March 22, 2013
Concerning Proposed Int. No. 97-A
Testimony by James Copland, Senior Fellow and Director, Manhattan Institute Center for Legal Policy
Speaker Quinn, Chairman Nelson, and members of the Council and Committee, I would like to thank you for the invitation to speak to you today on Proposed Int. No-97A, the Earned Sick Time Act.
Since 2003, I have directed the Center for Legal Policy at the Manhattan Institute for Policy Research. The Center for Legal Policy seeks to develop and communicate thoughtful ideas on how to improve the civil and criminal justice system. I have authored numerous studies on how civil and criminal law affects businesses, and I have previously testified before Congress on litigation, legal enforcement, and capital markets. Before joining the Manhattan Institute, I served as a consultant for McKinsey and Company in its New York office and clerked on the U.S. Court of Appeals for the Second Circuit. I studied economics and political economy at the University of North Carolina and the London School of Economics, and I have JD and MBA degrees from Yale.
Beyond the Center for Legal Policy's work, the Manhattan Institute has long concerned itself with the economic vitality of the city in which it is housed, and my statement today draws from the work of colleagues at the Institute's Center for State and Local Leadership and Empire Center for New York State Policy, as well as the Institute's City Journal magazine. Nevertheless, I want to emphasize that my comments today reflect my own views and do not necessarily reflect the views of any of my colleagues or of the Manhattan Institute for Policy Research.
Summary of Analysis
The Earned Sick Time Act is well-intentioned but ill-advised legislation. The need for the proposed local law is minimal, given the prevalence of paid-leave policies at most City employers. The costs of this legislation would be real, particularly given the City's already-strained labor markets and other recent local laws likely to increase hiring costs and hurt economic growth. The enforcement of the proposed rules is problematic, given the institutional limitations of the City's Department of Health and the costliness, waste, and distortions inherent in private rights of action that would be created by the legislation.
The Absence of Need for the Proposed Legislation
An analysis performed by Ernst and Young for the Partnership of New York City, based on a survey of 708 large and small businesses employing 13 percent of the City's private-sector workforce, found that fully 88 percent of New York City's private-sector workers have access to paid-leave policies that can be used in case of illness. The study further found that businesses offering paid leave typically offered substantially more time than that included in the Earned Sick Time Act—on average, 8.7 days for large businesses and 7.1 days for small businesses—and small businesses in every industrial sector that offered paid leave gave workers at least five days of such leave.
Businesses not offering paid leave, according to the Ernst and Young-Partnership study, tended to be small (only 70 percent of small businesses offered paid leave, and only 62 specific paid sick leave) and fell disproportionately in certain economic sectors, such as construction, hospitality, retail, and certain educational organizations. That small businesses would be less likely to offer paid leave makes sense: such businesses lack sufficient scale to easily shift workers to cover missing employees or locate replacement workers, and in many cases the absence of a single employee can lead to the curtailment of operations and decreased daily sales. For construction businesses—by far the least likely to offer paid leave (52 percent)—missing employees can lead to project delays; such businesses typically hire replacement day-laborers on an hourly basis, such that it would make little sense to pay absent employees for the missed time—and these businesses are heavily unionized and policies are generally specified in collective bargaining agreements. Many retail and restaurant jobs do not lend themselves readily to "paid sick leave" policies because actual wage scales—short of commissions or tips—are very low; workers in such jobs would typically prefer to exchange shifts with colleagues as opposed to being paid wages falling far short of full expected compensation.
In short, businesses in New York City already overwhelmingly offer paid leave policies beyond those proposed in this legislation. Those that do not are constrained by size or sector from doing so in a cost-effective manner.
The Direct Costs of the Proposed Legislation
Ernst and Young estimated that an earlier version of this legislation would have direct payroll costs of $789 million annually, equivalent to an 0.30 percent increase in private labor costs citywide. Fully 60 percent of these costs would fall on businesses with existing paid-leave policies, and 20 percent of the costs would fall on small businesses. Certain sectors would face significantly higher burdens, such as construction and utilities, facing the equivalent of $0.48 and $0.35 in hourly labor costs, respectively.
