Founders typically delay investing in benefits until after raising a seed round. While it's unrealistic for a Seed company to provide the same benefits as a growth stage company, under investing in your benefits offering is likely to cause hiring challenges and employee frustration.
We recommend selecting benefits before jumping in to hiring efforts. Expect candidates to ask about benefits during the interview process.
Develop a Benefits Philosophy That Will Scale
When building a competitive benefits plan, consider doing the following:
- Come up with a philosophy that will scale for at least 2 years: Once you've instituted a benefit, it’s difficult to take away or significantly change it without causing major employee dissatisfaction.
- Take your competitors and target hiring channels into account: Consider what benefits the companies you are competing with for talent provide. Candidates will take these benefits as benchmarks when considering offers.
- Align your benefits with company beliefs and values: Benefits are a powerful tool for showing how your business values employees and cares about them as a person. Well-structured benefits also can help shape and emphasize company culture.
Use a PEO
Most Seed companies should use a PEO (Professional Employer Organization) to outsource HR, benefits, payroll, employee onboarding, and compliance. For companies looking to hire in non-US markets, consider using a global EOR (global employer of record). They function similarly to a PEO and allow for easy management of global employees.
Common US PEOs for Seed Companies:
Common Global EORs for Seed Companies:
Medical, Dental, & Vision Coverage
The below data represents benchmarks for Seed-stage venture backed companies.
- Competitive Minimum: 50% coverage for employees + no mandate for dependents (don’t recommend)
- Typical: 80-100% coverage for employees + 50% coverage for dependents
- Best-in-class: 100% coverage for employees + minimum 50% coverage for dependents
❗Disclaimer: This document is meant to be informational and should not be considered legal advice. Please work with your legal counsel before finalizing any policies.
Employee benefits typically represent the second largest expense for a company (the first being salaries). Managing the high cost of healthcare and prescription drugs can be challenging for companies as they try to build the competitive benefits program they need to attract and retain talent.
Going beyond just offering the right plan design and employee contribution model, people-first companies need to focus on executing a total rewards strategy that balances costs with employee satisfaction.
Key Questions to Ask
Below are five key questions to clearly define before setting up a benefit plan. Whether using a broker or PEO, these questions will help you set yourself up for success.
How many people (employees, partners, spouses, and children) will be on the plan?
Estimate how many people will be on the plan in six months. The types of benefit plans your company is eligible for vary depending on the number of employees and dependents on the plan. Typically, if there are less than 100 people, you’ll be on a small group plan. If more than 100 people, large group plans could be an option. It can be helpful to anticipate your headcount growth plan in this number, too.
How much investment (time, money, creativity) can you put into your benefit programs?
This question helps determine which type of model (PEO or broker) works best for your company. The most hands-off model is a PEO, and the most hands-on model is to partner with a benefits broker to help you design your plans internally. Pros and cons of both models can be found later in this guide.
What types of benefits are important to the team in order to inspire and attract talent?
The standard issue benefits are medical, prescription drug, dental, vision, life insurance, and disability. Additional benefits can be added such as pretax savings accounts - Flexible Spending, Health Saving, or a 401(k) retirement savings plan. These plans are typically low cost to set up and provide employees options for tax savings.
Despite the cost, time, and effort put into the plans listed above, this is often times not enough to inspire and attract the best talent. Programs that provide wellbeing, mental health, women’s health, financial wellness, fertility, family & caregiving, and other inclusive benefits that align with your employee needs and company values should be added over time.
Take your competitors and target hiring channels into account. Consider what benefits the companies you are competing with for talent provide. Candidates will compare benefits packages when considering offers.
How can benefit programs align to company values or what’s important to the team?
Benefits are a powerful tool for showing how your business values employees and cares about them as a person, essentially, “putting your money where your mouth is”. Well-structured benefits also shape and emphasize company culture.
It’s important to listen and understand what your employees value. Pulling in benchmark data and using employee surveys to drive decision-making around benefits helps increase the ROI on the benefit programs you choose to roll out.
Are you managing benefits for a global team?
When managing a globally distributed workforce, leaders are often faced with evaluating total compensation, benefits, and perks, balancing local market practices with global consistency.
It would be wise to partner with a Broker or PEO who can help develop a global benefits strategy, and help you navigate key decisions on how to design your benefit packages by country. For example, most countries outside of the US require pension matching contributions so you will have to match retirement contributions in those countries to be in compliance. However, companies will have to weigh their financial ability with their desire for internal equity when thinking about whether they will offer a 401(k) match in the US as well.
If you do not have the internal resources to manage this, global brokers and Global EORs (such as Oyster, Deel, Papaya Global, or Remote) can help you navigate what competitive benefits look like across countries. Papaya Global offers a free CountryPedia resource to help you understand the statutory (required) benefits in each country. More info on Global EORs is below.
Once you hit the employee minimum (typically 3-5 full time employees), we recommend using a PEO to save time, headaches, and money. Remote-first and distributed companies should use a PEO to avoid the complex compliance requirements that arise from having employees in multiple states.
EORs are the best way to manage non-US employees. Most seed companies start by hiring contractors, then moving to a full EOR product once they have 10+ employees in a given country. Platforms like Deel, Papaya Global and Remote.com all manage contractor payments.
Broker vs. PEO
Depending on the type of benefits administration you need, either an insurance broker or a professional employer organization (PEO) may be a better match for your business.
A PEO (Professional Employer Organization) is a 3rd-party firm that provides services to small and medium-sized businesses (SMBs) through co-employment, the PEO becomes the employer of record for tax purposes through filing payroll taxes under its own tax identification numbers.
The most common practice for early-stage companies is to use a PEO as it allows you to provide benefits and manage payroll without hiring a dedicated HR manager to do so.
When to Use:
When you don’t have time or the internal resources to manage all the aspects of onboarding, benefits, payroll, and compliance.
A PEO is Responsible For:
- Providing benefits to your employees
- Administering and managing your benefit plans, including FMLA
- Processing payroll (payment and reporting of wages, issuing and filing W-2 forms, determining proper exempt/non-exempt classifications, etc.)
