Proposals to increase paid and unpaid paternity leave will be bad news for small businesses, say employers’ groups.

The Federation of Small Businesses and Forum of Private Business are warning that small companies will find it particularly difficult to replace skilled male workers and will struggle with administering statutory paternity pay.

The extension of paternity leave and paternity pay were among a raft of family-friendly measures contained in the Work and Families Bill, introduced to the House of Commons recently. These include:

* Extending paid maternity leave from six months to nine months from April 2007, with the aim of extending the period to 12 months by the end of this parliament.

* Significantly increasing the two weeks statutory paternity pay currently allowed, so that fathers can take up to six months paternity leave. This can include three months leave with statutory paternity pay if the mother returns to work after six months (which effectively allows parents to ‘swap’ three months of maternity pay for paternity pay).

The bill also contains measures intended to help employers plan their business around parental leave and to deal with the paperwork, including:

* Extending the period of notice for return from maternity leave to two months.

* Introducing “keeping in touch days” so that women on maternity leave can go into work for a few days, without losing their right to maternity leave or a week’s statutory pay.

* Measures designed to help businesses manage the administration of statutory maternity pay (SMP) and statutory paternity pay (SPP).

But despite the government’s efforts to sweeten the pill, the new legislation has caused alarm among the UK’s smallest entrepreneurs – and it’s not just about the money they’ll be paying to staff, as this can be recouped.

As under the present system, small businesses with annual NIC bills of up to £45,000 will be able to reclaim from HMRC all the SPP they are obliged to give (currently up to £106 a week), along with all SMP (90% of average weekly earnings for the first six weeks, then a maximum of £106 a week). Companies whose NIC liability is over £45,000 a year will continue to recoup 92% of statutory paternity and maternity pay.

The main issue for small businesses is the difficulty of filling skilled shoes for a short period of time – and it’s thought this will pose a particular problem in traditionally male-dominated sectors such as engineering and the building trades where there are already some skills shortages, and where the challenge of providing cover for parental leave may be a relative novelty.

“In many cases it will be impossible for a firm such an engineering company to find a temporary replacement skilled enough to provide paternity leave cover,” says Nick Goulding, chief executive at the Forum for Private Business (FPB). “While we endorse equal opportunities in the workplace, some of the firms we represent say they might even be forced to close if some of their key skilled male workers took up the right to paternity leave.”

One such member is Wayne Green, manager of W and M Joyce Engineering in London. “We employ nearly a dozen men whom it has taken years to gain the skills they need,” says Green. “If just one or two decided to take paternity leave, it would be impossible for us to find a temporary replacement capable of doing the job. This could have a crippling effect on our business.”

The Federation of Small Businesses (FSB) echoes the concerns of the FPB. The Federation’s employment chairman Alan Tyrrell says: “97% of businesses in the UK employ less than 20 people. Such employers will find it very difficult to put in place arrangements to hire suitably trained staff to take the place of employees who have children.”

The FSB also points out that the proposal to transfer an element of maternity leave from the mother to the father will now mean that two employers will have to make arrangements to cover for temporary leave. Another problem is the speed at which change is taking place, adds Tyrrell: “We appreciate these measures are family-friendly, but they are not business friendly, partly because they are being introduced at some speed, leaving small employers with little time to cope with the changes.”

The speed of change and the extra administrative burden have also raised hackles at the British Chambers of Commerce (BCC). The organisation’s director general David Frost warns: “Employers are concerned about the unprecedented pace and extent of change and the damaging consequences this could have for the operation of their businesses.

Small businesses now face tremendous pressures due to the likelihood of losing more key staff for longer periods of time. This could also be an administrative nightmare with employers having to cope with more paid maternity leave, more paid and unpaid paternity leave… With the economy slowing sharply and the business environment worsening, the Government needs to offer our firms support at this difficult time rather than burdening them with yet more damaging employment legislation.”

Employee bodies such as trades unions are understandably ‘pro’ the new proposals, and ‘anti’ the opposition being voiced by industry. The TUC recently warned employers’ organisations that they should be careful in expressing opposition to fathers’ rights, as it was sending the message that they value their male staff more than their female employees.

However, even the TUC has some misgivings about the bureaucratic burden placed on employers – a concern that is shared by industry bodies such as the CBI and Institute of Directors (IoD), which have given the new proposals a cautious welcome while expressing reservations.

The IoD says that the government should transfer responsibility for paying statutory maternity and paternity pay from employers to the state, if it wants to win over businesses.

“We cannot ignore the fact that smaller firms will finder it harder to cope with these proposals, hence the pressing need to reform the administration of maternity and paternity pay,” says IoD director general Miles Templeman.

The CBI says it will continue to press the government to take back responsibility for administering statutory parental pay from companies. TUC General Secretary Brendan Barber believes the government should listen to the employers case for transferring administration to the Revenue. “This would be a sensible move,” he says.

While the prospect of extra paper-pushing and losing skilled staff are the most immediate worries for employers, there is also some concern about the government’s long-term intentions for paternity leave, and the potential knock-on effects of the new legislation. The manufacturers’ organisation, the EEF, is concerned that the paternity leave proposals introduce “a new right” on which the government will inevitably seek to build in the future.

The CBI identifies a specific way in which such a new right could increase the burden on industry: “The planned introduction of unpaid paternity leave will put considerable pressure on firms to match their occupational maternity pay with paternity pay,” says CBI deputy director General John Cridland.

Other financial impacts on firms include the cost of recruiting and training replacement skilled employees, says the FPB. “If Labour is intent on introducing this equal right for male workers, the government should foot the bill for the extra cost of recruiting temporary workers for paternity cover, and they should also pay the costly bill for training such temporary staff, rather than expecting small businesses to pick up the hefty tab,” says FPB Chief Executive Goulding.

However, the FPB acknowledges that the levels of statutory paternity pay on offer may not be enough to entice a skilled male worker earning an average £300 to £400 a week – especially at a time when he has an extra mouth to feed. This means there is considerable doubt over the likely take up of paternity leave, and therefore the consequences for business.

In fact, research by the Chartered Institute of Personnel and Development (CIPD) suggests that there is unlikely to be a stampede to use the new paternal rights. A study commissioned by the Institute and published in the last year shows that less than half (46%) of fathers would take paternity leave at the current rate of pay. The improvements in unpaid leave “are unlikely to lead to a surge in up-take based on our research findings”, says the Institute. Fathers tell us they can’t afford to spend time with their newborn children at current rates of paternity pay.”