The Council should realize that such economic costs would not simply punish business owners. Effective increases in employee benefits in the form of paid sick leave without concomitant productivity improvements would lead employers, when possible, to reduce other employee compensation in kind—depressing salaries or other benefits including health-care and pension costs. When such compensation compression is not possible, due to collective bargaining agreements or "sticky" employment contracts and arrangements, costs would typically be passed along to consumers, both directly (through higher prices) and indirectly (through reduced supply of goods and services—which would also, of course, reduce labor demand and employment).
The Enforcement Difficulties and Indirect Costs of the Proposed Legislation
The aforementioned direct costs of the Earned Sick Time Act, significant as they are, understate the problems with and costs of the proposed legislation. Primary enforcement authority in the legislation is vested with the City's Department of Health, which would seem poorly equipped to assess workplace leave policies. The legislation as written gives departmental regulators sweeping powers—including subpoena powers, audit powers, and the authority to conduct on-site investigations —based solely on employees' confidential complaints.
At least as troubling is the legislation's creation of a private right of action to permit the filing of lawsuits "for compensatory damages, injunctive and declaratory relief, attorney's fees and costs, and such other relief as such court deems appropriate." While such private enforcement might be intended as a useful adjunct to facilitate compliance—understandable in light of the Department of Health's lack of institutional competence to enforce the legislation—in practice the private-enforcement provision would tend to permit attorneys to file extortionate "shakedown" lawsuits.
The history of wage-and-hour and rest-break litigation in California, and under federal law, is instructive. In 2004, California passed the Labor Code Private Attorneys General Act, which permitted lawsuits against employers for violating the state's labor code. After the legislation went into effect, a flurry of lawsuits quickly followed, and the legislature quickly amended the provision to exempt notice-posting requirements and require employees to notify the state and their employers before filing suit —limitations notably missing from the Earned Sick Time Act. Notwithstanding these changes, California nevertheless experienced a "wage and hour class action epidemic," driven by "multimillion dollar settlements." Such claims, over time, have morphed into joint state-federal class action claims invoking the federal Fair Labor Standards Act; overall, such federal court actions have increased 400 percent since 2000.
It is important to note that such litigation is profitable for plaintiffs' attorneys even if meritless. The high costs of discovery and legal representation in U.S. litigation—coupled with the absence of fee recovery after a successful litigation defense (a feature of the American legal system notably different from the rest of the developed world )—makes small businesses highly susceptible to employment litigation, which has a settlement value well above expected recoveries. While large employers are able to fight back against such litigation by individual employees, they are potential targets for class action lawsuits filed by attorneys on behalf of multiple employees, which impose significant costs on businesses—and often do little to improve plaintiff class members' well-being, enriching only the lawyers involved in the litigation. And according to a study by New York's NERA Economic Consulting, litigation costs depress economic growth, much in the manner of taxation.
Further Economic Considerations
While the City has significantly recovered from the financial collapse of 2008—and for the first time in decade, by welcoming a net population inflow --the City's economic performance continues to lag national trends, at least for the least fortunate of the City's residents. The City began 2013 with an unemployment rate over 9 percent, well above state and national levels. Moreover, New York already faces a litigation climate among the worst in the nation: the state ranks 48th among the 50 states in commercial tort liability costs relative to the size of the state economy, and the City disproportionately accounts for the state's poor performance, based on jury awards and the City government's own remarkably high tort bill.
In summary, there is little rationale for the Earned Sick Time Act, and its costs clearly outweigh its benefits. The direct cost of the legislation are sizable, its enforcement unwieldy, and the indirect costs of the legislation—including particularly the private right of action it creates—significant. New York's economy remains behind the rest of the country in generating jobs, and its litigation climate is among the nation's worst. The Council would be well-advised not to adopt the proposed legislation.