State & Local Tax Alert Breaking state and local tax developments from Grant Thornton LLP District of Columbia Enacts New Payroll Tax to Fund Paid-Leave System On February 17, 2017, the District of Columbia enacted the Universal Paid Leave Amendment Act of 2016 (UPLAA), which will impose a 0.62 percent payroll tax on employers to fund a paid-leave system for individuals employed in the District. 1 While the tax will not have to be paid by employers until July 1, 2019, the passage of the UPLAA is a significant development that will need to be considered by businesses that employ personnel in the District, both from a financial and administrative perspective. At the same time, the UPLAA will provide employees working for District businesses significant flexibility to take paid leave when certain extraordinary events occur in their lives. Background Many workers in the District currently have access to job-protected, unpaid family and medical leave under the Family and Medical Leave Act of 1993 2 and the District of Columbia Family and Medical Leave Act 3 of 1990. 4 However, financial strain prevents many workers from utilizing the leave provided by these two Acts. 5 Additionally, access to both of these Acts is dependent upon employer size, employee job tenure and the number of hours the employee has worked in the previous year. 6 Against this landscape, the UPLAA was drafted to provide a paid family leave benefit for all private sector workers in the District that would insure workers against wage loss when they take time off from work to bond with a new child or care for a family member with a serious health condition. 7 New Payroll Tax Established The UPLAA establishes a new payroll tax which requires a covered employer to contribute an amount equal to 0.62 percent of the wages of each of its covered employees to the Universal Paid Leave Implementation Fund (Fund). 8 Release date May 9, 2017 States District of Columbia Issue/Topic Payroll Tax Contact details Joel Waterfield Metro DC - Arlington T 703.847.7595 E joel.waterf ield@us.gt.com Jeremy Jester Metro DC - Arlington T 703.847.7505 E jeremy.jester@us.gt.com Jamie C. Yesnowitz Washington, DC T 202.521.1504 E jamie.y esnowitz@us.gt.com Chuck Jones Chicago T 312.602.8517 E chuck.jones@us.gt.com Lori Stolly Cincinnati T 513.345.4540 E lori.stolly@us.gt.com Priya D. Nair Washington, DC T 202.521.1546 E priy a.nair@us.gt.com www.grantthornton.com/salt 1 ACT 21-682 (D.C.B. 21-0415), Laws 2017 (unsigned by District Mayor). 2 29 U.S.C. 2601 et seq. 3 D.C. OFFICIAL CODE 32-501 et seq. 4 Office of the Budget Director, Council of the District of Columbia, Economic and Policy Impact Statement: Universal Paid Leave Amendment Act of 2016 (December 2, 2016). 5 Id. 6 Id. 7 Id. 8 ACT 21-682, 103(a)..
Grant Thornton LLP - 2 A covered employer is broadly defined as any individual, partnership, general contractor, subcontractor, association, corporation, business trust, or any group of persons who directly or indirectly or through an agent or any other person, including through the services of a temporary services or staffing agency or similar entity, employs or exercises control over the wages, hours, or working conditions of an employee and is required to pay unemployment insurance on behalf of its employees by D.C. Code Ann. Sec. 51-103 of the District of Columbia Unemployment Compensation Act. 9 However, the United States, the District of Columbia, or any employer that the District of Columbia is not authorized to tax under federal law or treaty are not considered a covered employer. 10 A covered employer also includes a self-employed individual who has opted into the paidleave program. 11 A covered employee is defined as an employee of a covered employer who spends more than 50 percent of his or her work time for that employer working in the District or whose employment for the covered employer is based in the District and who regularly spends a substantial amount of his or her work time for that covered employer in the District and not more than 50 percent of his or her work time for that covered employer in another jurisdiction. 12 Categories of Qualifying Leave and Payout Formula The UPLAA provides paid-leave benefits for three categories of leave taken in the 52 weeks following a qualifying event: (1) qualifying family leave; (2) qualifying medical leave; and (3) qualifying parental leave. Generally, an eligible individual 13 can receive paid leave for up to a maximum of 6 workweeks within a 52-workweek period for qualifying family leave; 14 a maximum of 2 workweeks within a 52-workweek period for qualifying medical leave; 15 and a maximum of 8 workweeks within a 52-workweek period for qualifying parental leave. 