- Preparing, filing, and depositing payroll taxes (federal + states)
- Investigating and managing workers compensation claims
- Recruiting and hiring
- Administering unemployment
- Assisting with compliance and regulations
- PEOs give you the opportunity to offer best-in-class benefits at a lower cost for the company. They offer meaningful savings on health insurance for small businesses (less than ~ 100 employees) as PEOs provide employees with health coverage at the same affordable rates as large companies (economies of scale). PEOs are legally capable of bargaining for health plans as if they were businesses with thousands of employees. This means a PEO’s health insurance options are usually cheaper than an insurance broker’s. You can also choose to offer a broader set of benefits including - life insurance, disability, fertility, 401k, etc.
- PEOs take on some of your company’s responsibilities as you outsource part of your processes.
- Given many administrative and compliance tasks are outsourced, if you have limited HR resources, this frees up your HR team to focus on employee experience programs, such as onboarding, performance, and engagement.
- The PEO will help you manage employee onboarding tasks, benefits questions, and open enrollment.
- They will help you anticipate compliance issues and will help you navigate state-specific laws & policies.
- A single PEO will likely carry plans from just a few providers. As a result, it offers a limited range of plan options. PEOs aren’t well-suited to creating benefit programs customized to their clients’ specific needs. PEOs’ one-size-fits all approach may be a problem as you grow.
- When you join a PEO, you become part of a large benefits pool. You can no longer make decisions about specific details of your benefits plan. You are still able to choose which benefits to offer and how much employee vs. employer pay, but you are not able to control what is/ is not covered or who the provider will be.
- If PEO fees are based on a percentage of total payroll, using a PEO can get very expensive for companies with large and growing payroll and/or highly compensated employees. Costs can also get confusing if they bucket together payroll, taxes, workers’ comp, liability insurance, admin fees, etc.
- PEOs require a legal structure known as “co-employment”, in which your employees are also the PEO’s employees. From this arrangement may arise several problems:
- Poor communication from either side can impact HR operations.
- Both entities can be found legally responsible for one’s mistakes.
- Conflicts can be hard to resolve if one entity doesn’t fulfill what is legally expected from them.
- To protect themselves, PEOs require client companies to adopt their policies and procedures. As a result you don’t have total autonomy to customize many of your essential internal processes.
- Possible security issues with the PEO’s system (personal information, privacy rules, etc.)
- Even though PEOs provide a larger scope of HR services than brokers, you still have to recruit, hire, train, evaluate, motivate, engage, manage, retain and terminate your employees.
- Not all PEOs offer the same services, so employers must carefully select the right one and make sure you know what the PEO is responsible for versus your internal team.
- It takes proper planning and internal resources to transition off of a PEO. You will need to have dedicated HR and Finance resources to take on the responsibilities the PEO was handling, i.e. payroll, taxes, benefits, onboarding, offboarding, and compliance.
- Sequoia One
- TriNet (not recommended)
- ADP (TotalSource)
- Gusto (can be used to administer benefits and payroll, but is not a full PEO so admin/compliance support is needed)
An EOR (Employer of Record) is a third-party company that takes over all the employment tasks on behalf of another company. This allows non-local companies to create geographically distributed teams without setting up operations within each operating country. EORs reduce costs and time for companies and minimize the liabilities around local employment laws.
When to Use:
If you are testing the viability of a new market, either as a source for potential revenue or talent, they can employ workers through a third-party Global EOR. The EOR will employ your talent, can provide them with a competitive benefits package, and ensure the proper deductions are contributed for taxes and local programs such as national healthcare and pension.
- A Global EOR is ideal for companies looking to hire a small number of people on a short-to-mid term basis.
- The EOR assumes responsibility for payroll, taxes, healthcare, and all other areas of legal compliance, but this, of course, comes with a cost. This makes an EOR a less risky option than hiring contractors but requires additional budget to support.
- An EOR is not a long-term solution for companies hiring globally as some countries put restrictions on the time employees can be employed through a third party. For example, Germany limits the use of EORs to 18 months.
- EORs may start to be less cost-effective once you exceed 15-20 employees in that country. If your presence is approaching 10+ workers in a given country, it may be time to consider direct employment through an entity.
- Although your employment, benefits & payroll needs are covered by the EOR, there is still typically up-front work needed on behalf of the HR, Finance and Legal teams to review the employment contract, select competitive benefits, identify local holiday calendars and other employment programs, and identify other potential legal & financial risks.
Common Global EORs:
A broker is a firm that has information about various employee benefit options, and can help you narrow down your offerings by providing their input and expertise on the matter.
When to Use:
Consider working with a broker when you have someone in-house that can manage your benefits program, renewals, open enrollment, and the broker relationship.
A good broker will provide the following:
- Benchmark data, trends and assistance in choosing insurance
- Advice on changes to benefit packages and creating a multi-year plan/roadmap
- Assistance with employee communications related to benefits enrollment and ongoing employee education
- Contract review and negotiation, helping to minimize costs
- Assistance in resolving benefits issues that arise
- Analysis of your existing benefits and claims
- Compliance checklists, guidance, and support
- Insurance brokers are highly knowledgeable about the healthcare landscape. Brokers work with many insurance networks/carriers and know the ins and outs of most providers. As a result, they can identify the most suitable plans for you and your employees and help resolve issues when they arise with the carriers.
- Brokers can offer tailored, highly customizable options to your employees in terms of benefits plans.
- They act as an extension of your team to tackle benefits questions. They are an advisor for all things benefits-related.
- They take on some fiduciary responsibility regarding the company’s responsibilities and legal obligations
- You should vet that your broker works with similarly sized companies and deeply understands your industry.
- Brokers are paid commissions by insurance carriers so they may not be incentivized to provide you with the cheapest benefit plans even if they fit your current needs (the higher the premium, the higher the commission). To avoid this conflict of interests, some brokers have now chosen to negotiate flat fees paid directly by employers.
Questions to Ask Your Benefits Broker:
- What is their method for helping you control healthcare costs? Your broker should use data analytics and benchmarking to determine how your premiums compare to similar companies’ premiums.
- How do they determine the best coverage for you (carriers, plans, options)? How many carriers will they access for your specific needs? Why this specific insurance company for your coverage?
- Is there any insurance coverage that they have not offered to you?
- What is the scope of services they provide? How will they support your business, your employees, and your growth?
