Delusions of grandeur

This article originally appeared in the Fall 2025 issue of Thinking Minnesota magazine.

The reality of Minnesota Paid Leave

In their first paycheck of 2026, Minnesotans will see a new deduction. The 0.44 percent payroll tax, matched by another 0.44 percent paid by their employer — 0.88 percent in total — will fund the state’s new Paid Leave scheme, which will give payments to workers taking time off for their own health or that of family members.

Enacted by the “historic” “trifecta” in 2023, the scheme is popular. A January 2024 KSTP-TV/SurveyUSA poll found that 61 percent of Minnesotans supported Paid Leave. This echoed polling in the Winter 2023 edition of Thinking Minnesota, which found that 74 percent of Minnesotans supported the scheme, with just 23 percent against.

While paid family and medical leave sounds like a great idea in the abstract, there is evidence that Minnesotans like it less the more they know about it. For example, when Thinking Minnesota Poll respondents learned that the Paid Leave program will require a vast new state government bureaucracy of 400 full-time employees to operate it, 56 percent said they would be less likely to support it. This isn’t the only way that Paid Leave will make itself felt in Minnesotans’ lives. Starting in the New Year, we might find that having isn’t quite so nice as wanting.

The history of Paid Leave

Schemes like Minnesota’s Paid Leave date back to the 1940s, when several states established state-administered temporary disability insurance programs to provide workers with paid leave when experiencing a serious illness or injury. Beginning with California in 2002, states began establishing paid family leave programs, allowing workers to take time off to care for a loved one with a serious health condition or a new child. Thirteen states — now including Minnesota — and the District of Columbia have enacted such schemes.

The push for Paid Leave in Minnesota gained serious momentum in 2022. With a forecast budget surplus of $7.7 billion, the scheme was a top priority for Gov. Tim Walz. With Republicans holding the state Senate, Paid Leave stalled, but when Democrats won control of both chambers later that year, the stage was set for its passage.

However, the Paid Leave scheme, which is set to begin operation in January, differs from the one proposed by Democrats in 2022. In fact, it’s not even the same as the one enacted in 2023.

The 2022 proposal allowed “up to 12 weeks of benefits to care for a family member with a serious health condition, for a qualifying exigency, for safety leave, or for bonding and up to 12 weeks of benefits for an applicant’s own pregnancy or a serious health condition” with the total capped at 20 weeks annually. This was enacted in 2023 and will go into effect in January.

In 2022, the scheme was estimated to cost $781 million annually, funded by a payroll tax of 0.6 percent split between employees and employers. However, research shows that the incidence — who actually bears the burden — of payroll taxes (such as Social Security) is borne entirely by workers in the form of lower wages, which is likely to be the case with Paid Leave. The calculation behind this estimate was reasonably straightforward. It assumed an “Annual Usage” of 198,682, with each person receiving an average payout of $598 a week for 6.6 weeks. This yields a total annual cost of $784 million (198,682 x $598 x 6.6), which is reported as $781 million in the fiscal note.

By the time the scheme passed in 2023, its cost had climbed by 30 percent, to $1 billion annually. The assumptions behind this estimate were more opaque than previously but assumed 204,057 people using the scheme and receiving an average payout of $850 per week for six weeks (204,057 x $850 x 6 = $1 billion).

As the cost climbed, so did the tax necessary to cover it. Paid Leave was passed into law in May 2023 with a payroll tax rate of 0.7 percent, split equally between the employee and the employer.

Milliman, a “worldwide provider of actuarial and related products and services,” was commissioned by the state’s Department of Employment and Economic Development (DEED), the agency in charge of the scheme, to perform an actuarial analysis of Paid Leave. In October 2023, it released its findings. It projected significantly higher benefits and administrative costs than the state had estimated. In the first three years of the program, Milliman forecasted total Paid Leave expenses of $4.4 billion, roughly $628 million — or 17 percent — more than state officials claimed when passing the bill.

As costs escalated, so, again, did the tax necessary to cover it. Milliman found that the payroll tax rate would need to rise to 0.86 percent in year four of the scheme, representing a 23 percent increase in just four years.

Despite these exploding costs, the DFL trifecta expanded the program’s coverage in 2024. Applicants would now receive a payment during the first week of paid leave beginning in the second year of the program, a change that will cost an extra $300 million annually in 2027.

And again, as costs escalated, so did the tax necessary to cover it. When DEED asked Milliman to conduct another analysis factoring in this expansion, a 0.88 percent tax rate in the first year was recommended (by law it cannot go above 1.1 percent). This is 47 percent higher than the rate proposed in 2022 and 26 percent higher than the rate when the measure was enacted less than a year earlier.

Paid Leave in operation

What might Minnesota’s Paid Leave mean for the employees and employers involved?

Eligibility

Almost all workers are eligible for the scheme, except for those self-employed, independent contractors, and tribal nations, although they have the option to opt in. Workers must work at least 50 percent of the time in Minnesota to be eligible and have earned at least $3,700 in the last year. Workers who take paid leave will have legal guarantees that their role will be available when they return, provided they have been in the position for at least 90 days.

