Paid Family Medical Leave (PFML) Bonds

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What Are They?

As of this writing, seven states (New York, Connecticut, California, Rhode Island, Washington, Massachusetts, and New Jersey) as well as the District of Columbia have passed legislation to mandate employer-paid family medical leave for employees. These state laws typically provide broader coverage for a larger percentage of employees than is provided under the federal Family Medical Leave Act, which applies only to employers with 50 or more employees.

Eligible employees include those who need to take time off to:

  • Bond with a new addition to the family (whether by birth, adoption, or foster care placement)
  • Care for a seriously ill family member
  • Or for other approved reasons (such as active duty military service or the employee’s pregnancy)

In most states, the PFML program is an extension of the state’s short-term disability law. Employees who take paid family medical leave enjoy the added benefit of job protection, so they have a job to return to at the end of their leave.

Depending on the state, such programs are funded by employer contributions only, by employee contributions only, or by a combination of the two. Some states offer employers the option of self-insurance, while others require them to purchase coverage from a state plan by paying into a public trust fund.

Employers who choose to self-insure are required to purchase a paid family medical leave surety bond. The bond guarantees that the employer will pay PFML benefits to qualified employees, charge employees no more than the maximum allowable contribution rate allowed by law, or otherwise violate the terms of the surety bond and the state’s PFML regulations.

Who Needs Them?

Any employer who is required by state law to provide paid family medical leave benefits to qualified employees and chooses to do so through a self-insured plan will need to purchase a paid family medical leave bond. How the total bond amount required is calculated varies by state, but it is typically based on the number of employees to be covered and the specific benefits offered.

Companies that operate in more than one state that mandates PFL coverage at the state level will have to set up a PFML plan in each of those states for the employees who work in that state.

How Do They Work?

A PFML bond is both proof of an employer’s ability to pay benefits and a guarantee of lawful and ethical performance in managing their self-insured PFML plan. The three parties to a PFML bond agreement are:

  • The obligee. The state agency (often the state’s Insurance Department) that requires the employer to purchase the bond.
  • The principal. The employer purchasing the bond.
  • The surety. The company that underwrites and issues the bond

Anyone who suffers a financial loss as a result of the principal’s violation of the surety bond contract has the right to file a claim against the PFML bond. Examples of such violations include failing to pay benefits to an employee who is entitled to them or not protecting the employee’s job while on leave, resulting in a lower-paying position or a job that doesn’t match the employee’s skills and experience.

In the event of a claim, the surety will conduct an investigation to ensure that the claim is valid. If it is found to be valid, the surety will settle or pay the claim to avoid a protracted dispute. However, surety bond contracts indemnify the surety and place full legal responsibility for paying claims on the principal. Consequently, the principal is responsible for reimbursing the surety for any advance payments on claims.

What Do They Cost?

Surety bond premiums are calculated as a small percentage of the required bond amount—typically between 1% (for applicants with good credit) to 3% (for those with poor credit). Collateral may also be required in some cases.

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