State Disability Insurance in the USA

When your London-based fintech company hires its first California employee, you receive a notice about State Disability Insurance withholding requirements within days. Your HR director in Dublin asks what SDI means, whether it’s required in all states, and how much it costs.

You’re not alone. International companies expanding to the United States often discover mandatory state insurance programs that don’t exist in most other countries, creating compliance obligations that catch even experienced global businesses by surprise.

Unlike the UK’s Statutory Sick Pay or Ireland’s social welfare illness benefit programs funded through general taxation, five US states require employers to provide State Disability Insurance through a combination of employee payroll deductions and, in some cases, employer contributions.

These mandatory programs provide partial wage replacement to workers unable to perform their jobs due to non-work-related illness, injury, or pregnancy. For European companies accustomed to more uniform national employment systems, navigating this state-by-state patchwork of disability insurance requirements represents one of the more complex aspects of US market entry.

What Is State Disability Insurance and Why Does It Matter?

State Disability Insurance provides temporary wage replacement to employees who cannot work due to non-work-related illness, injury, or pregnancy. If your employee in California breaks their leg skiing over the weekend, they can claim SDI benefits while recovering. If your New Jersey employee needs surgery for a medical condition, SDI provides partial income during their recovery period. If your pregnant employee in New York takes disability leave for childbirth, SDI replaces a portion of her wages.

SDI exists to protect workers from income loss during temporary disabilities that prevent them from performing their jobs. The keyword is “temporary.” These programs provide short-term benefits, typically for several weeks to several months, not permanent disability support.

What SDI covers:

• Non-work-related illness or injury
• Surgery and recovery periods
• Pregnancy and childbirth
• Mental health conditions requiring time off work
• Temporary disabilities preventing job performance

What SDI does NOT cover:

• Work-related injuries or illnesses (covered by workers’ compensation)
• Long-term or permanent disabilities (covered by federal Social Security Disability Insurance)
• Unemployment (covered by state unemployment insurance)
• Time off for reasons other than medical disability

Only five states mandate SDI programs: California, Hawaii, New Jersey, New York, and Rhode Island. Puerto Rico also maintains a similar mandatory program. In the remaining 45 states, short-term disability coverage is optional. Employers may choose to offer it as a voluntary benefit, but no state law requires it.

For international employers, this creates a compliance challenge. Your company might have employees in Texas (no SDI requirement) and California (mandatory SDI). You need different payroll processes, different employee communications, and different benefit administration for workers in different states. This state-by-state variation differs fundamentally from European systems, where national programs apply uniformly across the entire country.

Why International Companies Need to Understand SDI

State Disability Insurance matters for international employers for three critical reasons: legal compliance, cost planning, and employee expectations.

Legal compliance: SDI is mandatory in five states. If you hire even one employee in California, Hawaii, New Jersey, New York, or Rhode Island, you must comply with that state’s SDI requirements. There is no employee count threshold, no grace period, and no exemption for foreign companies. Your first hire triggers full compliance obligations including registration with state agencies, payroll withholding, quarterly reporting, and remittance of contributions.

Cost planning: SDI contributions affect your total labor costs. While employees typically fund most SDI costs through payroll deductions, employers bear administrative expenses and, in some states, direct contribution obligations. California’s 1.3% employee contribution rate on unlimited wages means an employee earning $150,000 pays $1,950 annually in SDI. New Jersey requires both employee and employer contributions for Temporary Disability Insurance. Hawaii requires employers to pay at least 50% of TDI premium costs. Understanding these costs upfront prevents budget surprises as you scale US hiring. Learn more about California’s employment compliance requirements.

Employee expectations: American workers in SDI states understand these benefits and factor them into employment decisions. Your ability to explain how SDI works, when employees can claim benefits, and how much they’ll receive demonstrates HR competence and builds employee confidence. Mishandling SDI creates confusion, compliance violations, and employee relations problems that damage your employer brand in competitive US labor markets. For more on what US employees expect, read our guide on full-time employee benefits in the USA.

The Five States With Mandatory SDI Programs

Understanding each state’s specific requirements is essential for compliance. While all five states provide wage replacement during temporary disability, the contribution rates, benefit calculations, and administrative processes differ significantly. Here is what international employers need to know about each state.

