In 2017, the District of Columbia passed the Universal Paid Leave Amendment Act of 2016 (the “Act”), which called for the creation of a paid-leave program for private sector employees who work in D.C. Earlier this year, the D.C. Office of Paid Family Leave adopted final regulations to implement this new paid-leave program. One of the most notable requirements implemented by the regulations is the imposition of the Act’s 0.62% payroll tax assessed on employers subject to the Act beginning today, July 1, 2019. Employers subject to the Act will have until July 31, 2019, to file the appropriate return and pay the tax without incurring a penalty.
With this upcoming deadline, employers with employees in D.C. need to determine whether they are subject to this tax, and if they are, timely report and pay the tax to avoid potential penalties.
Which Employers Are Subject to the Tax
All “covered employers” who employ “covered employees” must pay the tax.
A “covered employer” is any employer that performs business in D.C. and pays D.C. unemployment insurance taxes for its employees. While government employers are exempt from this definition, guidance released by the Department of Employment Services (“DOES”) states that non-profit organizations, many of which may opt-out of paying D.C. unemployment insurance tax, that otherwise meet the definition of a covered employer will not be exempt. The regulations and DOES guidance make clear that the number of covered employees employed by a covered employer has no bearing on the employer’s obligation to pay the tax. In other words, employing a single individual in D.C. will result in a filing and payment obligation. Guidance from DOES also clarifies that employers will not be able to escape the tax or reduce the amount of tax due by providing their own paid leave benefits. Employers may, however, adjust their paid leave offerings to take into account the benefits available to their employees who are covered by the Act.
All employees for whom a covered employer pays D.C. unemployment insurance taxes are presumed to be “covered employees.” This presumption may be overcome on a case-by-case basis. To do so, the employer must submit documentation to show that the employee in question (1) spent at least 50% of his or her work time in a single jurisdiction outside of D.C.; and (2) the employee’s work time in the non-D.C. jurisdiction was not incidental, temporary, or transitional in nature nor consisting of isolated transactions.
An employer’s liability for the tax will follow its liability for the D.C. unemployment insurance tax unless the employer can overcome this covered employee presumption.
How to Pay the Tax
The Tax must be paid quarterly and equals 0.62% of the covered employer’s covered employees’ gross wages from the previous quarter.
Prior to July 1, 2019, covered employers must register through the online portal with DOES. This is the same portal used for the payment of D.C. unemployment insurance taxes, so most employers only need to verify that their information, particularly contact information and power of attorney forms for third-party administrators, is up to date.
Starting on July 1, 2019, employers that file electronically will report the same wage information that they currently report for D.C. unemployment insurance taxes to DOES through this portal. Submission of payment of the tax will also be through this portal. For paper filers, employers will submit both the UC-30 to report their employee’s wages and the forthcoming PFL-30 to calculate and submit payment of the tax.
It is important for employers to note that the 0.62% of quarterly wages is calculated using their employees’ gross wages, not taxable. Additionally, unlike D.C.’s unemployment insurance tax, the paid family leave tax is not subject to a wage cap or limit. As with D.C. unemployment insurance taxes, the cost of the tax is solely the responsibility of the employer and cannot be deducted from employee compensation.
Penalties for Delinquent Payments
The deadline for paying the tax is the end of the month following the end of the calendar quarter.
Failure to pay the tax by this deadline will result in the accrual of 1.5% monthly interest on the amount owed. Additionally, if the employer is more than one month late in its payment of the tax, DOES will assess an additional penalty equal to the greater of $100 or 10% of the amount owed. This additional penalty is assessed only once and will not accrue interest.
July 1, 2019 marks the start of the first tax payment period, and employers will have until July 31, 2019, to pay the tax owed on wages paid in April, May, and June 2019 before they will begin to incur penalties for delinquent payments.
In addition to the tax, the regulations impose certain notice requirements on employers subject to the Act. However, these notice requirements will not take effect until January 1, 2020, at the earliest. The regulations for the paid family leave benefits are still being finalized. DOES will provide additional information on the notice requirement once these regulations have been finalized.
The regulations also require employers to maintain records pertaining to their obligations under the Act and in relation to the tax for at least three years. This would include the employee wage records that are required to be submitted in relation to the present July 1, 2019, payment period for the tax.
The District of Columbia’s paid-leave program is not the first of its kind, nor will it be the last. Other states, such as Massachusetts and Oregon, are also striving to implement their own state-administered paid-leave programs. The Massachusetts program was set to take effect today as well, but was recently delayed three months. Employers need to be aware of these developments and act proactively to avoid inadvertently triggering penalties under these new state paid-leave programs.