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Mandatory Paid Time Off: Something for Nothing Is a Myth

It is simultaneously fascinating and disappointing to read opinion pieces from bloggers advocating for mandatory paid time off (PTO) for American workers. It is easy to get the impression that some of them do not understand that nothing is free. The idea that mandatory PTO constitutes something for nothing is a myth. In the end, someone needs to pay for it. That someone is either employees, customers, or both.

Companies have long offered PTO as a benefit. They have been happy to do so because they can use the benefit as a way to recruit and hire the top talent in their respective industries. Companies have been willing to accept the financial burden of the PTO game in order to better compete for the best workers.

But guess what? No company eats the cost of PTO. Rather, PTO is considered a labor cost. Likewise, labor costs are added into the total cost of doing business – which is ultimately passed on to customers through pricing. So who is paying for PTO? It is a combination of employees and customers.

How Employees Pay

Before companies can decide what they can afford in terms of employee benefits, they need to look at the total cost of employment. In other words, how much do they actually pay to employ each of their workers? They pay salary, payroll taxes, benefits, etc. It all adds up. Most employers designate a certain portion of revenues to cover all their labor costs. Let us arbitrarily say 10%.

An employer is going to do everything within its power to keep labor costs at 10% or lower. If employees want more PTO, they must expect that their total compensation will be cut in other areas so that the company doesn’t exceed its 10% threshold. This is what makes mandatory PTO so risky.

New Mandatory PTO in Illinois

According to general agency BenefitMall, Illinois recently became the third state to approve mandatory PTO. Beginning in 2024, virtually every worker in Illinois will it be eligible for up to 40 hours of PTO, no questions asked. They can use the time off for any purpose – taking a vacation, renovating the house, caring for a sick relative, etc.

Let’s say you own a company in Illinois. You are now faced with a whole new financial burden by way of mandatory PTO. You’re not going to allow your labor costs to exceed 10%. So now what? You start looking at other ways to make up the difference. Perhaps future salary increases will be less generous. Or maybe you’ll decide to go with a less generous health insurance plan. Perhaps you were hoping to offer vision and dental, but now you need to scrap those plans.

The one thing your company is not going to do is absorb the cost of mandatory PTO. If you absorbed the cost of every measure put in place by government mandates, you would go out of business. Every time your costs go up, you need to pass those costs along to someone else.

Passing Them on to Customers

If a company does not want to cut back on other benefits to cover the cost of mandatory PTO, the only other option is to pass the higher costs on to customers. That means higher prices. If you live in Illinois, you are about to see this in real time with your state’s hospitality industry. Expect to pay higher prices at restaurants and hotels. Price hikes are coming. And when they do come, do not blame restaurants and hotels. It wasn’t their idea to saddle the industry with mandatory PTO.

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