DIRECTIVE	:	UNEMPLOYMENT INSURANCE PROGRAM LETTER NO. 14-94
TO	:	ALL STATE EMPLOYMENT SECURITY AGENCIES
FROM	:	MARY ANN WYRSCH Director Unemployment Insurance Service
SUBJECT	:	North American Free Trade Agreement Implementation Act (P.L. 103-182) - Provisions Affecting the Federal-State Unemployment Compensation (UC) Program relating to Self-Employment Assistance

1. Purpose. To advise State agencies of the provisions of the North American Free Trade Agreement Implementation Act which affect the Federal-State UC Program.

2. References. The Federal Unemployment Tax Act (FUTA); Title III of the Social Security Act (SSA); the Federal-State Extended Unemployment Compensation Act of 1970 (EUCA), as amended; Section 9152 of P.L. 100-203; Section 507 of the North American Free Trade Agreement Implementation Act (NAFTA), P.L. 103-182; Unemployment Insurance Program Letter (UIPL) 29-83, Change 1; General Administration Letter (GAL) 7-94; and UI Occasional Paper 92-2.

3. Background. On December 8, 1993, the President signed into law the NAFTA, P.L. 103-182, which affects the UC program in two ways. First, NAFTA created a transitional adjustment assistance program designed to address worker dislocation caused by NAFTA. This aspect of NAFTA was addressed in GAL 7-94. Second, NAFTA amended Federal law to give States the option of permitting, for a five-year period, certain individuals to receive a payment from the State's unemployment fund for the purpose of assisting such individuals in establishing a business and becoming self-employed. It is this second aspect of NAFTA which is the subject of this UIPL.

4. Discussion.

   1. In General.  The "withdrawal standard" of Section 3304(a)(4), FUTA, and Section 303(a)(5), SSA, limits withdrawals (with specified exceptions not relevant here) from a State's unemployment fund to payments of "compensation" and prior to the enactment of NAFTA would have prohibited withdrawals for the purpose of paying self-employment allowances. The term "compensation" is defined in Section 3306(h), FUTA, as "cash benefits payable to individuals with respect to their unemployment." Due to this requirement that the payment be with respect to "unemployment," the withdrawal standard has previously, with one temporary exception, prohibited States from using unemployment funds to assist individuals in establishing themselves in self- employment.

      The previous temporary exception was created by Section 9152 of P.L. 100-203, the Budget Reconciliation Act of 1987. P.L. 100-203 authorized three demonstration projects to test the feasibility of providing self- employment allowances, payable from a State's unemployment fund, to individuals. Only Massachusetts operated a demonstration project. The initial report on this project was issued in UI Occasional Paper 92-2, Self-Employment Programs for Unemployed Workers, and is available by writing Ingrid Evans, United States Department of Labor, Unemployment Insurance Service, 200 Constitution Ave. N.W., Room S-4231, Washington, D.C., 20210. A final report will be available in 1994.

      NAFTA amended Federal law to allow payments to self- employed individuals under specified conditions during the five years following NAFTA's date of enactment. The report of the House Ways and Means Committee describes the intent behind the new self-employment provision:

      Providing States the authority to establish and operate self-employment programs would significantly benefit workers that may be dislocated because of the NAFTA. The traditional system of unemployment compensation is primarily designed to provide income support for workers who are temporarily laid off or expect to be unemployed for only a short time. However, as a result of the NAFTA, some workers may lose their jobs permanently and need additional tools besides the basic income maintenance provided by the unemployment insurance system in order to reenter the work force. For some of those workers, access to a self-employment program would be the best path for them to reenter the work force. This provision gives states the ability to add the tool of self-employment training and support to the options available to help speed the tran- sition of dislocated workers back into the work force. [H. R. Rep. No. 361, Part 1, 103rd Cong. 1st Sess. 94 (1993).]

      Specifically, Section 507, NAFTA, amended the withdrawal standard (and the definition of "unemployment fund" in Section 3306(f), FUTA) to provide that amounts may be withdrawn from the unemployment fund of a State "for the payment of allowances under a self-employment assistance program (as defined in section 3306(t)) . . ." FUTA. This exception to the withdrawal standard applies solely to the to the self-employment assistance (SEA) allowances described in Section 3306(t), FUTA, which was also added to FUTA by Section 507(a), NAFTA. Under new Section 3306(t)(1), SEA allowances are payable "in lieu of regular" UC for the purposes of assisting individuals in establishing a business and becoming self-employed.