- Do they have solid references and industry experience? Can they provide references and credentials?
- In which states are they authorized (licensed) to operate? If you have operations outside the United States, do they have experience in those parts of the world?
- What type of technology do they use and what type of tools and resources do they offer to manage your benefits programs (employee enrollment, benefits administration, etc.)?
- Will you have a dedicated account manager? How will their customer service help you?
- Do they have RMIS (Risk Management Information Systems) capabilities?
- How do they ensure that you are kept in compliance?
Timeline & Costs
Yearly Benefits Timeline
Initial Benefits Setup
Benefit plans typically take six weeks to set up, mostly due to the underwriting process. Benefit plans typically start on the employees date of hire or first of the month following date of hire.
If your company has a January 1 plan year start date, your PEO or broker will offer a pre-renewal meeting in May or June to set the stage for bids (or “marketing”) for your benefit plans for the next plan year.
Questions to Ask Your Broker or PEO
- How has the plan performed looking back 12-18 months (medical, prescription, dental, vision)?
- What is the anticipated plan performance looking forward to the next plan year?
- What are the projected premium increases? What is the national average? What is the average in tech?
- Where are some easy quick wins in the plan design that we should decision this open enrollment?
- What are other companies asking about or asking to include into their renewal?
- Where are our top five claims areas? How might we add programs to reduce claims costs in those areas? For example, if we’re seeing a lot of lower back or spinal issues, might we roll out an ergonomics benefit to proactively address the back issues we’re seeing.
- Share feedback from the team on the plan performance. For example, the mobile app is buggy, the prescription medicines are expensive, or dental benefits are bad.
This is the one time a year when employees can make changes to their benefit elections without a qualifying life event. These changes take effect in the following plan year, likely January 1st. Typically open enrollment happens in the Fall.
- Stick with a standard calendar year (January to December). This helps to avoid confusion and allows employees to make plan decisions (opt-in or opt-out) based on their spouses plans as most companies follow a standard calendar year.
- Avoid adding new benefit programs mid-year. This makes Finance teams happy as they can better anticipate and budget for annual benefits costs. This also increases fairness around decision-making for what benefits are added each year and why.
- July to August - Start planning for the following year. A broker should notify you about increases or changes to plans during this time. PEOs will also reach out with updates about their upcoming benefits.
- September to October - Make final decisions about plan changes.
- End of Oct to Mid November - Open Enrollment for employees:
- 2 weeks open enrollment is best practice. With anything longer, people typically wait until the last week or even last day to make changes
- Proactively ask your benefits broker or PEO to run an open enrollment session. They can educate employees about plan changes and answer questions.
To impact employee health in a more meaningful way, companies need to efficiently communicate and engage employees in their benefits. A large majority of companies still use traditional open enrollment presentations and benefits guides to educate employees on their benefits programs. However, along with leveraging mobile apps, there is a move towards enhancing the open enrollment experience with custom websites, self-serve on-demand tools, push notifications, video, etc.
Ongoing Employee Support:
Providing employees with the service and support they need to make educated benefits decisions and answer coverage and enrollment questions is key to ensuring that they are getting the most out of their benefit programs. Employees continue to lean heavily on People teams to address most of their questions. However, many companies are engaging their PEO/ Broker for care concierge to take some of the burden and privacy concerns off already-stretched internal teams.
Many companies are finding that even in this volatile economic environment, they must meet today’s challenges with providing above market compensation and benefits. Per the Lightspeed 2022 EOY HR Trends Report, 56% of companies will allocate the same or more to HR and recruiting budgets next year. Nearly 93% of companies are also keeping their current benefits or expanding their offerings.
Healthcare benefits costs continue to rise with a median 6% increase in PEOs and 7% with brokers. ~25% of respondents reporting increases from 40% to 100%, but let’s hope those are outliers.
Healthcare and income protection benefits are important to many job applicants. They also represent a significant portion of a company’s overall expenses. On average, healthcare benefits costs equal 11% as a percentage of payroll, which equates to ~$12,300 per employee per year, including employer and employee costs across all plan types.
To combat rising healthcare costs, some companies offer an incentive to employees to opt out of the company’s healthcare program and seek coverage through a spouse’s plan or a parent’s plan (for employees under age 26). The average monthly credit is $100-200/month.
Health Benefits Packages
Below are details on the standard issue benefits that most candidates will expect. We’ve included recommended guidelines to develop a competitive benefits package, varying based on competitiveness and how much you can afford.
For additional data and benchmarks, Sequoia Benefits has a yearly trends report covering common benefit benchmarks that can be found here.
PPO (Preferred Provider Organization) plans are the most common plans offered. The most common PPO plan design is a $250/$750 in-network deductible and a 90% in-network co-insurance. Other plans offered can include an EPO (Exclusive Provider Organization, HMO (Health Maintenance Organization), and HDHPs (High-Deductible Health Plans) with HSAs (Health Savings Account). HDHPs are growing in popularity with 75% of companies offering such a plan.
Ensure that there is competitive prescription drug coverage available. Look for affordable and accessible copays. The most common plan designs cost $10/$25/$40, followed by $5/$30/$50, broken down by generic/preferred/non-preferred drug categories.
A typical dental plan design includes two preventative cleanings (including x-rays and fluoride treatment) per year. There is typically coverage for cavities, root canals, bridges, and implants. It’s unusual for orthodontia coverage (especially for adults).
Orthodontic benefits, or for adults asking for Invisalign, these services can be covered via a Flexible Spending Account (FSA) or Health Savings Account (HSA) if the dental plan doesn’t cover this service. If your company offers a HSA, you can offer an employer contribution each year that can offset the cost of the orthodontia. Employees and plan participants always appreciate this consideration.
Important: There is a very important point to know about dental insurance is that its structured opposite to a medical plan. When the plan is designed, it’s the total amount of money paid by the plan. (Whereas medical always talks about the most you will pay). The key term to look for is the annual benefit, which is typically $1,500 USD to $3,000 USD per year. That means the plan will not pay for services above the annual benefit. There is another point to look for is the lifetime benefit which is to say each tooth can have a limitation on the number of services per year. For example, if a crown is needed on a molar, the plan will typically not pay for a replacement crown if another is needed in less than 3-5 years. This is important to note because the plan design can be helpful or harmful depending on how the plan is structured.
