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Application Software
Michael Brown, Dallin Bills, Aaron Neil  |  March 27, 2023
The Next Horizon in HR Tech: Leave-of-Absence Management

Battery has a long history investing across the HR suite. Over the past four decades we’ve seen multiple platforms built to reduce reliance on third-party services and streamline tedious HR workflows tied up in email and spreadsheets. We have been fortunate to partner with a few of these exceptional companies selling into the HR function, including human-resource information system (HRIS) company HiBob* and VNDLY*, a vendor-management company that serves as an add-on to a company’s core HRIS system.

At the same time, Battery is a huge fan of the underlying tools supporting compliance professionals. Compliance is a mission critical function for many organizations, but our research has shown that the category generally has poor tooling, making life tough for compliance professionals. From Auditboard* in in-house audit to Hummingbird* in anti-money laundering, we’ve seen some of these modern tools make 10x improvements to how compliance teams get work done.

More recently, we have been excited about the intersection of these two thesis areas: HR and compliance. Specifically, one of the toughest domains where we have seen HR professionals struggle is with employee “leave of absence management”—and excitingly, we’re seeing technology rise to the challenge to improve these workflows.

Keeping Up with the Regulators

Hopefully, everyone has requested time off from work for a vacation. This process can be relatively straightforward, sometimes it is as simple as just sending an email to your boss or HR manager.

Now, have you ever had to take a leave of absence? Often underappreciated, a leave of absence—most common for people taking parental leaves, such as a maternity leave—is quite complex under the hood. Believe it or not, the term “leave of absence” itself has a regulatory aspect in that the phrase is included in laws established by the Family and Medical Leave Act (FMLA) and American with Disabilities Act (ACA).

At risk of oversimplification, the FMLA essentially mandates that employees who have worked for an employer for more than 1,250 hours be given up to 12 weeks of job-protected, unpaid leave per year, according to the legislation. This is applicable only to employers with 50+ employees and to employees who work in locations where their employer has 50+ employees within 75 miles. FMLA applies to parental, non-parental caretaking, military, and jury duty leaves. ADA, on the other hand, requires all employers to make reasonable accommodation for employees with qualifying conditions. These accommodations are commonly time off, in addition to workplace assistance.

Herein lies the complexity: FMLA and ADA are simply federal frameworks that states and municipalities build their own legislation on top of, in effect, forcing companies to stay on top of all three levels of bureaucracy. States and municipalities often have broader classifications of what leaves are protected (e.g., bereavement, voting, etc.) as well as more liberal leave regulations broadening employee FMLA eligibility scope and entitlements (e.g., compensation, which can vary at different levels of normal salary in different states/cities). The legislation at all three levels is constantly evolving and affects each individual employee differently based on determinations such as their location, leave history, tenure, and more.

Covid Magnified Leave Management Complexity

If that complexity weren’t enough, Covid has made it worse. In 2020, the federal government created job-protected paid leave policies to battle the pandemic, which brought attention to FMLA. Simultaneously, as many workers now have flexible working arrangements and states are competing for their tax dollars, state governments have been incentivized to expand their leave laws. As a result, today, according to the 2021 Guardian Absence Management Study and Index, nine states have paid leave programs, two states are implementing programs, and 33 more are trying to pass regulations. Today, roughly 7-10% of a company’s employees may go on a leave annually, which has increased from around 5% just 3-5 years ago.

Our research has shown that the HR suite typically has lackluster tooling to deal with leaves, so HR managers are feeling an acute pain caused by the increase in leaves. Sadly, most HRIS systems aren’t addressing leaves due to leave complexity and novelty. As a result, we found that around 40% of leaves today are outsourced to service organizations while roughly 60% are managed internally, most commonly on spreadsheets.

Software to the Rescue… Again!

How can companies keep up? There are numerous precedents where complexities created by overlapping federal, state, and municipal regulations have been streamlined by software: ADP in payroll, Avalara* in sales and use tax, and Provi in alcohol distribution, to name a few.

We’re now witnessing an exciting time where young and mature companies alike are tackling the leave management problem head on. Industry giants Larkin and Reed Group, which makes a product called LeavePro, offer fully outsourced, white-glove leave management. Startups like Cocoon, Tilt, and Sparrow are attempting to build a dynamic “rules engine” across the different federal, state, and municipal regulations. Meanwhile, more mature companies like AbsenceSoft and Qcera have very sophisticated platforms built through decades plus of FMLA experience.

Our research, including discussions with software providers and buyers, shows that the core of most new leave-of-absence solutions is functionality to deal with leave intake (people applying for leaves); leave eligibility; length determination, or figuring out how long the leave can be; and workflow management for supporting medical documentation, leave planning and communication, and responsibility handoff. Today, compensation management and claims filing remain harder problems to solve because employees are typically paid directly from their state/city (so if employers want to pay employees 100% of salary, they can’t directly see if the state paid their employee 50%, 60%, or 70% of their normal salary and the remaining amount they are on the hook for) and file for leave benefits directly with the state. More broadly, we believe leave management can act as a wedge into many employee benefit and fintech opportunities.

Call to Entrepreneurs

Battery is very excited about the future of leave management. In other types of technology sectors, we’ve witnessed “shadow markets” where purpose-built products can eat away at services spend and band-aid solutions to create large pools of software revenue—such as in Cube* for FP&A, Kojo* in construction procurement, Zip in spend approvals, or CaptivateIQ for sales commissions. We believe software can unlock $1B in spend through managing leave of absences alone by replacing existing services consumption.

We believe leave of absence management is a large, growing market solving an acute buyer pain point with an associated strong ROI and clear “why now” component. If you are building a company to improve leave of absence management, we would love to hear from you. Battery has decades of experience helping companies sell into the HR suite and addressing regulatory compliance.

This material is provided for informational purposes, and it is not, and may not be relied on in any manner as, legal, tax or investment advice or as an offer to sell or a solicitation of an offer to buy an interest in any fund or investment vehicle managed by Battery Ventures or any other Battery entity. 

The information and data are as of the publication date unless otherwise noted.

Content obtained from third-party sources, although believed to be reliable, has not been independently verified as to its accuracy or completeness and cannot be guaranteed. Battery Ventures has no obligation to update, modify or amend the content of this post nor notify its readers in the event that any information, opinion, projection, forecast or estimate included, changes or subsequently becomes inaccurate.

The information above may contain projections or other forward-looking statements regarding future events or expectations. Predictions, opinions and other information discussed in this video are subject to change continually and without notice of any kind and may no longer be true after the date indicated. Battery Ventures assumes no duty to and does not undertake to update forward-looking statements.

*Denotes a Battery portfolio company. For a full list of all Battery investments, please click here.

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