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Updated Nov 21, 2023

How Paid Leave Policies Can Help Small Businesses

Learn how paid leave policies can boost engagement and productivity.

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Kiely Kuligowski, Business Strategy Insider and Senior Writer
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This guide was reviewed by a Business News Daily editor to ensure it provides comprehensive and accurate information to aid your buying decision.

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Paid leave encapsulates several benefits, allowing employees to take a leave of absence for approved reasons. But what do these policies mean for workers and small businesses? Are they affordable, or do they unbearably balloon entrepreneurs’ budgets? Do they contribute to staff well-being and productivity? Read on to learn how paid leave policies can help your business.

What are paid leave policies?

Paid leave policies are regulations that extend job protection and paid time off (PTO) to workers for specific situations, such as illness and family emergencies. Different kinds of paid leave policies exist, including sick leave, family leave and parental leave. The exact provisions of these laws tend to vary widely locally and by state.

Here’s a quick look at two of the most common types of paid leave policies.

Paid family leave

Paid family leave policies generally create a fund to extend state temporary disability insurance programs supported by a small percentage withdrawn from every employee’s paycheck. These insurance funds are typically 100 percent funded by workers and don’t require any added investment from employers or taxpayers. Instead of offering fully paid days off, paid family leave insurance funds typically offer wage replacement, generally worth about two-thirds of the employee’s weekly pay. 

Karen White, former director of policy analysis and community engagement for the Rutgers Center for Women and Work, said five states currently offer a temporary disability insurance program that can be expanded to support paid family leave. For example, New Jersey’s paid family leave policy requires a mere 0.06 percent deduction from workers’ paychecks up to the first $156,800 in pay to support itself. That means the maximum deduction from each employee amounts to just $94.08 annually. 

In return, workers receive wage replacement at a rate of 85 percent of weekly wages up to a maximum of $1,025 per week. That amount, White said, will be paid to workers for up to 26 weeks under the current state law.

The policy doesn’t cost employers anything and is often viewed as a favorable employee benefit because it offers another layer of financial security for workers on leave. 

Did You Know?Did you know
Companies may not be aware of some ADA requirements for businesses, including ADA-compliant website rules and physical accessibility regulations.

Paid medical leave

Unlike paid family leave, paid sick time is usually an employer-supported expense; some state and local governments require businesses to offer it. Paid sick leave laws are designed to protect workers who fall ill or have loved ones who require care. In some states, the legal requirement is relatively minimal and just says that employees can take time away from work without fear of reprisal if they get sick.

“The thing about [paid sick leave] is that it is a basic standard,” White explained, citing New Jersey as an example. “In New Jersey, in the municipalities that have passed the law, workers are provided with five job-protected paid days off. You can carry these paid sick leave days into the following year. This level of protection is a minimal standard that necessitates few employer costs.”

However, because paid sick leave laws are implemented at the local or state level, they are different everywhere and can vary widely, even within the same area. 

How paid leave policies help small businesses

Research into paid leave policies has revealed significant employer benefits.  

1. Paid leave policies create more engaged, productive employees.

In New Jersey, researchers found that workers subject to paid leave protections had higher morale and productivity, and businesses that offer paid leave experienced significantly lower employee turnover.

“In return, the benefits for businesses … far exceed the costs,” White noted. “The research shows that workers are more motivated, they are more productive, they have higher morale. The employers are better able to retain workers, and they reduce their turnover costs. It really is a win-win.”

Additionally, new parents who received paid leave were more likely to remain employed a year after their child’s birth and less likely to require public assistance in general.

2. Paid leave policies yield better recruiting prospects.

Some prospective new hires may decline even the most promising job offer if paid leave isn’t among the employer’s policies. Incorporating paid leave policies into your business and clearly stating them in your job postings can help you recruit top talent. Additionally, when you offer generous paid leave policies, fewer prospective new hires will reject a job offer during the final recruitment stages. 

3. Paid leave policies create healthier workplaces.

Team members do their best work when they’re healthy. When you implement paid leave policies and include sick leave, you permit unwell employees to stay home when they’re potentially contagious. This means your other employees won’t contract the employee’s illness, thus keeping them healthy and capable of doing their best work. Plus, even without work in the picture, prioritizing the health of the people in your life is just the right thing to do.