Benefit exclusions: Dental plans can have some unusual exclusions that are useful to know upfront. The first is that “laughing gas” is sometimes not covered, in general, but this can be $150-$300 per service out of pocket for the employee. Imagine a small child needing a cavity repaired and the family cannot afford the laughing gas cost. It leaves a not-so-pleasant experience.
Vision insurance is for maintenance of vision. It is not for injuries or diseases of the eye. This type of care is for the medical insurance plan. A typical vision plan design includes a routine exam per year and coverage for frames or corrective contact lenses every 12 months. It’s unusual for a plan to pay for both contacts and glasses in the same year. It’s also unusual for a vision plan to pay for Lasik eye surgery.
Additional eye care needs, such as Lasik eye survey or additional frames/lenses, can be covered via a Flexible Spending Account (FSA) or Health Savings Account (HSA) if the vision plan doesn’t cover this service. If your company offers a HSA, you can offer an employer contribution each year that can offset the cost of these services. Employees and plan participants always appreciate this consideration.
Vision insurance is generally cheap by cost standards. A single plan doesn’t usually cost more than $5-8 per month and a family plan $35-50 per month).
Life Insurance / AD&D
Life insurance / AD&D (Accidental Death & Dismemberment) plans pay a fixed amount of money in the event the plan participant passes away whilst on the plan.
The most prevalent offering is 1X salary with a maximum benefit of $500,000. Earlier stage companies may choose to start with a smaller flat amount of $25,000 in life insurance and add to their offering over time.
Disability insurance provides income replacement in the event an employee becomes ill or injured and unable to perform their job. Most disability plans have a 7-day elimination “waiting” period until benefits kick in.
Disability plans are typically broken into:
- Short-term disability - plans commonly cover 60% of pay for up to 12 weeks (max weekly payout of $2,500)
- Long-term disability - plans commonly cover 60% of pay until Social Security retirement age if the employee remains disabled (max monthly payout of $10,000)
Common carriers: Guardian
Competitive Coverage Levels
- Minimum: Employer pays 50% of the monthly premium for employees. There is no requirement to pay monthly premiums for spouses, partners, and dependent children under age 26.
- Typical: Employer pays 80-100% of the monthly premium for employees and 50% coverage for spouses, partners, and dependent children.
- Best in Class: 100% coverage for employees + minimum 60-80% coverage for dependents.
- Pro Tip: If you offer more than one medical plan, some plans will be more expensive than others. You should be intentional about what percentage of the premium you cover for each plan to incentivize employees to select the plan to keep employer costs down. For example, if the high-deductible health plan is the cheapest and you’re trying to incentivize employees by covering the highest percentage of the premium for that plan and make the other plans, such as the PPO, the “buy-up” or more expensive plan. Employees can choose the PPO if that’s the best fit for them, but they will pay more.
401k matching is extremely rare for early-stage companies and unheard of at the seed stage.
Pre-Tax Savings Plans
Pre-tax savings accounts such as FSAs, HSAs, and 401(k) retirement savings plans are great to add to your benefit package to provide tax savings options for your employees.
These plans typically don’t cost much if you’re able to easily set them up and administer them ongoing. FSAs and 401(k) plans do require some admin and compliance so make sure you’re prepared before rolling them out.
Flexible Spending Account (FSA)
- Are used to pay for various healthcare expenses that are not covered by your medical, dental and vision plans, such as prescription medications, co-pays, deductibles, and medical devices. Here is a list of generally permitted expenses.
- The annual maximum contribution amounts change every year: For 2022, employee contributions to a health FSA, made pre-tax through salary deductions, are capped at $2,850. If you are married, your spouse can also contribute up to $2,850 in a FSA through their employer.
Dependent Care (DC-FSA)
- Are used to pay for dependent care services such as day care, preschool, summer camps and after school programs.
- The annual maximum for 2022 is $5,000 a year for single taxpayers and married couples filing jointly, or $2,500 for married people filing separately. Employers may contribute to their employees’ dependent Care FSAs but the combined employer and employee annual contributions cannot exceed the aforementioned IRS limits.
- Limited Flexible Spending Accounts only apply to medical insurance participants on a High Deductible Health Plan (HDHP). Because participants on HDHP plans are eligible for a Health Savings Account (HSA), they can use a Limited Flexible Spending Account for dental and vision expenses only.
FSAs are “use it or lose it” plans so employees should be intentional about how much FSA they choose to sign up for each year. Whatever expenses don’t get used are lost.
Health Savings Account (HSA)
Can be used for current out-of-pocket health care and medical expenses or saved for the future, i.e. for care you may need years down the road. The HSA eligible health care expenses are doctor’s visits, prescriptions, and coinsurance as well as health monitoring supplies, over-the-counter drugs, feminine hygiene products, complementary treatment (chiropractor, massage), glasses and contact lenses, many fertility and maternity services and equipment.
In 2023, the annual maximum contribution for an HSA is $3,850 for an individual and $7,750 for a family. The annual contribution limits refer to the cumulative amount paid by both the employer and the employee in a given year. Individuals who are 55 or older at the end of the tax year can make an additional $1,000 catch-up payment to their HSAs.
401(k) is a retirement savings plan sponsored by an employer. These accounts can be both pre-tax and post-tax with employee and employer contributions. The employee can put a certain percentage of their paycheck up to the annual IRS maximum.
401(k) plans should be co-owned by People and Finance teams, due to the fiduciary responsibilities. There are also compliance, tax, and reporting requirements to these plans.
401(k) plans are a very popular employee perk, with upwards of 90% of companies with fewer than 50 employees offering 401(k) plans. They provide a great tax incentive for employees even without company matching.
Offering a Company Match
- Common practice is to offer employee-only contributions first, then when financially feasible, offer matching.
- It used to be that companies waited until profitability to offer company matching, but to remain competitive, companies are choosing to offer a company match earlier.
- The most popular company match is 3-4%. Companies can start lower (1.5%), and get to 3-4% as they grow and it’s financially feasible to do so.
Commuter benefits allow employees to use pre-tax dollars towards commuting expenses, such as parking and public transportation.
Commuter benefits are required for all San Francisco companies with more than 20 employees nationwide. You can find more information on this SF Ordinance here.