California State Disability Insurance

Administering Agency: California Employment Development Department (EDD)
Program Name: State Disability Insurance (SDI)
Year Established: 1946

2026 Employee Contributions:
California employees pay 1.3% of all wages with no wage cap. An employee earning $100,000 pays $1,300 annually. An employee earning $200,000 pays $2,600 annually. California eliminated its wage cap on January 1, 2024, meaning all wages are subject to SDI withholding throughout the year.

2026 Employer Contributions:
None for the state program. California SDI is funded entirely through employee payroll deductions. However, employers who establish approved Voluntary Plans must fund any difference between employee contributions and actual plan costs.

Maximum Weekly Benefit:
$1,765 per week for both Disability Insurance and Paid Family Leave claims.

Benefit Calculation:
60% to 70% of wages, depending on earnings level. Lower earners receive higher wage replacement percentages (up to 90% for workers earning under approximately $65,000 annually).

Benefit Duration:
Up to 52 weeks for Disability Insurance. Up to 8 weeks for Paid Family Leave.

Waiting Period:
7 consecutive days (unpaid) before benefits begin.

How to Comply:
Employers must register with the California EDD, withhold 1.3% from all employee wages, and remit contributions quarterly. California allows employers to establish approved Voluntary Plans as an alternative to the state program, but most employers participate in the state-run program.

Hawaii Temporary Disability Insurance

Administering Agency: Hawaii Disability Compensation Division
Program Name: Temporary Disability Insurance (TDI)
Year Established: 1969

2026 Employee Contributions:
Up to 0.5% of weekly wages, capped at $7.50 per week ($390 annually). The actual contribution depends on the insurance plan costs but cannot exceed these statutory maximums.

2026 Employer Contributions:
Employers pay at least 50% of TDI premium costs. The exact amount varies based on the insurance carrier and plan selected.

Maximum Weekly Benefit:
$871 per week.

Benefit Calculation:
58% of average weekly wages. If an employee’s average weekly wage is less than $26, the benefit equals the actual wage but not more than $14.

Benefit Duration:
Up to 26 weeks.

Waiting Period:
7 consecutive days (unpaid) before benefits begin.

How to Comply:
Employers must provide TDI coverage through one of three methods: purchasing insurance from an authorized carrier, adopting a self-insured plan approved by the Disability Compensation Division, or through a collective bargaining agreement with equivalent sick leave benefits. Employers withhold the employee contribution (up to $7.50 weekly) and pay their share of premiums directly to the insurance carrier.

New Jersey Temporary Disability Insurance

Administering Agency: NJ Department of Labor and Workforce Development
Program Name: Temporary Disability Insurance (TDI) and Family Leave Insurance (FLI)
Year Established: 1948

2026 Employee Contributions:

• TDI: 0.19% of first $171,100 in wages (maximum $325.09 annually)
• FLI: 0.23% of first $171,100 in wages (maximum $393.53 annually)
• Total maximum employee contribution: $718.62 annually

2026 Employer Contributions:

• TDI only: 0.10% to 0.75% of first $44,800 per employee (rate varies by employer experience rating, ranging from $44.80 to $336.00 annually per employee)
• FLI: None. Family Leave Insurance is funded entirely by employees.

Maximum Weekly Benefit:
$1,119 per week for both TDI and FLI.

Benefit Calculation:
85% of average weekly wages.

Benefit Duration:

• TDI: Up to 26 weeks
• FLI: 12 weeks for bonding with a new child; varies for family care

Waiting Period:
7 days (unpaid) before benefits begin.

How to Comply:
Employers must register with the Division of Employer Accounts, withhold both TDI and FLI contributions from employee wages, make employer TDI contributions, and remit quarterly. New Jersey allows approved private plans as an alternative to the state program.

New York Disability Benefits Law

Administering Agency: New York Workers’ Compensation Board
Program Name: Disability Benefits Law (DBL) and Paid Family Leave (PFL)
Year Established: 1949

2026 Employee Contributions:

• DBL: Up to 0.5% of weekly wages, capped at $0.60 per week ($31.20 annually)
• PFL: 0.432% of wages, capped at $411.91 annually
• Total maximum employee contribution: $443.11 annually

2026 Employer Contributions:
Employers pay DBL insurance premiums (minus employee contributions). Premium costs vary by insurance carrier and employee demographics. Employers do not contribute to PFL (employee-funded only).