16 9 ACT 21-682, 101(4)(A). 10 Id. 11 ACT 21-682, 101(4)(B). UPLAA provides special provisions for covered employers who are selfemployed individuals that are not covered in this Alert. 12 ACT 21-682, 101(3). 13 Eligible individual is defined as a person whose claim for paid-leave benefits is not based on employment for the United States, the District of Columbia, or an employer that the District of Columbia is not authorized to tax under federal law or treaty, who meets the requirements of this act and regulations issued pursuant to this act and: (A) Has been a covered employee during some or all of the 52 calendar weeks immediately preceding the qualifying event for which paid leave is being taken; or (B) Is a self-employed individual who has: (i) Opted into the paid-leave program established pursuant to this act; and (ii) Earned self-employment income for work performed more than 50% of the time in the District of Columbia during some or all of the 52 calendar weeks immediately preceding the qualifying event for which paid leave is being taken. ACT 21-682, 101(6). 14 ACT 21-682, 101(12). Qualifying family leave event is defined as the diagnosis or occurrence of a serious health condition of a family member of an eligible individual. ACT 21-682, 101(13). 15 ACT 21-682, 101(14). Qualifying medical leave event is defined as the diagnosis or occurrence of a serious health condition of an eligible individual. ACT 21-682, 101(15). 16 ACT 21-682, 101(16). Qualifying parental leave event is defined as events, including bonding, associated with: (A) the birth of a child of an eligible individual; (B) the placement of a child with an eligible individual for adoption or foster care; or (C) the placement of a child with an eligible
Grant Thornton LLP - 3 Generally, an eligible individual is required to provide written notice to his employer of the need to use paid-leave benefits provided for under the UPLAA. 17 Once an eligible individual files a claim for benefits under the UPLAA, within 3 business days of filing, the Mayor must notify an employer that a claim has been made. 18 No later than 10 business days after a claim for benefits has been filed, the Mayor must notify an individual of its initial determination on the claim. 19 The UPLAA provides a formula for determining the amount of the weekly paid benefit. For eligible individuals who earn an average weekly wage 20 that is equal to or less than 150 percent of the District s minimum wage multiplied by 40 are entitled to weekly paid-leave benefits equal to 90 percent of the eligible individual's average weekly wage. 21 Eligible individuals who earn an average weekly wage that is greater than 150 percent of the District s minimum wage multiplied by 40 are entitled to weekly paid-leave benefits equal to 90 percent of 150 percent of the District s minimum wage multiplied by 40, plus 50 percent of the amount by which the eligible individual's average weekly wage exceeds 150 percent of the District s minimum wage multiplied by 40. 22 The maximum weekly benefit amount is capped at $1,000 until October 1, 2021. 23 After October 1, 2021, this amount will be indexed for inflation. 24 Paid leave under the UPLAA that also qualifies as protected leave under the Family and Medical Leave Act of 1993 25 or the District of Columbia Family and Medical Leave Act of 1990 26 will run concurrently, and will not be considered additional leave. 27 Covered employers can provide eligible individuals with leave benefits in addition to those provided for in the UPLAA, but such benefits will not exempt the employer from their obligations under the UPLAA. 28 Individuals receiving unemployment benefits 29 and long-term disability benefits are not eligible for the paid leave benefits under the UPLAA. 30 individual for whom the eligible individual legally assumes and discharges parental responsibility. ACT 21-682, 101(17). 17 ACT 21-682, 107(a)(1). 18 ACT 21-682, 106(c). 19 ACT 21-682, 106(d). 20 Average weekly wage is defined as the total wages subject to contribution under l03 [of the Act] earned by an eligible individual during the 4 out of the 5 quarters immediately preceding the qualifying event during which the eligible individual's wages were highest, divided by 52. ACT 21-682, 101(1). 21 ACT 21-682, 104(g)(1). 22 ACT 21-682, 104(g)(2). 23 ACT 21-682, 104(g)(5). 24 ACT 21-682, 104(g)(6). 25 29 U.S.C. 2601 et seq. 26 D.C. OFFICIAL CODE 32-501 et seq. 27 ACT 21-682, 107(b). 28 ACT 21-682, 107(d). 29 ACT 21-682, 107(e). 30 ACT 21-682, 107(f).
