Thursday, December 2, 2010

The Devil’s in the Details: the Family and Medical Leave Act and the Accounting Workplace

I write a monthly column for the American Institute of Certified Public Accountants. The following is my latest submission.

The Devil’s in the Details: the Family and Medical Leave Act and the Accounting Workplace

Mitchell Langbert, Ph.D.

With October’s unemployment rate at 9.6% and Russia and China claiming that they are going to drop the dollar as their currency of choice, one of the laws that may wound job creation deserves a fresh look.  The Family and Medical Leave Act (FMLA), passed on February 5, 1993, may at first glance seem to do little harm to efficiency but, at a second glance, it may.  A fast-paced unionized service firm like Southwest Airlines and a manufacturer like Hallmark Cards have protested the law, while the AFL-CIO stoutly defends it.  In academia, social workers argue that FMLA ought to be expanded and economists claim that the law’s employment and productivity effects are potentially beneficial.   But social workers and economists do not focus on regulatory complexity. There has been a suspiciously heavy FMLA litigation docket for a law with supposedly benign effects on productivity.  And with respect to regulatory costs, the devil is often in the details, even if the devilish details do not concern sociologists and economists.  

Andrew E. Scharlach and Blanche Grosswald of the University of California published a 1997 summary of the social work implications of FMLA in the Social Service Review.[1] Scharlach and Grosswald note that FMLA requires businesses with 50 or more employees to provide 12 weeks of leave for personal or family disability or the birth or adoption of a child. The leave may be unpaid but health insurance must be continued. The employee’s or an equivalent job must be held until he or she returns.  Records must be kept and notices must be posted.  They argue that the law should be expanded because it does not cover firms with fewer than 50 employees and because Swedish and other European employers offer more generous leave policies. 

According to Uric Dufrene and G. Richard French of Indiana University Southeast, roughly 80% of accounting firms in their Indiana-based sample have fewer than ten employees.[2] Since FMLA excludes firms with fewer than 50 employees, most accounting firms need not comply with it at all, although if Scharlach and Grosswald have their way all accounting firms will be added to the law’s purview.

DOL Regulations

On January 16, 2009 the Department of Labor (DOL) published new FMLA regulations.   According to DOL’s Website[3] employees can use leave for any period of incapacity such as periodic part-day visits to physicians and brief episodes of incapacity.  The regulations define “serious health condition” as involving continuing treatment, which in turn means, according to DOL:

 “(A) period of incapacity of more than three consecutive…days plus treatment by a health care provider twice, or once with a continuing regimen of treatment.”  

As well, pregnancy, serious chronic health conditions, and incapacity for which treatment is ineffective are eligible for FMLA leave. The regulations are complex but vague, a recipe for inefficiency and workplace disruption.

To be eligible for FMLA leave employees must work 1250 hours for the prior 12 months at a location where there are at least 50 employees.  But the 12 months do not need to be consecutive.  Breaks in service count if the prior employment was at least seven years prior to the leave, with the exception of military service.  Again, the DOL adds complexity that is bound to confuse. 

The regulations require that employers must post a notice explaining FMLA and include a similar notice in employment manuals, or provide the information to new employees if there is no employment manual.  The notice must tell the employee whether paid leave will be applied toward FMLA leave. Employers must notify employees whether leave will be considered FMLA leave within five days of learning of the employee’s intent to take a leave. 

The employer must inform the employee of the number of hours, days or weeks that will be applied toward his or her FMLA entitlement.  Failure to notify an employee that their leave counts as FMLA leave can increase the employee’s entitlement.  If a leave can be foreseen employees are supposed to give 30 days notice, but verbal notice as soon as practicable is all that is required when circumstances change.  To apply for FMLA leave the employee just needs to inform the employer about the leave and its timing.

Employees must follow the employer’s call-in procedures as well as provide “sufficient information,” some of the parameters of which the regulations describe in detail. Employees need not file a written application for the leave.  A verbal notification to the supervisor is all that is required. 

Employers can require certification of the serious condition. In fact, the regulations establish four certification forms, namely, for an employee’s illness, a family member’s illness, the need for a qualifying leave and the health condition of an eligible service man or woman.  In verifying the employee’s information on the forms, the employee’s supervisor is not permitted to contact the health care provider directly. Rather, the supervisor must use a go-between such as a human resource professional when following up a certification.  Employers can require recertification every 30 days or after the initially certified period of leave if greater. After the leave employers can require fitness for duty certification. 

Employers can require that employees use up paid leave, including vacation and sick days and employees can choose to do so if the employer doesn’t require them to do so.


