Unemployment insurance continues to be front and center in the news. Commentators discuss: the legislation pending in Washington D.C. to extend long-term benefits; changes in state and federal unemployment law; and the rise of unemployment rates across the country. How did everything get so out of control? Here is an overview of how we got here and where we seem to be going.
Background
Unemployment insurance benefits (“UI”) came about in 1935 as a social welfare program during the Great Depression to help unemployed persons pay for their basic necessities while looking for jobs. It was created by federal law and is administered by the federal Department of Labor’s Employment and Training Administration and by individual states. UI is financed through both state and federal taxes on employers based on payroll. Federal taxes are mainly used to pay for administrative costs while state taxes pay for benefits. Tax revenue is deposited into individual state trusts that are managed by the federal Treasury Department.
The Great Recession of 2008 resulted in another significant job loss nationwide and many employees again turned to UI. Just as in 1935, many employers faced decreasing profits or losses and were forced to lay-off current employees and stop hiring new employees. As a result, employees found themselves without work and forced to apply for UI. While these benefits were designed to temporarily replace wages for employees between jobs and to support the economy itself by giving laid-off consumers’ money to spend, the benefits were too small and didn’t last long enough in this distressed economy.
A History of Benefits Extensions
The federal government has typically stepped in during economic downturns and funded temporary benefits extensions. It did so in June 2008, by creating the Emergency Unemployment Compensation (“EUC”) program, a temporary fully federally funded program, to extend UI benefits once state benefits had been exhausted. It was modified and extended repeatedly but ran out on January 1, 2014. Currently, legislation aimed at reauthorizing EUC has passed in the Senate but not in the House.
Another program that has been around since 1970, the Extended Benefit Program, adds additional benefits to employees in certain states where unemployment rates are very high. Typically, the cost of this program is split between the state and federal governments. However, since 2009, it has been fully funded by the federal government, which funding expired at the end of 2013.
Federal Legislation to Detect and Reduce Improper UI Payments so the Funds can Remain/Return to Solvency
During the last few years, it has become increasingly important to ensure UI benefits are reaching those that need it. In an effort to detect and reduce improper payments, the federal government passed legislation in 2011 that became effective October 21, 2013, as part of the Trade Adjustment Assistance Extension Act of 2011, entitled the Unemployment Insurance Integrity Act.
This Act required states to adopt certain laws by October 21, 2013 in order to receive full state UI credit against FUTA taxes. Among the requirements are that states enhance penalties for fraudulent claimants, revise the timing of “new hire” reporting, and require employers to respond to UI claim notices adequately or risk losing credit later for erroneous charges. This was going to help return the program to solvency.
Despite all this, States Still Can’t Fund UI
Despite the federal programs’ funding extended UI, states have had to pay for the initial unemployment benefits which have been dramatically increasing for several years. Federal law requires states pay for benefits even if the trust where this money originates becomes insolvent. When these trusts are depleted, states can borrow from the federal Treasury but after a grace period, they must repay these loans with interest. Interest payments that become due cannot be paid out of the trust fund and therefore states must separately bill employers for this amount, typically through special assessments. Many of the states’ payments on these loans became due in the last quarter of 2013. Despite levying special assessments to pay these debts, many states who borrowed this money remain insolvent. Their only solution is to curtail benefits and reduce costs.
A Case Study – New York
New York was one such state that was forced to borrow money when the New York State Insurance Fund became underfunded. As a result, New York borrowed $3.5 billion from the federal government with $85 million in interest due in 2013. In order to pay for the interest, the state assessed a temporary Interest Assessment Surcharge on employers. For 2013, the maximum assessment for an employer was $12.75 per employee. As a result of this and the new federal law requiring certain changes to state UI law, New York passed legislation in 2013 aimed at repaying the loan quicker and avoiding large interest payments. Some of the key changes New York made are:
Penalties for Incomplete and Late Responses
Under the new rules, employers may lose the right to receive credit for benefits erroneously paid or overpaid. After an employee files for UI, the New York Department of Labor (“NYDOL”) will contact the most recent employer to fill out certain paperwork within 10 days and gather other information. As of October 1, 2013, if an employer provides incomplete answers or responds late, employers lose their right to a credit if it is later determined they are owed one. Previously, this was allowed. For example, if an employer does not submit paperwork regarding an employee who claims entitlement to UI benefits, and it is later determined the employee was not entitled to benefits, the employer will not receive a credit for benefits erroneously paid. Instead, these monies will revert to a general fund. There is one exemption for where an employer overpays and can establish good cause for a delinquent response.
Separation Pay Preclusion
Another change impacts individuals who receive a severance package. Effective January 1, 2014, former employees who receive severance pay within 30 days after their employment relationship ends, and the severance is greater than the maximum weekly amount, cannot collect unemployment benefits. If the severance pay ends or is no longer greater than the weekly maximum rate, the employee becomes eligible for unemployment benefits. Employers who do not want to pay UI immediately should structure the severance payments so the payments start within 30 days of the employee’s last day. If severance is made in a lump sum, the NYDOL will divide the severance by the maximum amount of weekly benefits to determine the number of weeks of ineligibility for UI.
Pension Pay Reduction
Similarly, if an employee is receiving a pension from the employer from whom he/she wishes to receive UI, those benefits will be reduced by the weekly amount of the pension, prorated.
Increase in Wage Assessment
Another change is an increase in the taxable wage rate. Employers typically pay UI tax based on the number of employees in the state and their experience rating, which is assessed on the first $8,500 that an employee earns. Starting January 2, 2014, that number is $10,300 and rises to $13,000 by 2026. This increase will put New York’s taxable wage rate more in line with the rates of surrounding states.
Penalty on Claimants For Failure to Repay Benefit
Another change impacts individuals who are erroneously paid benefits or who are overpaid benefits. These individuals have twelve months to repay the money and if they do not do so, the NYDOL will assess a penalty of 15% on the overpayment or $100, whichever is greater. In addition, the individual will forfeit four days of future UI benefits for every week the individual was overpaid.
Stricter Definition of “Actively Seeking Work”
A final change is the NYDOL’s adoption of a more stringent definition of “actively seeking work” from “ready, willing and able to work” to “engaged in systematic and sustained efforts to find work.” The NYDOL is creating procedures to monitor claimants’ job searches to determine if this standard is met.
Other States
In addition to New York, other states have passed legislation aimed at reducing the high cost of funding UI debts.
In 2013, North Carolina reduced the maximum weekly benefit from $535 to $350 per week, reduced the benefit duration from 26 to 20 weeks, and created a sliding scale for benefits duration between 5 and 20 weeks depending on the state unemployment rate. More changes are likely to come.
In 2011, Michigan passed legislation which increased the taxable wage base from $9,000 to $9,500, heightened the standard for “looking for work,” and strengthened the rules for eligibility and disqualification standards, among other changes.
According to the National Conference of State Legislatures, as of December 16, 2013, fifteen states and the U.S. Virgin Islands owed money to the federal government loan fund for state unemployment programs totaling approximately $20 billion for loans taken out beginning in 2008 until present. The two highest debtors are California and New York.
Conclusion
Despite what anyone thinks of UI, it is here to stay. The question, however, is how to pay for it. The answer, at least in part, is more federal funding and the passage of state laws reforming UI. Be sure you know what your state is doing and how this will affect your costs and your (former) employees’ benefits.
Brody and Associates regularly advises management on complying with state and federal employment laws. If we can be of assistance in this area, please contact us at info@brodyandassociates.com or 203.965.0560.
This article first appeared in the September issue of Employment Law Strategist.