Maximum Weekly Benefit:

• DBL: $170 per week
• PFL: $1,228.53 per week

Benefit Calculation:

• DBL: 50% of average weekly wages
• PFL: 67% of average weekly wages

Benefit Duration:

• DBL: Up to 26 weeks
• PFL: 12 weeks
• Combined DBL and PFL cannot exceed 26 weeks in any 52-week period

Waiting Period:
7 days for DBL (unpaid). No waiting period for PFL.

How to Comply:
Employers must purchase DBL coverage from an approved private insurance carrier or self-insure with state approval. There is no state-run insurance fund. Employers withhold DBL and PFL contributions from employee wages and remit to their insurance carrier. The New York State Insurance Fund provides coverage for employers unable to obtain private insurance. Learn more about New York’s Paid Family Leave program at paidfamilyleave.ny.gov.

Rhode Island Temporary Disability Insurance

Administering Agency: Rhode Island Department of Labor and Training
Program Name: Temporary Disability Insurance (TDI) and Temporary Caregiver Insurance (TCI)
Year Established: 1942

2026 Employee Contributions:
1.1% of first $100,000 in wages (maximum $1,100 annually).

2026 Employer Contributions:
None. Rhode Island TDI/TCI is funded entirely through employee payroll deductions.

Maximum Weekly Benefit:
$1,103 per week (base benefit). Additional dependent allowances available: the greater of $20 or 7% of benefit rate for up to five dependent children.

Benefit Calculation:
4.62% of wages paid in the highest earning quarter during the base period (first four of the last five completed calendar quarters).

Benefit Duration:

• TDI: Up to 30 weeks
• TCI: 8 weeks (increased from 7 weeks effective January 1, 2026)

Waiting Period:
Must be out of work for at least 7 consecutive days (unpaid) before benefits begin.

How to Comply:
Employers must participate in the state-run program. Rhode Island does not allow private insurance alternatives. Employers register with the Department of Labor and Training, withhold 1.1% from employee wages (up to $100,000 annually), and remit contributions quarterly.

How SDI Differs From European Social Insurance Systems

European companies entering the US market often try to understand SDI by comparing it to familiar programs like UK Statutory Sick Pay, Ireland’s Illness Benefit, or Germany’s Krankengeld. While these programs share the goal of supporting workers during illness, fundamental differences in structure, financing, and administration make direct comparisons challenging.

The most significant difference is the absence of a unified national program. Unlike European countries where a single national system applies to all workers across the entire country, the US has five separate state programs with different contribution rates, benefit levels, and administrative processes. The remaining 45 states require no short-term disability coverage at all. European companies operating across multiple US states must manage different SDI obligations in each location.

Financing structures differ substantially. Most European social insurance systems split costs between employers and employees, often with significant employer contributions. In contrast, California and Rhode Island fund SDI entirely through employee payroll deductions, with no direct employer contributions to the state programs. Hawaii requires employers to pay at least 50% of TDI premium costs. New Jersey requires employer contributions for TDI (but not FLI). New York requires employers to pay DBL insurance premiums (minus employee contributions) but not PFL premiums. The employer-employee cost split varies dramatically across SDI states.

Perhaps most importantly, SDI provides income replacement without job protection. In most European countries, social insurance programs include strong employment protection during illness leave. US workers receiving SDI benefits have no automatic job protection unless they qualify under separate laws like the Family and Medical Leave Act. This separation of income replacement from job protection confuses many international employers accustomed to integrated systems.

US State Disability Insurance vs. European Systems (Key Differences)

Understanding these differences helps international employers set accurate expectations, budget appropriately, and avoid compliance mistakes based on home country assumptions.

Integration With Other Leave Laws

SDI programs interact with federal and state leave laws, creating both opportunities and compliance challenges for employers. Understanding how different leave entitlements coordinate helps employers provide accurate information to employees and avoid violations.