In a 2005 article in the Journal of Corporation Law, which preceded the 2009 DOL regulations, Kenza Bemis Nelson[4] notes that there has been considerable litigation surrounding FMLA provisions, particularly the definition of serious health conditions and the employee notice requirements.  Looking at the Eighth Circuit, which covers the western strip of states going north from Arkansas to North Dakota, Nelson discusses cases such as Caldwell v. Holland of Texas, which mandated that a three-year old’s earache count as a serious health condition.  Quoting Nelson:

“(T)he Eighth Circuit offered a sharp warning to employers who are tempted to discharge employees when FMLA might be involved…The court held that an employer cannot avoid liability for firing an employee who took leave for a situation later found to qualify under the FLMA” (emphasis added).

As the law becomes murky and unknowable, costs of compliance rise and inefficiency is enhanced.

In the case of Rankin v. Seagate Technologies the Eighth Circuit held that FLMA can cover minor illnesses such as flu as serious health conditions.  In the case of Spangler v. Federal Home Loan Bank of Des Moines Spangler was repeatedly absent because of depression.  On one occasion she simply told a co-worker that she was taking off because of depression.  She failed to comply with the firm’s call-in procedures and was fired.

The Eighth Circuit held that by telling a co-worker that she was taking off there was sufficient notice even though this violated the firm’s call-in procedures (which DOL says can be required). The failure of the federal courts to pay attention to regulatory requirements is nothing new.  I noticed this repeatedly in a review of ERISA cases that I did in the early 1990s.[5]

Chamber of Commerce Protests

The US Chamber of Commerce devotes a page of its Website to its claim that FMLA has led to workplace abuse. Written before the DOL regulations, the Chamber argues that the definition of “chronic serious health condition” needs to be clarified and that the requirement for tracking of leaves of as little as six minutes ought to be eliminated.   The DOL’s 2009 regulations did not revise the definition, leaving the prospects for extensive litigation and lawyers’ fees bright, nor did it change the partial day leave requirements.

In a 1997 testimony linked to the Chamber site, Hallmark Cards states that its paid leave costs increased by 35 percent from 1993 to 1996 following the passage of FMLA and that employees have abused the Act by claiming that absences for other reasons were FMLA absences.  The firm quotes employees who say that FMLA is being abused by a small minority of shirkers.  In contrast, Ellen Bravo of the AFL-CIO says that FMLA should be expanded and that ten minute breaks ought to count as FMLA leaves of absence.  Indubitably, the AFL-CIO expects further bailouts.

Economic Devilry

In an elegant 1997 article in the Journal of Economic Perspectives, Christopher Ruhm[6] argues that the effects of FMLA might be minimal because of the law’s limited requirements and that it might even contribute to increasing efficiency because firms may contract with the median worker and so overlook the needs of employees who benefit from leaves.  Hallmark Cards, in contrast, argues that there are neighborhood or externality effects that Scharlach and Grosswald and Ruhm themselves overlook. As Freidrich Hayek pointed out in his 1945 American Economic Review article “Use of Knowledge in Society” central planners (and by implication regulators) lack the information needed to intelligently manage a complex economy from the center.    

The details of execution and management are too often assumed away by economists and sociologists.  But the Devil, and his leave of absence, is in the details.

[1] Scharlach, Andrew E. and Grosswald. B.  1997.  Social Service Review 71:3, 335-359
[2]Dufrene, U. and French, G. Richard.  December 2, 2010. “An Investigation of the CPA Firm Industry Across Indiana Metropolitan Areas.” Retrieved from
[3] US Department of Labor. “Frequently Asked Questions and Answers About the Revisions to the Family and Medical Leave Act, January 16, 2009.” Retrieved December 2, 2010.
[4]Nelson, Kenza Bemis. 2004.  “Employer Difficulty in FMLA Implementation: A Look at Eighth Circuit Interpretation of “Serious Health Condition” and “Employee Notice Requirements.” 30 J. Corp. L. 609
[5] Langbert, Mitchell. 1991.  Firm Compliance and Employee Voice under the Retirement Income Security Act of 1974.  Doctoral Dissertation. Columbia University Graduate School of Business.
[6] Chirstopher Ruhm. 1997. “The Family and Medical Leave Act,” Journal of Economic Perspectives, 11:3, 175-86

Wednesday, December 1, 2010

Managing Your Life in a Declining America

China's and Russia's announcement that they will use the ruble or the yuan to trade bi-laterally seems to have struck financial blogs, but few others, as important.  Market Watch writes in an understated tone:

>China and Russia will stop using the U.S. dollar to settle bilateral trade and instead use the ruble or the yuan, though the move is not meant to signal a challenge to the dollar, according to reports Wednesday. China's Premier Wen Jiabao and Russian President Vladamir Putin made reference to the new currency trade pact late Tuesday, following meetings in St. Petersburg that also saw the signing of bilateral trade and energy-cooperation agreements, according to a report in the state-run China Daily. "About trade settlement, we have decided to use our own currencies," Putin told reporters, according to the report. Earlier this week, China added the ruble to the list of currencies that can be traded against the yuan on its domestic exchange.