Workers can take medical leave for a wide variety of reasons. These include recovering from an illness, injury, disorder, or impairment. They will be eligible to take time off to heal, seek out treatment or evaluation, or recover, and those recovering from surgeries or pregnancy complications will also be eligible for medical leave.

Family leave will also cover a wide range of situations, such as the birth of a child, care for a loved one with a health condition, recovery from safety issues like domestic violence or sexual assault, or to support a family member called to active duty in the military. The law defines “family” very broadly. Not only does it include a worker’s spouse or partner, child (whether biological children, foster or adopted children, stepchildren, or a child raised in the household), parent or person who raised them, a sibling, a grandchild or grandparent, and in-laws, but anyone who counts on that person like a family member would.

Application

DEED recommends that applicants notify their employer in advance of leave requests but does not require it: The first time an employer learns of a worker’s impending 12-week absence may be an email from the state government. It will be the employer’s responsibility to find and pay workers to cover the absence.

Applicants must fill out an application with DEED, including medical documentation. Minnesota will be one of just a handful of states where applicants can apply for leave ahead of a birth or medical procedure, but they are required to follow up with medical paperwork confirming their reason for taking leave. Potential fraud in the scheme will be policed in the same way as it is with other state government programs.

Payout

Workers will only receive a percentage of their regular pay, the amount depending on their typical weekly salary. The scheme is redistributive. Those who have lower salaries or hourly pay receive more through the program — up to 90 percent of their typical weekly pay — while those who make more will receive a smaller percentage of their regular pay from the program. The most someone can receive is about $1,423 a week, the state’s average weekly wage.

Recipients can choose between receiving their money by either direct deposit or prepaid debit cards. Once again, potential fraud in the scheme will be policed in the same way as it is with other state government programs.

Opting out

If you like your current paid family and medical leave plan, you can keep it. Under Paid Leave, employers with leave programs that match or exceed the state offerings can opt out of the program.

There are numerous and significant obstacles to their doing so, however. These businesses will have to pay an accounting fee and must still submit quarterly wage detail reports to the state, as well as comply with the notice requirements. Their schemes will be overseen by a commissioner who will have the power to terminate such programs if they violate the rules. Violations warranting terminations could be as minor as the business failing to provide reports. Additionally, employers face penalties of up to $10,000 for record-keeping and other violations. These compliance costs will weigh more heavily on Minnesota’s smaller businesses than on its larger ones.

Many businesses currently offering paid leave schemes, either formally or informally, will find the cost of opting out of the state’s scheme too high, which is, no doubt, the whole point. This will have a significant impact on Minnesota workers, given how many are already covered by such schemes. The Minnesota Chamber of Commerce says that 80 percent of its members already provide paid family leave. The National Federation of Independent Business, an association of small businesses, says “The vast majority of small business owners provide flexibility for employees to pick up kids from school, attend tee ball games, and attend to family emergencies.” Many of those schemes and arrangements will likely be junked in favor of the state scheme.

Paths forward

Minnesota’s Paid Leave scheme is a major intervention in the state’s labor market, and it is one that will be felt disproportionately by its smaller businesses. It raises the cost of employing each worker, both with its new and ever-rising payroll taxes and by the necessity of hiring temporary replacement workers at short or no notice to cover their absences. In a state that already struggles with job creation — Minnesota ranks 38th out of 50 states for job creation since Gov. Walz’s inauguration in January 2019, and 31st for employment growth — this could be a problem.

Some concessions have been made to smaller businesses. If they have 30 or fewer employees and the average employee wage is less than 150 percent of the statewide average weekly wage, they are subject to a lower premium rate, 75 percent of the standard premium rate, or 0.66 percent. This does not compensate for the significant costs they will incur in terms of lost workers and replacements if they are part of the scheme, nor the additional compliance costs if they are not.

Smaller fixes are available. During the bill’s passage, Republicans offered four sensible amendments to the program.

First, they proposed limiting eligibility to full-time employees, as with the federal Family and Medical Leave Act (FMLA); second, they suggested limiting its application to employers with 50+ employees, as with the FMLA; third, they proposed deleting from the definition of “family member” the terms “individual related by blood or whose close association with the employee is the equivalent of a family relationship” and “up to one individual annually designated by the employee”; fourth, they sought to reduce the penalties on employers for record keeping and other violations from $10,000 per incidence back to $1,000, which was current law. There is little bipartisanship when one party holds a “trifecta,” and none of these amendments was adopted. They should be enacted.

Minnesota should look to emulate the 10 states that have voluntary systems providing paid family leave through private insurance. Seven of these states have adopted a legislative blueprint endorsed by the National Council of Insurance Legislators, which permits the sale of paid family leave insurance. These would be a good model for our state.

Minnesota should make it easier for businesses to opt out of the state Paid Leave scheme. And, when they do, their employees’ payroll taxes should be removed from the scheme as well: If they are not part of the scheme, why should they fund it?

With many of our state’s workers already covered by some form of paid family and medical leave arrangement, the “problem” the state scheme was enacted to solve was insufficient to justify the scale of the response: the vast new bureaucracy, the ever-rising taxes, and the thicket of compliance requirements. One or two years into the bloated scheme, how will Paid Leave be polling?