supplement the employee's income. Thus, it would appear that an employer may institute such a requirement. Supplementing an employee's income while receiving FTDI benefits provides an employee with 100 percent pay while on this leave. Further, it also allows the employer to exhaust an employee's entitlement to additional time off and to minimize the amount of time an employee is absent from the workplace, so as to minimize disruption to the workplace.
  According to the Act, FTDI benefits are intended to operate similarly to SDI benefits. As such, it appears as if it is up to the employee to apply for FTDI benefits. If the employee chooses not to apply for these benefits, he or she will not receive these benefits during any eligible leave. If the employer does not require an employee to apply for these benefits, it is possible that an employee, who is not eligible for FMLA and/or CFRA, could choose to use paid time off, sick, and/or vacation time before applying for FTDI benefits (beyond the two weeks of vacation that the employer may require the employee to use). In essence, because it is up to an employee to apply for FTDI benefits, the employee could protract his or her absence from work by using employer-sponsored benefits and then receiving FTDI benefits. Thus, the employer must resolve the dilemma of discouraging early use of FTDI by requiring the taking of vacation versus extending the total amount of paid time that the individual can be off work. One helpful generalization is that those taking long leaves are more likely to have serious needs.
• Developing a Plan of Action and Implementing It
  Once employers have assessed the impact of this law on their businesses, and educated themselves on the interaction between FTDI leave and benefits and other leaves and benefits, they should develop a checklist of tasks to accomplish. For example, employers must revise their leave of absence policies, forms, and notices. Revisions to leave of absence policies, forms, and notices include, but may not be limited to, such information as:
  1. The fact that FTDI leave runs concurrent with FMLA leave and CFRA leave.
  2. The fact that the Act creates an additional leave benefit for employees not eligible for FMLA and/or CFRA leave, but that the Act does not entitle employees to automatic reinstatement after utilizing this benefit.
  3. Details on the interaction of FTDI benefits with employer-paid benefits such as vacation, paid time off, sick leave, and any other employer-sponsored benefits.
  4. Details on the interaction of FTDI benefits with SDI benefits.
  5. Details regarding filing for benefits and the seven-day waiting period to be eligible for benefits.
  6. If a voluntary SDI plan is being used, check with the plan administrator as to whether FTDI will be offered as an option or whether the employer will be required to participate in the state-sponsored system.
  7. Employers should also develop a plan to educate employees, managers, and supervisors as to their obligations under the law.
  8. Employers should plan to post the required notices and provide the required pamphlets to new employees and employees taking leave when the law becomes effective in 2004.
  9. Monitor procedures and required notices provided by the Director of Employment Development. It is expected that such information will be automatically sent to employers under SDI.

What Does the Future Hold?

Advocates for the new law have lauded the Act as preventing employees from having to make a choice between caring for an ill loved one and putting food in their families' mouths. On the other hand, opponents of the law are concerned that providing such a paid leave to employees is a "job killer," putting numerous strains on a small employer's ability to run its business.

Specifically, critics are concerned that providing paid leave will increase employees' use of leaves of absence. Researchers have concluded that the general trend in countries where paid leaves are provided to employees is that more and more individuals take advantage of these benefits. For example, the use of certain types of paid family leave has steadily increased in Norway. Indeed, the percentage of men using paid leaves related to the birth of a child increased from 1.2 percent in 1990 to 25 percent in 1995 and 27 percent in 1996. Such increased use has the possible effect of taking away vital or key employees from the workplace and inhibiting a business' ability to operate efficiently and effectively.

Critics of the law are also concerned that the current funding scheme for FTDI benefits will be underfunded. Proponents of the law insist that employee contributions, which are scheduled to begin on January 1, 2004, will be sufficient to support the fund beginning on July 1, 2004. The current funding scheme contemplates that for every one employee who takes a paid FTDI leave, 83 employees will continue to work (1.2 percent usage). Nevertheless, if the number of employees utilizing this new benefit exceeds projections, the system may crash and the legislature may be forced to amend the statute to require employer contributions, which were included in original versions of the bill, to sustain the fund.

Regardless of whether employee use of leaves will increase or employer contributions are required to fund the program, employers can expect to see new forms and notices from the State of California, explaining rights and obligations under the law. Employers can also likely expect the development of regulations to help administer and interpret FTDI benefits.

Avoiding Pitfalls and Traps

As with any new law that creates an administrative obligation on businesses, employers should be aware that the road to compliance may be fraught with pitfalls and traps for the unwitting. Therefore, employers are encouraged to consult labor and employment counsel when looking to the future and developing a plan of action for dealing with FTDI leaves and benefits. Additionally, they should take special care to avoid the following mistakes:

• Underestimating the new law's impact on the workplace and how often employees will use this leave.
• Failing to educate managers, supervisors, and human resources representatives on how to process requests for time off.
• Failing to maximize the economic benefit of the leave for the employer.
• Failing to develop a system that probably utilizes vacation and sick leave in conjunction with an FTDI leave.
• Ignoring the impact this law may have on future legislation, including the possible expansion of CFRA leave.
• Failure to evaluate whether FTDI or the application for this benefit is playing any role in planned discipline of an employee.

Garry Mathiason is a shareholder and Michelle Barrett is an associate in Littler Mendelson's San Francisco office. If you would like further information, please contact your Littler attorney at 1.888.Littler, info@littler.com, Mr. Mathiason at GMathiason@littler.com, or Ms. Barrett at MBarrett@littler.com.