Grant Thornton LLP - 4 Effective Date and Timeline for Implementation of Key Provisions of UPLAA While the law was enacted by the City Council on February 17, 2017, legislation is subject to a mandatory waiting period of thirty Congressional session days, in order to provide Congress an opportunity to weigh in on the legislation. The Congressional 30-day mandatory waiting period passed on April 6, 2017, and the law became effective April 7, 2017, though as noted above, the tax itself will not have to be paid by employers until July 1, 2019. 31 The UPLAA provides a timeline for implementation of key provisions of the paid-leave system, and the effective date of the legislation is important for determining when this implementation must be undertaken. The Mayor is charged with the task of establishing a paid-leave program to administer the paid-leave benefits. 32 Within 180 days after the effective date of the UPLAA, the Mayor is required to issue proposed rules to implement the UPLAA s provisions, which must then be submitted to the Council for a 45-day period of review. 33 Within the same 180-day period, the Mayor is also required to give notice to covered employers about how it will collect contributions to the Fund. 34 The Mayor must begin collecting contributions from covered employers by July l, 2019. 35 By July l, 2020, the payment of paid-leave benefits will begin. 36 Covered employers that fail to contribute to the Fund will be subject to the notice requirements, procedures, interest, penalties, and remedies governing the administration of the District Unemployment Fund. 37 By September 30, 2017, and quarterly thereafter, the Mayor is required to submit a project plan that explains in detail the timeline for the development of the software necessary to administer the paid-leave system. 38 By December 30, 2017, and quarterly thereafter, the Mayor must submit a document explaining in detail the requirements needed in order to develop all software necessary to administer the paid-leave system. 39 The UPLAA also contains provisions governing procedures for erroneous payments, 40 prohibiting retaliation by an employer against an employee for, among other things, requesting or using paid-leave benefits 41 and giving the Mayor authority to investigate employers to ensure compliance with the UPLAA. 42 The UPLAA also contains provisions for bringing a civil action against an employer for violations of the UPLAA. 43 Under the 31 ACT 21-682, 303. Notice was published in the District Register on April 28, 2017. 32 ACT 21-682, 102(a). 33 ACT 21-682, 102(b). 34 ACT 21-682, 103(c). 35 ACT 21-682, 103(d). 36 ACT 21-682, 104(j). Covered employers will not be responsible for collecting or tracking any taxes from individuals related to paid-leave payments received under UPLAA. ACT 21-682, 104(k). 37 D.C. CODE ANN. 51-104. ACT 21-682, 103(f). 38 ACT 21-682, 104(h). 39 ACT 21-682, 104(i). 40 ACT 21-682, 109. 41 ACT 21-682, 110. 42 ACT 21-682, 111. 43 ACT 21-682, 112.
Grant Thornton LLP - 5 UPLAA s appeals process, individuals can appeal a claim determination to the Office of Administrative Hearings. 44 Commentary While District Mayor Muriel Bowser allowed the UPLAA to pass without her signature, rather than vetoing it (which would have required a supermajority of the District City Council to override the veto), she did make known her grave concerns about the legislation. 45 According to Bowser, although the tax is expected to generate $250 million per year, it represents one of the biggest tax increases in recent history and comes at a time when the District is reducing taxes in an effort to stay competitive. 46 Bowser also noted that the UPLAA would require the creation of one of the largest DC government agencies to administer the program, but two-thirds of the benefits would go to non-dc residents. 47 The new tax requires undertaking a costly first of its kind technology infrastructure that will result in an outlay of $40-80 million before any tax can be collected. 48 The new payroll tax is also controversial because of the potential for the employer to shift the cost of the payroll tax to employees through eliminated or delayed salary and benefit increases. 49 Despite the enactment of the measure, it is not entirely certain that the UPLAA will ultimately be implemented. In part due to the concerns raised by the Mayor about the high payroll tax rate to be borne by District employers, another measure has been introduced by the District City Council as a potential alternative. On February 21, 2017, two members of the District City Council, Mary M. Cheh (D-Ward 3) and Jack Evans (D-Ward 2), introduced the Paid Leave Compensation Act of 2017, 50 creating a fair amount of uncertainty to the fate 51 of UPLAA. 52 The proposed bill requires small employers to pay 0.4 percent of an employee s wages to a paid-leave compensation fund on a monthly basis 53 while large employers are required to contribute 0.2 percent. 54 These amounts are much lower than the 0.62 percent tax rate under the UPLAA. Phil Mendelson, Chairman of the City Council, has indicated that hearings on both the UPLAA and the new proposed bill will be held in June. 55 44 ACT 21-682, 108. 45 Letter to the Honorable Phil Mendelson, Chairman of the Council of the District of Columbia, Re: Bill 21-415, the Universal Paid Leave Amendment Act of 2016 (Feb. 16, 2017). 46 Id. 47 Id. For example, a significant number of employees of District businesses covered under the UPLAA are residents of nearby Maryland and Virginia. 48 Id. 49 Office of the Budget Director, Council of the District of Columbia, Economic and Policy Impact Statement: Universal Paid Leave Amendment Act of 2016 (December 2, 2016). 50 D.C.B. B22-0130, Laws 2017. 51 Peter Jamison, Two D.C. Council Members Propose Overhaul for Paid-Leave Law, THE WASHINGTON POST, February 23, 2017. 52 Another bill, The Universal Paid Leave Compensation for Workers Amendment Act of 2017, B22-0133, was introduced on Feb 21, 2017 by Council members Jack Evans and Vincent C. Gray. 53 D.C.B. B22-0130, 113(a). 54 D.C.B. B22-0130, 113(b). 55 Maria Koklanaris, D.C. Council Members Introduce Alternate Family Leave Plan With Lower Tax on Employers, TAX ANALYSTS STATE TAX TODAY, February 23, 2017.
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