Maine Businesses Brace for New 1% Payroll Tax and Paid Leave Mandate

Businesses throughout Maine are preparing for the state to implement its new payroll tax and a complex series of rules stemming from the newly approved paid family and medical leave program in just a matter of months.

Over the summer, Gov. Janet Mills (D) signed a budget into law that included, among other things, legislation establishing the program with a starting appropriation of $25 million for the Maine Department of Labor (MDOL).

Beginning in the spring of 2026, Maine workers will be eligible to take up to twelve weeks of paid leave to care for a sick family member, as well as to bond with a newborn baby or newly adopted child. Also eligible for leave are those who are experiencing a serious health condition and are rendered unable to work for an extended period, and anyone serving as a caregiver for someone who meets the other conditions.

Employers and employees will begin contributing a new one percent payroll tax to the state on January 1, 2025, sixteen months ahead of when benefits are scheduled to first become available.

Click Here for More Information on the Paid Family and Medical Leave Program

Although many of the major structural elements of this program were already outlined by the Legislature, most of the specifics were left up to MDOL and a commission formed to administer the program. Advancing the bill in this manner allowed lawmakers to get the measure approved without quibbling over details, but it also created a significant amount of uncertainty for Maine businesses that will now be required to comply with various mandates, changes to tax collections, and paid leave allowances.

The rules set by the MDOL go into greater detail with respect to the relevant administrative processes — that is, the nuts and bolts of the requirements the program will impose on Maine businesses. Importantly, every business in Maine will have to determine, based on its number of employees, which set of MDOL regulations it must adhere to.

[RELATED: MDOL Updates Rules for Paid Family and Medical Leave Program, Now Accepting Public Comment]

An earlier draft of these rules raised numerous concerns for the state’s business community. A revised version of the rules addressed some, but not necessarily all, of these criticisms.

The MDOL continued accepting comments on the most recently revealed version of the rules until the end of September.

Denying a Claim On the Basis of “Undue Hardship”

Among the major changes advanced by the MDOL in these updated rules are some alterations to the process by which businesses can deny an employee’s request for leave on the basis that it would cause “undue hardship” to the employer.

Because Maine’s businesses are incredibly diverse, their workforce challenges are also unique, which has created difficulties when trying to impose a “one size fits all” rule structure.

Originally, businesses had “the burden to prove the undue hardship,” but under the updated rules, this is no longer a requirement.

Instead, “an employer may reasonably determine that scheduling of leave creates an undue hardship,” unless “sufficient notice has been provided.” That said, employers may still be able to establish “that, in the specific context of the employer’s business, the amount of notice provided was insufficient.”

The rules outline three requirements that must be met by an employer for their claim of undue hardship to be met, including providing the employee a written explanation of why their request for leave would be harmful to the business.

Employees, however, must retain “the ability to take leave within a reasonable time frame relative to the proposed schedule,” and “a good faith attempt” must be made to work out a schedule that would not be disruptive of the employer’s operation.

In an interview with the Maine Wire prior to the release of these updated rules, Maine State Chamber of Commerce President and CEO Patrick Woodcock explained that the original version of these rules represented a serious disconnect between “how we thought the legislation was structured and how the rules are written.”

In some instances, Woodcock said the MDOL’s original rules directly contradicted the way the law was written, particularly with respect to a business’ ability to deny a request for leave based on its potential to cause “undue hardship.”

“The [MDOL’s] rule directly contradicts the legislative language and the intent of the legislature,” said Woodcock.

“Its very clear from reading just one sentence that it is the employer who has the right to determine a reasonable hardship on their business, and the rule says that you have to make the case to the Department of Labor before you can exercise the right, and the burden would be on the business,” he said.

“I think the inclusion of that provision [by the Legislature] was a recognition of the moment in the Maine economy that this law will have the impact of having challenges on small businesses, and as a result — because of Maine’s economy — there should be the ability for businesses to reasonably claim hardship if somebody is seeking twelve weeks when that would torpedo their business,” he said.

Similarly, Amanda Johnson, HR General Manager for Somic America Johnson took issue with the “exceptionally high burden of proof on employers to demonstrate undue hardship” under the original rules.