Family Leave Policies
In any well-designed benefits plan, a thoughtful and robust family leave policy should be a central part of the overall package. Competitive plans can attract, motivate, and retain employees and signal that a company cares about their physical, emotional, and mental well-being along with being supportive of their families.
How employers treat employees during these exciting and/or difficult moments in life has a huge impact on how they feel about their organization. Employees remember their leave experience, which when handled well, increases loyalty and retention.
The US is one of only seven countries globally that does not require federally mandated paid parental leave. However, even without a federal requirement, paid parental leave is table stakes for employees working in tech.
Note: Although paid parental leave is not required at the federal level, many states and cities have specific requirements around leave. As a best practice, policies should be based on a combination of employee locations and what is competitive and generous given your peers and competitors.
Providing a Competitive Leave Policy
- Attracts and retains top talent by encouraging employees to return to work instead of leaving permanently, saving organizations time and money in terms of recruiting and onboarding new employees.
- Sets the tone for having an inclusive culture.
- Increases employees happiness, leading to higher productivity and engagement.
- Decreases employees stress and lack of focus at work.
- Enhances employees creativity by letting them get enough distance from work to get new perspectives and find new angles to approach products and culture.
- Positively impacts employees work ethic and loyalty to their employers.
- Improves employer attractiveness and branding.
Leave Across the Globe
For the purposes of this parental leave overview, all of the guidance will be focused on the US market. However, for companies with international operations, here are a few recommendations on how to think about developing a supportive leave policy.
When managing a globally distributed workforce, individuals are often faced with evaluating total compensation, benefits, and perks, balancing the trade-offs of local competitiveness and internal equity.
Parental leave laws vary widely country-to-country. If managing a global workforce, companies must be in compliance with all local laws, but can enhance their company offering beyond what’s required to create more internal equity.
Let’s walk through an example of a company that has a large employee presence in both the US and Germany: The United States as a whole provides no form of paid parental leave, while in Germany, parents can request up to 3 years of parental leave, which is partly paid with parental allowance. It is not feasible, nor expected, that a US employee would receive 3 years of parental leave. However, depending on your company values, priorities, and available budget, a company could choose to enhance their paid parental leave policy to their US employees to create greater parity amongst their US and German employees.
Consider working with a Global EOR or HRIS system to help you manage this. Global EORs, such as Oyster, Deel, and Papaya Global can help guide you through designing your global benefits policies. Papaya offers a free CountryPedia resource to help you understand the statutory (required) benefits in each country.
Developing a Leave Policy
First, Let’s Define Some Terms
- Qualified Family Member: As defined for the purposes of leave of absence eligibility, a qualified family member means your spouse, domestic partner or equivalent designation, child, sibling, parent, parent-in-law, grandparent, grandchild, or any individual whose close association with you is the equivalent of a family relationship, and for any other “family member” or “designated person” identified by applicable law.
- Serious Health Condition: An illness, injury, impairment, or physical or mental condition that involves either an overnight stay in a medical care facility or continuing treatment by a health care provider. The condition prevents you from performing the essential (or core) functions of your job or prevents the qualified family member from participating in school, work, or other daily activities.
- Birthing Parent: An individual who has given birth and/or who is recovering from pregnancy and childbirth; sometimes referred to as “primary”.
- Non-Birthing Parent: A parent who will receive time off to bond with a newborn or adopted child who is not recovering from pregnancy and childbirth; sometimes referred to as “secondary”.
- FMLA: Family and Medical Leave Act (FMLA) is a US federal law entitling eligible employees to take unpaid, job-protected time off for up to 12 weeks per year.
- PFL: Paid Family Leave (PFL) is a state insurance program that allows eligible employees to take time off in order to care of an ill family member or a new child.
- Disability: As defined for the purposes of leave of absence eligibility, disability is an illness or injury that prevents you from performing your customary work. This includes pregnancy, childbirth, or other related conditions.
The Basics of FMLA Leave in the US
The Family and Medical Leave Act (FMLA) is a US federal law that provides eligible employees of covered employers with up to 12 weeks of unpaid, job-protected leave per year. FMLA applies to companies with 50 or more employees who have worked for their employer for at least 12 months, among other requirements. Given the rise of distributed work and that some employees need parental leave before the 12-month mark, employers are choosing to be flexible with eligibility around FMLA leave to be more employee-friendly.
→ Read more about FMLA Leave here.
US State-Specific & City-Level Considerations
Specific US states or localities may also provide additional unpaid or paid parental leave protections. The below is not an exhaustive or necessarily up-to-date list of state-specific considerations as state laws are constantly changing. But, if you manage a distributed team, you may need to adjust your policy based on state-specific requirements like the following:
- New York - NY Paid Family Leave (NYPFL) provides all new parents with up to 12 weeks of paid time off (up to 67% of your pay) and job protection to bond with your newborn within the first 12 months of the child’s birth.
- California - Paid Family Leave (PFL) provides up to 8 weeks for those who need to take time off to care for a seriously ill family member, bond with a new child, or participate in a qualifying event because of a family member’s military deployment up to ~60-70% of pay.
- Other States with state-specific parental leave laws, such as Colorado, Connecticut, Delaware, Massachusetts, New Jersey, and Oregon.
More and more cities are also implementing policies that mandate equitable paid leave for their employees and private sector workers.
- San Francisco, CA
- New York, NY
- Cities such as Washington DC, Chicago, Los Angeles and others have similar policies
New York City and San Francisco’s paid leave laws tend to be the most progressive. If you have employees in these two cities, we recommend defaulting your parental leave policy to their policy if you do not have the operational resources and time internally to manage compliance across multiple cities and states. For example, San Francisco requires 8 weeks of bonding time. If your employee population is heavily weighted in San Francisco, you may want to implement a policy that gives all employees in your company 8 weeks of leave.
Considerations When Creating Your Policy
According to Sequoia Consulting’s 2021 employee benchmark data, 76% of employers (made up of mostly technology startups ranging from ~50-500 employees) offer supplemental pay for parental leave. However, how much supplemental pay can vary based on company size, stage, and culture/values.
Founders and people leaders want to know:
- How competitive is our leave policy against the companies we’re competing with for talent?