Did You Know?Did you know
Paid medical leave can protect your business from presenteeism – when unwell employees come to work because they fear reprisal for taking time off.

Are U.S. employers required to offer paid leave?

The U.S. is alone among industrialized countries in that it does not maintain federal paid leave healthcare policies. The federal Family and Medical Leave Act (FMLA) requires companies with 50 or more full-time employees to provide unpaid time off to certain employees, but there are no regulations for smaller businesses. And there is no federal requirement to offer compensated time off. 

In many cases, this means workers who need to take time off to care for themselves or their family members must do so without pay or the job protections that many paid leave regulations offer to eligible employees. This leaves many people vulnerable, particularly low-income workers.

In recent years, a movement in local jurisdictions and state legislatures to implement paid leave policies has grown. While advocates of paid leave policies ultimately have their sights set on a uniform federal policy, many have settled for slowly filling in the gaps at lower levels. 

Implementing a paid leave policy for your company

Implementation has many moving parts. “The key to crafting a well-balanced paid leave policy is to ensure that your policy aligns with the mandatory requirements,” advised Dave Berndt, vice president of compliance and ethics at Southwest Key Programs. “Then it’s a matter of considering whether you, as an employer, want to add any additional coverage for your employees. For companies that have operations in multiple states, it can be a complicated process to comply with various versions of paid sick leave laws.”

Often, when a company does business in multiple jurisdictions with paid leave requirements, it might choose to adopt the most stringent requirements to ensure compliance across the board. Those operating in both jurisdictions with paid leave policies and those with no regulations might enact a company policy only where it’s required.

Ultimately, it’s a question of strategy. However, Berndt noted that while paid leave might represent challenges for employers, they should also view the changes as a positive opportunity to improve their team’s work-life balance.

“When states pass legislation mandating paid sick leave, this creates new regulatory burdens for employers,” Berndt conceded. “However, employers should also look at these new requirements as an opportunity to support their workforce, boost morale and provide a better work-life balance.”

For companies with locations in multiple states, the best course of action might be to adopt a paid leave policy with the most stringent requirements to ensure HR compliance across the board.

How software can help businesses manage paid leave policies

It’s one thing to develop and announce a paid leave program. It’s another thing to actually track employees’ accrued sick time and pay team members in accordance with your policy. You can automate these needs with the best HR software, the best time and attendance software and the best payroll software. Here are some examples of how these types of business software can help you manage your paid leave policies:

  • Gusto: Within Gusto’s HR software, your employees can request paid leave of various types. Gusto will indicate which type of leave the employee is requesting, and you can approve or decline it in one click. The platform will then automatically record the employee’s leave hours and pay them accordingly. Learn more via our Gusto HR review.
  • Paychex: Paychex’s payroll software is designed for businesses with extensive regulatory compliance needs, such as adhering to state and federal paid leave laws. With Paychex, you can also access HR professionals who can help you properly execute your paid leave policies. Our Paychex review details the additional features you receive when you choose this vendor for payroll processing.
  • QuickBooks Time: You can use QuickBooks Time to establish policy-based rules for your team’s paid time off requests and accrual within your time and attendance software. This way, you give employees full independence in managing their leave. Read our QuickBooks Time review to learn more.

Employees with paid leave stick around

Offering your team paid leave increases employee retention and leads to a healthier, more productive workforce. This is true whether or not you’re legally required to establish this type of policy. Plus, business software makes leave policies simple to set up and maintain. These are all great reasons to launch a paid sick leave program, but the best one is that it’s just a nice thing to do.

Max Freedman and Adam Uzialko contributed to this article. Source interviews were conducted for a previous version of this article.

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Kiely Kuligowski, Business Strategy Insider and Senior Writer
Kiely Kuligowski is an expert in project management and business software. Her project management experience includes establishing project scopes and timelines and monitoring progress and delivery quality on behalf of various clients. Kuligowski also has experience in product marketing and contributing to business fundraising efforts. On the business software side, Kuligowski has evaluated a range of products and developed in-depth guides for making the most of various tools, such as email marketing services, text message marketing solutions and business phone systems. In recent years, she has focused on sustainability software and project management for IBM.
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