“This could result in lengthy and costly processes, diverting resources from our core business activities,” she said.

The changes made by the MDOL for the updated version of the program’s rules appear to take these concerns into consideration to some extent, seemingly taking the burden of proof largely off employers.

That said, it remains to be seen if these changes strike an effective balance between giving employers the necessary latitude to keep their businesses running smoothly and employees enough assurance that they will be able to utilize these benefits as needed.

Opting Out of State Program in Favor of Private Option

The MDOL also made changes with respect to employers’ ability to opt out of the state’s program in favor of adopting or continuing to offer a private option.

The MDOL’s original approach to implementing the Legislature’s directive to allow businesses the option of substituting private plans also drew criticism for the lengthy period of time during which employers would be required to contribute to the state program before having the ability to opt out.

When the rules were revised, the MDOL shortened this period from sixteen months to just four months, allowing employers to stop contributing to the state-run program much sooner, likely saving many businesses a substantial sum of money.

That said, applications for a private plan substitution will now cost $250 and an additional $250 will be charged as an administrative reimbursement fee if the application is approved.

The rules state that these fees may increase after January 1, 2026 based on inflation or a determination from the MDOL that they do not “cover the actual cost for administering private plans.”

In his interview with the Maine Wire, Woodcock of the State Chamber of Commerce explained that the business community was “overwhelmingly opposed to the structure of how they propose to implement the utilization of private plans.”

“The expectation was that businesses who had the interest of creating a private system where you would not be subject to paying into the state trust but maintain a private system that is equivalent to the state requirements would be able to avoid this program altogether,” Woodcock said.

“You can do that, but not until April of 2026. In the meantime, you will be subject to paying into a new trust fund irrespective of whether you will ever utilize it,” Woodcock said. “That contradicts as what we see as best practices throughout the country of how other states have run these programs.”

Johnson also raised similar concerns at the time based on her experience at Somic America.

“For the first 16 months, companies like Somic America must contribute to the state plan before we can opt for a private plan with similar benefits,” she said. “This dual contribution period imposes a significant financial strain, complicating our ability to budget effectively for the future.”

The new four-month window of required contribution to the state-run program will likely save businesses interested in pursuing alternate plans a great deal of money, although it does not necessarily go as far as some may have hoped.

Redefining Eligible Non-Family Relationships

Another significant change made by the MDOL in the updated rules was a redefinition of qualifying non-family relationships, as the original approach drew concern for its lack of clarity and potential for abuse.

“Affinity relationships” have now been replaced with “the existence of a significant personal bond,” bringing the rules into alignment with the language contained in state statutes.

26 M.R.S. §850-A(19)(G) outlines a number of qualifying familial relationships, including “an individual with whom the covered individual has a significant personal bond that is or is like a family relationship, regardless of biological or legal relationship.”

The rules go on to provide some guidance on how the “existence of a significant personal bond” may be demonstrated, such as by an emergency contact designation, the expectation to provide care, or cohabitation.

Johnson of Somic America had previously taken issue with the program’s “broad definition of who qualifies as a family member, including significant personal bonds.”

These updated definitions, however, appear to largely address this hesitation, as there is greater clarity now about who is intended to be included under this umbrella.

Improving Employer Notification Policies

The MDOL also improved the program’s policies for notifying employers when a decision is made regarding an employee’s claim.

Under the original version of the rules, there was nothing stating that employers would need to be notified when the status of an employee’s claim changed.

The revised rules address this by explicitly including the employer in the list of those who will be notified when an application for benefits is accepted, rejected, or reconsidered.

Johnson specifically noted concerns over the lack of notification to employers under the original draft of these rules, explaining that not being kept in the loop would make it difficult to effectively manage staffing and workloads.

“Employers are only informed that an employee has filed for leave, which hinders our ability to manage staffing and workload effectively,” Johnson explained.

The MDOL’s second draft of these rules appears to address these concerns in full, as employers are now clearly included among the list of those who are notified when the status of a claim is changed.

Remaining Unaddressed Concerns

Although the MDOL has now made many changes aimed at addressing the concerns raised by Mainers with respect to the program, there are still a number of issues raised by members of the state’s business community that persist under the updated draft.