- What does our leave policy communicate to candidates and employees?
- Are we being compliant in the cities and states where we have employees?
While your policy should follow the law, it should also be a reflection of the culture and values of your company. If you can afford to do more than the bare minimum, you have the opportunity to provide benefits that signal an inclusive culture that supports employees during this major life event.
Parental Leave Benchmarks
The standard time off for disability while recovering from childbirth is 6 weeks for regular birth and 8 weeks for c-section birth. Most companies offer more than this minimum to provide additional time off to bond with a child.
Good: Target for 5-50 Employees
- Birthing Parent Leave: up to 10-16 weeks of Birthing Parent Leave fully paid
- Non-Birthing Parent Leave: up to 4-6 weeks of Non-Birthing Parent Leave fully paid
Better: Target for 51-200 Employees
- Birthing Parent Leave: up to 12-16 weeks of Birthing Parent Leave fully paid
- Non-Birthing Parent Leave: up to 6-12 weeks of Non-Birthing Parent Leave fully paid
Best: Target for 201-500 Employees*
- Birthing Parent Leave: up to 16 weeks fully paid + 4 unpaid weeks of Birthing Parent Leave
- Non-Birthing Parent Leave: up to 8-12 weeks of Non-Birthing Parent Leave fully paid
*As a reminder, the state of New York provides 12 weeks of paid time off for baby bonding. If your company’s paid leave policy covers less than 12 weeks of paid time off, for example, up to 6 weeks of paid time off, your company would cover 6 weeks of fully paid leave, your employee would then move to unpaid leave at your company, and the remaining 6 weeks would be paid to them by the state of New York at 67% of pay. Similarly, California provides up to 8 weeks of baby bonding time.
Optional Policy Add-Ons
Consider creative transitions back to work to support the re-onboarding process for new parents. This could be a reduced schedule or offering an alternative work schedule. Here are two specific examples:
- Full-time employees may take up to 4 additional weeks of unpaid time off.
- Offering 2-4 weeks on a reduced hours schedule of 20-30 hours per week. This reduced schedule is designed to be taken immediately following Birthing Parent Leave or Non-Birthing Parent Leave.
Additional Perks to Support New Parents
There are additional perks that can ease some of the challenges and unexpected circumstances that come with pregnancy, birth, and life with a new family member. Below are additional considerations that are deeply appreciated by new parents:
- Paid miscarriage bereavement leave to grief the loss of a pregnancy.
- Emotional and mental health support for mothers and fathers. There might be benefits offered through the medical plan, but you could add Spring Health or Galileo Health.
- Dedicated mothers room (if nursing parents are required to come into the office).
- Company parents support group.
- Maven, Care.com, or other support vendors for parents.
- Meal assistance (ex. $500 Instacart grocery credit or meal delivery service).
- Baby swag or care package.
- Access to back-up emergency childcare with Helpr or Bright Horizons.
- Housecleaning services.
Parental Leave Sample Policy
We provide all full-time employees with paid parental leave. 100% fully paid leave for up to:
- Birthing Parent Leave: A leave of absence for purposes of an individual who has given birth and/or who is recovering from pregnancy and childbirth. All full-time employees are eligible for up to [X] weeks of Birthing Parent Leave.
- Non-Birthing Parent Leave: A leave of absence to bond with a newborn or adopted child within one year of birth or adoption. All full-time employees are eligible for up to [Y] weeks of Non-Birthing Parent Leave. Intermittent Non-Birthing Parent Leave is possible, but must be taken in increments of [one week] or longer.
- All full-time employees are eligible - there is no tenure requirement to receive parental leave. Eligible employees may use this perk once every 12 months on a rolling backward basis.
Leave of Absence Outsourcing
As companies grow and/or their leave program gets more complex, outsourcing to a leave expert can be a smart, time-efficient option. Outsourcing frees your internal team from needing to be experts on the latest federal, state, and local compliance in all of the localities you operate in and provides a better experience for employees and managers navigating the leave process.
Leave Program Timeline
This handy checklist will help you get started on all of the planning bits and pieces to ensure your team is ready to initiate a leave of absence on behalf of a team member.
Other Types of Leave
Although paid parental leave is the most popular leave type for employers to add to their leave program, other leave types are growing in popularity for companies to remain competitive and create a more inclusive leave program for people of all backgrounds and life stages. Companies can make an effort for a more progressive leave program by including the following as leave options:
- Parental Leave for the birth, adoption, or foster care placement of a child.
- Medical Leave to care for your own serious health condition.
- Caregiving Leave to care for a qualified family member with a serious health condition.
- Pregnancy Loss Leave for bereavement leave specifically for miscarriage.
- Mental Health Leave to acknowledge the importance of mental health in the workplace.
- Compassionate Leave for people experiencing difficult life events such as navigating divorce.
- Gender Affirmation Leave for those transitioning, which provides time off for medical procedures, but also time off to address employee mental health or legal requirements for finalizing transition.
Developing a Caregiving Leave Policy
Caregiving leave could be used to care for one’s children but also for qualified family members, allowing companies to consider the needs of all team members, not just new parents as both situations can be stressful, emotional, and time-consuming. Companies that offer paid caregiving leave find that it helps lower employee stress and increase motivation and focus when they return to work.
The majority of companies surveyed in the Sequoia 2021 report did not offer paid family leave. Of those who did, paid family leave ranged from 1-12 weeks, so it can be set by company practice. Cocoon’s data is sparse as well, but the data indicates that offering ~4 weeks of leave would be a good place to start. According to SHRM, although providing paid family leave is uncommon, companies tend to offer 11 sick days per year.
Sample Caregiving Leave Policy
<Although you may not be personally ill, you may be caring for those around you with a serious health condition, which can take a toll on your ability to perform at your best.
To support you during these difficult times, we provide up to [4 weeks] of paid leave for an employee to take care of a qualified family member with a serious health condition. In order to be eligible for caregiving leave, you must also apply for and be approved for FMLA and/or a state mandated leave. Caregiving Leave can be taken intermittently in [one week] increments.
*As a reminder, the state of California provides 8 weeks of paid time off for those who need to take time off to care for a seriously ill family member. If your company’s caregiving leave policy covers less than 8 weeks of paid time off, for example, up to 4 weeks of paid time off, your company would cover 4 weeks of fully paid leave, your employee would then move to unpaid leave at your company, and the remaining 4 weeks would be paid to them by the state of California at 60-70% of pay.>
Isn’t this expensive?
