In its current form, the recent law to increase maternity leave in the private sector to six months will end up being counter-productive and may actually result in a setback to equality in the work place. This law abdicates the responsibilities of government, pushing it onto the shoulders of the private sector. Rather than simplifying labor laws, this adds yet another burden onto the already groaning small and medium-sized businesses in India. It is reminiscent of the shortsightedness of past governments.

I applaud PM Modi’s commitment to female empowerment. The message to women is clear and correct – you are an equal and critical part of our economy. The Government recognizes that in order to be a world-class economy, we cannot leave 50 per cent of our talent locked up at home. In all these respects, adequate paid maternity leave is critical. It allows women to fulfil their commitment to child rearing, preserve family structure and still maintain job and career security. The intentions are admirable.

However, if the financial incentives of this scheme are not properly thought through, all these good intentions will be paving on yet another road to regulatory hell.

In many countries, maternity leave costs are borne by the Government (as a form of social security). The best countries offer additional subsidies and assistance to companies for hiring temporary substitute workers during maternity leave. This creates an insurance policy, protecting the small and medium-sized businesses (that make up the heart of the Indian economy) from the costs and temporary disruption of maternity leave. It ensures that companies are supportive of the policy and not constantly incentivized to undermine it.

If, however, as in the current law, the burden falls squarely on the employer, the incentives are perverse. A company is generally broken up into several departments that handle specialized functions. A medium sized company would have 2-4 people in an average department, small companies may have just one. The consequences of a couple of employees simultaneously going on 6 months paid leave could be devastating. Companies with tight margins would balk at the prospect of having to pay someone for half a year without any output. Since this benefit can be availed from the first day of employment, companies will rightly worry that, theoretically, someone could work for two months, go on leave, get paid for 6 months of not working, and then even quit and not return leaving the company high and dry. There is no minimum service period for qualification for the benefits and no guarantee of employee loyalty after.

In the end, businesses respond to financial incentives, and this law in its current avatar would mean that most businesses would be highly reluctant to hire young, recently married women in permanent positions. Women of a “child-rearing age” already face invisible barriers as companies calculate the risk of hiring someone that may very soon become entitled to many months of paid leave. This will only worsen as the costs of maternity leave now dramatically increase. Companies will have a financial incentive to hire on short term contracts (where benefits don’t apply), and those that discriminate against hiring young women will have a clear financial and competitive advantage. Cutting young women off from the best jobs at the start of their career, would be damaging to their careers and, most importantly, counter-productive to gender equality.

To make this act successful, the Government must address the primary concerns of employers – they must ensure that the costs of maternity benefits are borne by the government either through a national insurance scheme (like the ESIC) or even by allowing companies to claim full tax deductions for maternity benefits paid. In order to prevent abuse, the law must ensure that paid leave is compulsory only after a certain number of years of employment, and that it can only be availed only a limited number of times, with a suitable gap between each leave.

If these basic mistakes and disincentives are not fixed, this will just be another example of great intentions undone by poor policy.

[source;indianexpress]