I searched the words "China Russia trade dollar" on Google and got 238,000 hits, but the leading hits were all financial blogs.  Moreover, the ostriches have proven eager to bury their heads in the central Asian sand.  Tyler Durden notes that Russia and China made a similar bi-lateral statement more than a year ago and nothing changed then.  Also, the dollar has risen since the announcement.

But the dollar has risen since the announcements of numerous momentous decisions that will depreciate it, such as the bailouts and the massive expansion of the monetary base in 2008. Wall Street's short-term faith in the dollar has over-ridden longer term logic since 2008. Unless the Fed decides to reverse its policies of the past ten years there is little reason to believe short term market fluctuations.  Of course, as investors we need to consider such fluctuations.     

It would seem that a decision to drop a long standing business practice will require adjustment. It would also seem that along with the dollar habit Russia and China may be concerned with US power.  How long did the abolitionist movement in the US continue before slavery ended?  Even in 1776 Jefferson wanted to include more aggressive statements against slavery than the Southern delegates to the Continental Congress allowed in the Declaration of Independence . If it took 86 years to abolish slavery, might it take a few years for the Russians and Chinese to switch to an alternative currency?  By the time they and other global players make the decision the markets will have digested the information. At that point dollars will be worth a small fraction of what they are worth today.  Hence, the head-in-the-sand response may prove to be insufficient.

There are several possible outcome scenarios to long term dollar depreciation and American economic decline.  First, the Fed's monetary expansion could work for another round. The economy will grow in a valid way, jobs will be created and the public will become wealthier.  The nation's jobs picture would improve and there would be little inflation. I don't think that will happen. The  Fed has not been successful in stimulating sound economic growth. Although the past twenty years saw considerable economic activity, most of it involved the creation of unstable, low-end retail jobs.  The high unemployment of today results from the economic illusion for which the Fed has been responsible.  The Fed not only creates illusion but also transfers a wealth to Wall Street and corporate interests as well as to privileged workers in government, construction and big business. The past 10 years have seen a massive increase in privilege to the wealthy because of Republicrat policies. But until recently the illusion has been sufficient to keep Americans happy. Blissful ignorance might continue despite the Tea Party.  If the Fed's monetary policies work, then the stock market will shoot up. I don't think that will happen in the long term, but I do think that there will be short to medium term strength in the stock market, say into 2011. After that, all bets are off. 

The second possible outcome will be that the Fed's policy works but causes significantly higher inflation. This would happen if  the commercial banks convert all of the money reserves the Fed  has created into loans. That would stimulate a high degree of unproductive economic activity similar to the sub-prime building of the last decade. Economists will say that the economy has recovered, but Americans will become poorer. If you recall the seventies, then you have a sense of what higher inflation feels like. But the inflation this time around may be worse.  This is the scenario I think will occur.

The third scenario is that the banks will not lend a multiple of the reserves that have been created and instead contract their loans. That would result in deflation.  The markets have been afraid of this scenario but it would turn out better for the average American (except for the unemployed).  Stocks and bonds would decline as would non-monetary commodities.  Gold and silver both seem to behave today as monetary commodities.  Hence, they may do as well in this scenario as under inflation.  However, agriculture, DBA would not. As well, the stock market will probably fall as profits and consumer demand decline along with the availability of money.  There will be high unemployment but the government will become increasingly paralyzed.  I do not think this will occur because there will be too much pressure on the money center banks and the Fed to purchase US debt. Even if the banks do not lend to the public, the Fed will continue to monetize the federal debt, and government will continue to spend in value-destroying ways, resulting in inflation or dollar depreciation.

A fourth scenario would be total economic breakdown.  This might occur if there is disruption to the power grid through terrorism or some other disaster and the government lacks the resources or competence to respond, a kind of global or national Hurricane Katrina.  I know people who fear this but usually what goes wrong is what you don't expect, not what you do expect.  If you have a year's supply of dry food in your pantry I personally wouldn't call you crazy but I don't believe you will need it. At present I do not have any dry food, silver bars or firearms.  But having a rifle and an ample supply of junk silver (pre 1960 coins or one ounce silver bars) might be a good idea. You likely would never need that stuff but if you have five thousand dollars to invest in an insurance policy, you might consider those steps.

It seems to me that at this point cash is still safe, although the days of cash may be drawing to a close.  Gold and silver are highly speculative because of investment or speculative demand, but their persistent rise suggests that a broader-based demand for gold-as-money is motivating the price increases.  I have about ten percent of my portfolio in commodities and I am going to allow the percentage to increase for quite a while, purchasing some additional amounts.  I am also taking care of whatever home improvements I can afford, and if I inherit an additional $100 grand will buy myself a Boxster S.  I aim to invest in what I know or plan to know.

The Madness of a Lost Society

The video's description of Americans is demeaning but accurate. The fears it expresses are premature but also accurate.  Perhaps worse than the average American's capitulation to Progressivism's depredations are the greedy stupidity of global elites. Enjoy.