The vast majority of companies offer 100% pay for the full duration of the leave. Supplementing the benefits an employee may receive from their state or their company’s disability insurance is one of the ways companies keep costs down. Additionally, retaining and supporting your existing employees on their return to work is far cheaper than replacing and training a new employee.
Should we offer the same leave allotment for all parents?
Why does one parent typically get more time off than the other? Although some companies are adjusting their parental leave policies to be equal for the birthing and non-birthing parent, this is not the norm. Companies hyper-focused on internal equity are taking this approach but the majority of companies continue to offer longer leaves for the parent recovering from pregnancy and childbirth, since only providing ~6-8 weeks is typically not enough time for the birthing parent to be willing and able to return to work and perform at their best.
How should we handle bonuses while an employee is on leave?
The bonus policy must be neutral. Similar to how you treat bonuses when employees take vacation, you don’t prorate their bonus or change their vesting schedule.You can set a policy stating that bonuses are not prorated for time-off less than 12 weeks. Anything in excess of that (regardless of reason) will be prorated.
How does variable compensation work during leave?
For employees who depend on commissions or other types of variable compensation, there are two common approaches for how to approach their variable compensation element while on leave:
- Full OTE: Most companies pay out the employee’s full OTE. The repercussions of docking people’s pay for taking a leave of absence can be severe and not worth the small amount of savings.
- Average Historical Achieved Performance: Payout an average of actual previous commission payments over the last ~6-12 months. Some companies do an average looking back 3 quarters as a “baseline” to forward project variable compensation during parental leave. This approach is more understandable for employees and sometimes more palatable for management. However, if you don’t have enough quality historical data, best practice is to pay out the employee’s full OTE.
NOTE: One of the most difficult aspects of longer leaves with sales employees is managing reentry. Employees returning after several months and finding that they have to ramp their portfolio from near-zero will have thoughts about whether this is the right place to work, regardless of how well they were treated while on leave. It is essential to have a clear understanding, and for People teams to be involved, before the start of the leave about how territories, deals in progress, splits, etc. are going to be handled and handed off (or not) on return. There is no single, right answer since it depends on the company stage, maturity of sales management, and sales motion.
What if an employee welcomes more than 1 child into their family in a 12 month period?
FMLA allows for 12 weeks (or 60 calendar days) every 12 months. For additional leave, the employee can consult with the People team for additional options.
Does the company continue to pay benefits and health coverage while an employee is on family or parental leave?
Typically, the answer is yes. Under the Family and Medical Leave Act (FMLA), employers are required to continue offering benefits as a federally mandated entitlement to the employee. For more information, read more here.
Can an employee take leave before the baby is born?
Typically, the answer is yes. If the employee becomes medically incapacitated or physical or emotional state-of-being is debilitated due to pregnancy or the recovery from birth, a person can apply for short-term disability. Some companies allow employees to start their paid parental leave ~2 weeks before their due date. Keep in mind, however, that any time taken off prior to the baby's birth will likely eat into FMLA (or other) entitlements.
Can an employee take their leave in more than one increment?
This is at the discretion of the company. Some companies have guidelines around taking in equal increments (ex. one week increments or more) and others are more flexible. Just know that the smaller the increments you allow, the more difficult leave is to track and administer.
Until when does an employee have to take their leave? How long after birth, adoption, etc does the program expire or can an employee initiate indefinitely?
Typically, these policies are designed to be completed within one year of the child’s birth or date of adoption.
Will my employee’s stock options continue to vest while away on leave?
This information should live in the stock equity grant. When in doubt, speak to the equity administrator or internal legal counsel for clarification. But typically, yes, stock option vesting is not impacted by a job protected leave as this could be viewed as adverse impact / retaliation towards the employee.
How many times can an employee use the leave program?
Under the FMLA, a total of 12 weeks, or 60 days, can be used every 12 months. For other states or types of leave, verify on the state website.
Does an employee have to use any unused vacation time before being on leave or can they add it to their leave?
The company can require that unused vacation, sick, or floating holidays be used in order for the person to remain in a paid status for all, or a portion of leave. If your company has a flexible vacation policy, where no vacation days are accrued, it is okay for a company to not allow vacation to be taken before/after an approved leave of absence, or cap the number of vacation days allowed (ex. 2 weeks on either end of the leave).
Time off may feel like a foreign concept to founders searching for product market fit. As you hire your first non-founding employees, its important to provide the team with opportunities to re-charge and manage their lives outside of work.
Tips for PTO Early On:
- Set clear expectations
- Consider “flexible PTO”, but establish guidelines
Questions to Answer:
- What should seed companies consider when making a plan - if they have 5 employees and someone is out for 2 weeks, is that more impactful vs. someone taking 2.5 weeks spread out across a whole year
- What do we typically see Seed companies choose
- How should seed companies consider the operational overhead of managing a PTO vs. FTO plan?
Time off is one of the most common and highly-valued employee benefits. It’s an excellent recruiting and retention tool that conveys a company’s commitment to work/life balance.
There are two common approaches when it comes to time off: Accrued PTO (paid time off) and FTO (flexible time off), which we’ll cover in this guide.
Accrued PTO is a more traditional approach where employees accrue days throughout the year to use for time off, such as:
- Vacation days
- Sick days
- Standard and floating holidays
- Personal days
- Bereavement leave
- Family leave [link: family leave policies]
Any unused days are paid out to the employee upon them leaving the company.
Note, in some states it’s not permissible to lump sick leave in this balance. (For example, the San Francisco Sick Leave Ordinance requires a specific amount of time to be tracked and used for sick leave.)
Typical Accrued PTO Offerings
- Low-end: 15 days (10 days if sick days are tracked separately)
- High-end: 20 days (15 days if sick days are tracked separately)
- Easier tracking of how many days employees are taking throughout the year.
- Improves recruiting and retention if employees value knowing the set number of vacation days they’ll have available each year.
- Advanced planning can occur if employees give notice of when they intend to take time off (although advance notice should be provided with FTO too).