Federal Family and Medical Leave Act (FMLA)

The federal Family and Medical Leave Act provides eligible employees up to 12 weeks of job-protected unpaid leave for serious health conditions, family care, and other qualifying reasons. FMLA applies to employers with 50 or more employees and covers workers who meet service and hours requirements.

When an employee’s disability qualifies for both SDI benefits and FMLA protection, the leaves typically run concurrently. An employee recovering from surgery might receive SDI wage replacement while on FMLA job-protected leave. The SDI program provides income. FMLA provides job protection. Neither law requires the other. An employee might qualify for SDI without meeting FMLA eligibility criteria, or might exhaust FMLA protection while still receiving SDI benefits.

Note that even with a single employee working through an Employer of Record (EOR), employees may be eligible for FMLA because eligibility is based on the EOR’s total employee count, which typically exceeds 50.

Employers must track both entitlements separately and provide employees with required notices under each program. SDI claims do not automatically trigger FMLA leave, and employers must independently evaluate FMLA eligibility when employees need disability leave. For more information about FMLA requirements, visit the U.S. Department of Labor’s FMLA page.

State Family and Medical Leave Laws

Several states have enacted family and medical leave laws that expand upon federal FMLA protections. California’s Family Rights Act, New York’s Paid Family Leave, and New Jersey’s Family Leave Act each provide additional protections that coordinate with SDI programs.

These state laws often provide job protection during periods when employees receive SDI or PFL benefits. Understanding how state leave laws interact with SDI requires careful analysis of eligibility requirements, covered employers, qualifying reasons, and benefit coordination rules. Many international employers find these interactions confusing because the programs are administered by different agencies with separate notice and certification requirements. Stay current with 2025 employment law changes affecting leave policies.

Workers’ Compensation Coordination

SDI programs explicitly exclude work-related injuries and illnesses covered by workers’ compensation insurance. When an employee’s condition might qualify under either program, careful analysis determines the appropriate claim path. An employee injured in a car accident during their commute to work typically qualifies for SDI, while an injury occurring while performing job duties triggers workers’ compensation.

Employers sometimes face situations where workers’ compensation carriers deny claims, leaving employees without income replacement. Some SDI programs allow employees to claim SDI benefits while disputing workers’ compensation denials, with reimbursement requirements if workers’ compensation ultimately pays. Understanding these coordination rules helps employers counsel employees effectively and avoid potential liability.

How to Ensure SDI Compliance

Register before hiring: Complete SDI registration with the appropriate state agency before your first employee begins work. Registration processes vary by state but typically require employer identification numbers, business information, and banking details for remittance.

Update payroll systems annually: Review and update SDI withholding rates each January. Verify wage caps, contribution percentages, and remittance schedules for each state where you employ workers.

Provide required employee notices: Distribute SDI program information to new hires and post required notices in accessible locations. Maintain documentation proving notice distribution for compliance audits.

Track contributions accurately: Implement payroll systems that correctly calculate SDI withholdings based on state-specific rules. Multi-state employers need systems capable of applying different rates and caps to employees in different states.

Consider professional support: Many international employers work with Employer of Record services or Professional Employer Organizations during initial US market entry to handle SDI registration, withholding, and compliance while building internal capabilities.

How Foothold America Helps International Companies

Foothold America supports international companies navigating SDI requirements and broader US employment compliance challenges through specialized services designed for cross-border expansion.

Our Employer of Record service handles all SDI registration, withholding, remittance, and reporting while serving as the legal employer for your US workforce. We manage state-specific requirements across all five SDI states, keeping current with annual rate changes and notice requirements so you don’t have to. For companies not ready to establish US payroll operations, our EOR service provides immediate SDI compliance from your first hire. Learn more about choosing the right Employer of Record.

Our PEO+ Cross-Border Support service offers co-employment arrangements for companies that prefer to maintain employer status while accessing our SDI expertise and administrative capabilities. We handle payroll processing, tax withholding, and compliance while you maintain day-to-day employee management and corporate culture.

Companies establishing their own US entities can access our comprehensive guidance on employment compliance to build internal capabilities while understanding requirements like SDI, employee classification, and employee handbook requirements.