United States: How San Francisco Employers Adjusted to Paid Sick Leave Laws

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Paid Sick Leave is a relatively new concept in the U.S. with regards to contingent workers especially. It has only recently begun to gain traction nationwide after a few localities began to enforce Paid Sick Leave laws for workers. San Francisco, California started this trend and passed into law Paid Sick Time within the City of San Francisco in 2006. The laws only went into effect, however, on June 6, 2007. That said, information on the effects that paid sick leave laws have on businesses, both small and large, is still limited. Given the geographical separation from the surrounding towns and cities, San Francisco and the implementation of the Paid Sick Leave laws in this microcosm is an interesting case study on the effects the laws had on both employers and workers in this already expensive and isolated city.

When instituted the San Francisco Paid Sick Leave Ordinance (PSLO) provided sick leave to an estimated 115,800 additional private sector workers within the city limits of San Francisco. These workers were now eligible under the law’s provisions but had previously lacked access to any paid sick days. Overall, a 2006 study estimated one-quarter of the city’s private-sector workforce gained paid sick leave through the ordinance.

The law was notable because it included all employees within the City of San Francisco, whether they were employed on a full-time, part-time or even a temporary basis. Time off was granted for health-related needs for the worker, but also the workers’ family members or other “designated person.” Around the same time as the PSLO went into effect, San Francisco also increased the minimum hourly wage to $9.36, a rate $1.36 higher than the State of California minimum wage at the time. A health insurance expenditure requirement also went into effect the summer of 2006 in San Francisco. The three new employer mandates implemented in that short timeframe shaped the perspective of San Francisco employers, with regards to the business climate in the city.

In a study of 26 San Francisco employers during the initial implementation period, research from March 2008 measured the effects on employer costs, staffing and operations overall. The study respondents included a wide range of organizations, from an employer with only one part-time employee to a national company with 10,000 employees in San Francisco alone. The sectors represented reflected those industries employing a high percentage of low-wage workers, such as the restaurant, retail, service and health /human services industries. Each company implemented the new policy in their own way whether by (1) expanding leave for all or some employees, (2) establishing a paid time off (PTO) policy, (3) replacing other benefits and compensation policies, and (4) changing accrual rates and probationary periods or by implementing a combination of those four strategies.

While most employers who were surveyed reported that they were able to implement the PSLO with minimal to moderate effects on their overall business and their bottom line, most reported an increase in labor costs. These increases ranged from minor increases in terms of accounting or tracking systems to manage the amount of leave time accrued and taken by employees to larger increases associated with either expanding existing policies or increasing benefits. Employers surveyed were quick to say that the costs associated with their perceived increase in labor costs included the increase in minimum wage and the new health care requirements. PSLO was the least expensive of the three to implement, in general.

Of the half of respondents who attempted to offset or minimize costs, ten employers reported that they passed costs on to the workers either by changes in employee benefits or by delaying wage increases. With the exception of minimum wage employees, whose pay was increased by new minimum wage laws, some employee had to wait longer for regularly scheduled wage increases; while others may not have received year-end bonuses, payouts for unused sick days or other employee benefits. Seven employers surveyed said that they raised rates for services or prices on items sold to customers, but noted that this was a combination of factors and not solely due to the increase in costs related to the PSLO. The majority of rate increases were reported in the restaurant, retail and healthcare industries.

As anticipated, small and medium sized businesses reported a larger impact on their businesses than large employers. Smaller organizations struggled to expand benefits to a significant portion of their workforce while absorbing the labor cost increases and administrating the tracking of the leave for each employee. An industry that had some of the most difficulty with the new policy enactments within the City of San Francisco is the restaurant business. The effects of a raise in the minimum wage (that did not account for positions where tipping allowances were common in other local areas, or allow for a decreased minimum wage for workers who received tips), coupled with PSLO, forced restaurant owners to seek other cost cutting measures.

To reduce the cost of labor, restaurants and other businesses responded in different ways. Shift and schedule tightening allowed some owners to avoid hiring as many part time employees. While some transitions part-time staff into full-time positions, most commonly through attrition but a small percentage of owners let part-time employees go and hired new full-time employees to replace them. Some owners opted to have all of their prep cook work done outside of the City of San Francisco by workers in other facilities. Then have the products driven into the City of San Francisco for the final preparation and serving, thus reducing the amount of San Francisco-employee time to preparing food. Other owners simply purchased food for workers to prepare that was pre-cut or partially pre-prepared to reduce the need for non-essential “back of the house” workers.

Many business owners were concerned that they would fail to afford the staff required to run their businesses with the same level of productivity they had achieved in years past. If they chose not to comply with the laws they risked legal action. The threat of being forced to close businesses completely due to non-compliance was very real, especially within this major California city. Businesses with fewer employees, and, therefore, lower labor costs, would stand a better chance of remaining open in the city. If forced to close, some owners (especially restaurants) feared that this would affect the quality of businesses within the city and thus the reputation of the city as a destination for luxury and top shelf customer service.

While few employers reported any early benefits from reduced absenteeism, lower turnover, or improved employee morale as a result of the paid sick leave ordinance, as time has passed the employers with workers within the city limits of San Francisco, restaurants in particular, have adjusted their business practices and employee engagement strategies to suit the cost of labor and business needs within the city and remain profitable. San Francisco is still considered a “food destination” nearly a decade after PSLO, and after several increases in the locality’s minimum wage, with many restaurants serving a wide variety of local, visiting tourist and commuter customers.