- Employees may take less days off if they are sick or burned out as they don’t want to use their precious accrued vacation days.
- Employees may not be able to take a planned vacation earlier in their tenure if they have not yet accrued the necessary days. Companies can choose to allow employees to “go into the red” and take vacation days before they are accrued, but this leads employees to feel like they are catching up on their accrual and often don’t take necessary time off once they’re in the red.
- Employees may feel they have less flexibility to carve out time for family, friends, or themselves if all time off must be tracked.
- You must define the “expected working hours” to provide clarity on when PTO needs to be requested - is PTO request in increments of 2 hours, 4 hours, 8 hours, etc.?
- Adds cost to the business as accrued days must be accounted for on company financial statements.
Best Practices for Accrued PTO
- Ensure your PTO policy - how it’s accrued and what rolls over - is clearly communicated and accessible at all times.
- Foster a company culture that values taking time off. Encourage your team to use their leave and not feel guilty for requesting vacation or other time off.
FTO (Flexible Time Off)
With FTO (also referred to as Unlimited PTO), there is no set amount of days given or accrued; employees can flex up or down based on the time they need. Companies are not required to accrue time off or pay out employees for unused PTO when they leave the company. FTO is a good fit for companies who do not subscribe to the standard 9-5 workday and provide more freedom and trust to their employees to design their workday.
However, FTO does not mean you have “unlimited” vacation – individual, team, and company considerations must be taken into account when requesting time off. FTO is typically inclusive of sick days.
- It can allow people to take what they need without restrictions. FTO provides the greatest amount of flexibility to employees to plan their work day and take time off for personal needs, without having to track that time.
- Most companies still ask employees to request time off in advance for approval, but the admin burden is reduced.
- Employers benefit from not accruing vacation balances on their financial statements, reducing their financial liability.
- Abuse (taking too much time off) can exist. There is a higher probability of unclear expectations, across employees and managers, which can lead to employees taking too much time or not enough time off.
- Managers have a hard time saying “no”. However, the more common problem is that employees may end up taking far less than the average PTO days companies offer.
- There is more anxiety around the process for employees to request time off and obtain approval, rather than using their allotted bank of days. To avoid this, companies can offer a required minimum number of days off or provide guidance that “on average, employees take between X-Y days/weeks per year” to provide a frame of reference and set expectations.
Flexible time off continues to be the most common type of PTO plan offered, especially by tech companies. However, some tech companies are choosing to go back to a more traditional PTO plan for compliance reasons or due to employee feedback, since one of the common drawbacks of FTO is that employee’s aren’t taking enough time off.
Best Practices for FTO Plans
- Discuss your vacation requests with your team/manager in advance.
- Request time off at least 2 weeks before the FTO start date. You are responsible for ensuring coverage of your projects and day-to-day tasks so prepping 1-2 weeks in advance is a must!
- Planning to take time off for more than ~2 weeks? Talk to your manager and the People Team as this may be a leave of absence, rather than FTO.
- If you will be gone more than 2-3 days, it may be necessary to create an Out of Office (OOO) document to identity your areas of ownership and who will be covering for you in your absence.
- Block off the days on your calendar you will be on FTO to ensure meetings are auto-declined. Decline all current meeting invites with a note about your FTO plans.
- Create an OOO reply for your email with your backup’s contact info.
- Add FTO days to your slack status (e.g. “OOO 1/15 - 1/20” along with the “suitcase” or “palm tree” emojis.
Other Benefits to Consider
Despite the cost, time, and effort put into the plan listed above, this is still not enough to inspire and attract the best talent. Programs that provide wellbeing, mental health, women’s health, financial wellness, fertility, family & caregiving support, and other inclusive benefits to support employees and their families should be added over time that align with your employee needs and company values.
- Wellness stipends are the most popular way employers can support the wellness needs of their employees to cover a wide range of needs.
- Employees may use their stipend for however they define wellness, such as gym memberships, sports club dues, home gym equipment, yoga classes, massages, etc.
- A typical structure is to offer up to $100/month where employees submit receipts for reimbursement.
- Wellness Reimbursement Policy Template
If you’re looking to take a more nuanced, deeper approach to wellness, you can partner with the below vendors to address specific wellness needs within your organization:
- Calm - Mindfulness, meditation, and sleep app for mental health support (may be provided, at no cost, by your healthcare benefits provider).
- Spring Health - Comprehensive virtual, on-demand mental health care.
- Galileo - Comprehensive primary and multi-speciality practice, delivered digitally.
- One Medical - On-demand virtual care or same/next-day appointments.
- It’s becoming increasingly popular for companies to offer employees fertility support of $5-10K lifetime reimbursement to cover such expenses as in-vitro fertilization treatments, genetic testing, medications, egg harvesting and freezing, placing an emphasis on offering coverage and treatment to all employees, including LGBTQ individuals.
- Companies that can support your program and help reduce maternity and fertility costs are Carrot Fertility and Maven Clinic .
- Midi Health - Virtual health clinic for women 40+, specializing in menopause, pre-menopause, and more.
- Origin, Northstar, or Brightside - Financial benefits platform bringing employees closer to their financial goals.
Parenting & Caregiving
- Cleo - Support working parents so they can be their best at work.
- Care.com - Trusted caregivers to support busy parents.
- Wellthy - Caregiving support service for families with complex, chronic, and ongoing care needs.
- Helpr or Bright Horizons - Back-up child care.
For additional information about parental leave & caregiving policies, check out our Family Leave Policy post here.
Employee Assistance Program (EAP)
An EAP program is a confidential emotional support program where employees can get legal help, emotional help, or a referral for any type of problem. Most people don’t know this benefit exists and don’t want to use it because they think it will go in their HR file. It is 100% confidential. This is a great resource for work related stress or for anything that is happening outside of work and you aren’t sure who to turn to. EAP provides guidance for professional and personal related problems.
How do you set up an EAP? If you have a benefits plan set up, talk to your provider and see if they have a recommendation or strong partner org.
Learning & Development Stipend
Ongoing training and growth programs are a benefit that startups can offer to employees who want training outside of work. Companies may reimburse anywhere from $2500-$5000 for coursework done that is role related. Most companies require that the employee has been with the company 12 months and keeps up a B grade point average. For more information about L&D programs, check out our post here.