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Web of leave laws creates headache for many employers

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Tracking and managing employee leave time is one of employers' biggest challenges given the federal- and state-mandated leave laws, workers compensation claims and employer-provided leave, say absence management experts.

The cost of employee absence can be substantial, amounting to as much as 8.7% of payroll, according to a recent study by New York-based Mercer L.L.C. That accounts for more than half the cost of health care benefits, which Mercer's 2009 “Survey of Employer-Sponsored Health Plans” estimated at 13.6% of payroll when the latest survey was released in April.

Moreover, lost productivity associated with employee absence can amount to 80% of an employer's total health-associated costs, according to the San Francisco-based Integrated Benefits Institute. The U.S. Labor Department estimates that more than $100 billion is lost each year to workplace absenteeism.

To make matters worse, employers that fail to comply with mandated leave laws face stiff penalties as well as the risk of litigation, experts said. According to the Alexandria, Va.-based Society for Human Resource Management, the average cost to defend a lawsuit filed under the federal Family and Medical Leave Act is nearly $80,000, regardless of the outcome.

To better manage this risk and its associated costs, more employers are outsourcing the absence management function to providers that are better equipped to keep tabs on the approximately 135 federal, state and local leave laws. In some cases, they also manage workers compensation claims that require employees to take time off from work.

A 2009 survey by Boston-based Spring Consulting Group L.L.C. found that three out of four employers want to administer employee leave consistently, and more than half—65%—are interested in outsourcing their leave management.

“Five years ago, employers asked whether we could do leave management. Today it's unusual that we don't have a proposal for short-term disability administration that doesn't also ask for a quote for total leave management,” said Marjorie Savage, director of absence management products at Hartford Financial Services Group in Simsbury, Conn.

The reason for such requests is the increasing number of leave laws; Hartford counts 135, each with different eligibility requirements and duration, she said.

“We used to call it FMLA, but we don't anymore because it's gotten so complex. As of today, every state in the union has some form of job-protected leave that's above and beyond federal FMLA,” Ms. Savage said.

“In some cases, state leave laws run consecutively to FMLA. Others have less stringent eligibility requirements than FMLA. Connecticut, for example, gives up to 16 weeks off, extending federal FMLA by four weeks,” Ms. Savage said.

California laws are especially problematic for employers, she said.

Aside from FMLA, employers also must offer up to 16 weeks of pregnancy disability leave under the California Fair Employment and Housing Act; 16 weeks of leave under the State Disability Insurance program; leave under the California Family Rights Act, which adds up to 12 weeks to the FMLA's 12 weeks (see chart, page 16).

These mandated leaves generally come on top of any corporate leave that an employer may extend to employees, Ms. Savage said.

Marcia Carruthers, CEO and president of the Disability Management Employers Coalition in San Diego, said the decision to outsource absence management depends largely on in-house expertise, the volume of claims, the amount of litigation over leave issues and corporate philosophy.

“If you have a large claims volume, you probably should outsource;” whereas “if you have a low volume, maybe you can handle it internally,” Ms. Carruthers said. “Then there's the question whether to outsource all or some.”

Among other reasons employers may want to outsource leave management are greater speed in handling, improved communications to employees and supervisors, better tracking and data collection, and enhanced privacy protection, said Michael Klachefsky, a principal and leader in Mercer's absence management practice in Portland, Ore.

A vendor specializing in absence management also can provide specialty resources, such as access to clinical support or legal expertise, that can expedite the claims administration process, said Laura Beckmann, vp of benefits services at UNUM Group in Portland, Maine.

Providers usually are better positioned to keep up with changes in leave laws as well as court cases that may influence how they are administered, Mr. Klachefsky said.

For example, the Labor Department in June clarified the definition of “son” or “daughter” for purposes of FMLA eligibility that it said extended the rights of the gay, lesbian and/or transgender community to take federally protected time off to care for their partners' children.

The San Antonio-based United Services Automobile Assn., which has more than 22,000 U.S. employees, outsourced its absence management to ensure consistency, compliance and confidentiality in handling claims.

“When you outsource, you should get objective, consistent administration. You are taking highly confidential transactional work and contracting with a third party to administer,” said Cheryl Pasa, executive director of USAA People Services. “I believe it is a better arrangement for all when a third party makes those decisions because they're looking solely at the facts. In an outsourced arrangement, the employee's supervisor or manager receives pertinent information relative to the absence, but does not receive employee medical information.”

Smithfield, R.I.-based Sperian Protection USA Inc. outsourced its leave administration in January to Boston-based Liberty Mutual Insurance Co. to ensure privacy and expedite the administration process.

“We were renewing our insurance contracts and the life and disability insurance came up and we wanted to find a way to simplify this and make it more effective,” said J. Michael Vittoria, vp of human resources at Sperian. “Then you do have employee privacy concerns, which would make it better for employees if you outsource. For example, if they have a dependent child with behavioral issues or addiction problems, it's not something they want to go in and talk to people at work about.

Because Sperian's largest location has just 300 employees, “everybody kind of knows everybody and it's very hard to maintain a level of privacy. There's this risk that information can be inadvertently disclosed,” he said, a risk that is avoided by using an outside absence management firm.

Outsourcing to a third-party provider also expedites the administration process, which ultimately should lower Sperian's absence costs, Mr. Vittoria said.

“By leveraging all of our STD, our LTD spend and paying the administrative fee, it was very affordable. At worst, it will be cost-neutral,” Mr. Vittoria said.

Cleveland-based Sherwin- Williams Co., with 28,000 U.S. employees and 3,200 stores across the country, outsourced its absence management function to UNUM to ensure consistency in the way claims were handled nationwide and compliance with myriad state disability laws, said Martha Lanning, director of health and welfare plans.

“Historically, we have had decentralized administration of FMLA primarily through HR professionals in the field,” she said. “We found that as the new regulations made FMLA even more complex, we probably weren't administering it consistently across all of our divisions. It was just too much for a busy HR professional to keep up with the changes. There was certainly the possibility of us not being in compliance in certain situations.”

Outside absence management providers often also are better equipped to handle intermittent leave and disability programs that allow employees to work part-time while they are on disability, said Greg VanDam, Dover, N.H.-based senior vp of disability claims and technology at Liberty Mutual.

“Over and over, we hear from employers that the burden of managing intermittent time off...is more than they can handle,” Mr. VanDam said.

“For example, say someone gets a diagnosis of cancer. They have surgery, receive STD for three weeks and then come back to work. Now the STD component is done, but under federal law they are allowed up to 12 weeks to care for their illness. Say they are receiving chemotherapy or radiation three times a week. The employee reports that time off so that it is tracked against their individual entitlement for leave,” Mr. VanDam said.

Additional administrative concerns are posed when LTD programs include partial return-to-work benefits, allowing employees to re-enter the workforce part time. In such cases, an employee can earn up to a certain percentage of predisability income and still receive LTD benefits. Absence management providers can take the burden of making those calculations and tracking the hours worked off employers' hands, Mr. VanDam said.