Rapid Implementation Timeline Given Scale of Program

Woodcock told the Maine Wire over the summer that the timeline for the program’s implementation is far too rapid given the scale of the policies being instituted.

“I do think that the timeline of the entire program had a fundamental misunderstanding of the scale of this initiative,” Woodcock said. “It is the biggest program for the State of Maine government to set up in a generation.”

Woodcock also underscored the nature of how this program will fundamentally impact employers throughout the state, expressing concern that many businesses may not yet fully grasp the scope of the changes that will be wrought by the program.

“I think a lot of businesses are trying to navigate in 2024 the combination of inflation, labor scarcity, and now this additional payroll tax, and what in 2026 will be the management of a workforce that is now eligible for twelve weeks of leave,” said Woodcock.

According to Woodcock, there appears to be a lack of understanding of the “scope of this law and the proposed rules,” despite most executives and human resources officials having a general awareness of the program’s existence.

“I’m incredibly concerned that many businesses are unaware of what’s about to hit them,” he said. “The details matter, trying to think how this would impact an individual business…in terms of just managing your workforce, I don’t think a lot of businesses understand what’s going to really be taking effect in 2026.”

Potential for Fraud Given Level of Income Replacement

Woodcock also raised concerns over the potential for fraud within the program as it is currently set to be implemented.

“We’ve seen other states have lower levels of income replacement, where Maine is as high as eighty percent,” explained Woodcock. “Obviously we want to accommodate people that are in situations and support them, but it does create a fundamental concern of how are we going to police any sort of abuse of the program. And its very difficult to do that, especially on the medical side.”

Woodcock went on to say that the Chamber felt there were better models in other states that would have better limited the potential for abuse than that which was adopted in Maine.

“There is a spectrum of people in Maine with medical who will utilize this: those who have problems and should justifiably utilize it, and there are those that may take advantage of the program,” Woodcock said. “Then there’s a group that’s sort of in between.”

“And it’s going to be really important to create the right economic incentives for this, that we can monitor and ultimately police that its for the people who really need to make use of the program rather than those who are taking advantage of the program,” he said.

Fundamental Concerns with Program in General

Furthermore, some members of Maine’s business community have previously taken issue with the implementation of a statewide program in and of itself, regardless of the specific rules introduced by the MDOL.

“The Maine State Chamber of Commerce opposed the final law,” Woodcock previously told the Maine Wire, noting that he was not yet part of the Chamber when the measure was being debated in Augusta.

“We opposed the law, but it’s as if the rules were even worse than how we thought the law would be implemented,” Woodcock said.

“We do continue to have some really fundamental concerns with the program and the state law,” he said. “The thing that’s hard for us is that it is so far beyond what we thought the legislative intent was when they proposed the rules.”

Johnson also raised concerns in her statement to the Maine Wire that the program represents an additional financial obligation for employees that may never be utilized, creating uncertainty around the program’s expected return on investment for businesses and individuals.

“Although the tax rate is 1%, split between employer and employee, this represents an additional financial obligation that employees may never utilize,” said Johnson. “This could reduce disposable income for employees and increase our operating costs without a clear return on investment.”

Holly Roberts, Executive Director of the York Region Chamber of Commerce, also previously shared a statement with the Maine Wire, focusing broadly on her concerns with the program as a whole.

According to Roberts, most business owners in her area are opposed to the state’s attempt to implement this as a “one size fits all insurance policy” that many employees may never use and “don’t feel they should be required” to fund.

“This is a hot topic. Most businesses that I have had opportunity to discuss this with are not in favor of a mandatory paid family and medical leave program,” Roberts said.

“The general consensus is this is a type of insurance that all individuals should have the option to opt out of participating in,” Roberts said. “This is not a one size fits all insurance policy. Lots of employees are not in a position where they would ever use this and don’t feel they should be required by the State of Maine to pay for something they won’t use or don’t want.”

“This is just another example of our government with their hands in our wallets,” Roberts concluded. “Maybe the politicians need to take a step back, listen to what is being expressed by their constituents and remember they work for us, not the other way around.”

Click Here to Read the Updated Draft of the Program Rules