   2. Eligibility for SEA Allowances.  SEA allowances are to be payable "in the same amount, at the same interval [e.g., payment with respect to a period will be made weekly if that is the State's usual practice for claims for regular UC or every other week if that is the usual practice], on the same terms, and subject to the same conditions as" regular UC. (Section 3306(t)(2), FUTA.) This "equal treatment" provision applies to all monetary and nonmonetary (including reporting and certification) eligibility requirements except where specifically prohibited by other provisions of Federal law pertaining to SEA allowances. It also applies to notice and appeal rights.

      Since individuals engaged in self-employment activities will normally be disqualified if certain eligibility provisions for State UC are followed, Section 3306(t)(2), FUTA, provides that these provisions of State law shall not be followed. Specifically, the following provisions shall not apply:

      (1)  State requirements relating to availability for work, active search for work, and refusal to accept work.

      (2)  State requirements relating to disqualifying income are not applicable to income earned from self-employment by individuals claiming SEA allowances.

      In addition, individuals in the SEA program will be considered to be "unemployed" for purposes of both Federal and State UC laws provided the individuals meet provisions of State law subject to the above equal treatment provision and four additional eligibility provisions for SEA allowances discussed immediately below. (The effect of this requirement on Federal law is discussed below in item 4.f.)

      Section 3306(t)(3), FUTA, contains the four additional eligibility provisions which individuals must meet to receive SEA allowances:

      (1)  They must be eligible to receive regular UC under the State law (or they would be eligible but for the requirements suspended by the SEA provisions at Section 3306(t)(2), FUTA, as discussed above). This is basically a restatement of the "equal treatment" requirement of Section 3306(t)(1), FUTA, and includes monetary as well as initial and continuing nonmonetary eligibility. For purposes of determining SEA eligibility, "regular compensation" includes UC for ex-servicemembers (UCX) and former Federal employees (UCFE). (See item 4.g below.)

      Since the SEA allowance is "in lieu of" regular UC, the total amount of SEA allowances that individuals may receive is equal to their maximum benefit amount of regular UC less any regular UC previously received. Similarly, the weekly SEA allowance amount must equal the weekly benefit amount for regular UC. Also, SEA allowances and regular UC may not be paid for the same period.

      The term "regular compensation" is defined in Section 205(2), EUCA, as "compensation payable to an individual under any State unemployment compensation law (including compensation payable pursuant to 5 U.S.C. chapter 85), other than extended compensation and additional compensation." Thus, individuals who have exhausted regular UC are ineligible for SEA allowances. Individuals may not receive SEA allowances in lieu of Federal-State extended benefits (EB), additional benefits (AB)entirely financed by the State, any wholly funded Federal extension of UC, or other types of compensation not meeting the definition of regular UC.

      Individuals who are terminated from or voluntarily leave the SEA program may collect regular UC with respect to the benefit year (if otherwise eligible) until the total amount of regular UC paid and SEA paid equals the maximum benefit amount. Such individuals may be paid EB if otherwise eligible. This is because, under 20 C.F.R. 615.5(a)(1), these indi-viduals are "exhaustees" for EB purposes because they have received "all of the regular compensation that was payable under the applicable State law . . . ." Similarly, individuals who exhaust the maximum benefit amount as SEA program participants may also receive EB if otherwise eligible. Whether any of the individuals discussed in this paragraph are eligible for other Federal extensions will depend on the law creating the extension. Whether individuals are eligible for AB will be determined by State law.

      (2)  The individuals must be identified pursuant to a State worker profiling system as likely to exhaust regular UC. For further discussion of SEA profiling requirements, refer to items 4.d and 4.j of this UIPL.

      (3)  The individuals are participating in self- employment assistance activities which are approved by the State agency. State agency is defined in Section 3306(e), FUTA, as the authority "designated under a State law to administer the unemployment fund in such State." The activities which must be offered the individuals are entrepreneurial training, business counseling, and technical assistance. (Information concerning these activities may be found in UI Occasional Paper 92-2, which describes services provided to claimants participating in the self-employment demonstration programs in Washington and Massachusetts.) If these activities are not available, an individual pursuing self-employment will not be eligible for SEA allowances; determination of eligibility for regular UC for such individuals will be made under State law provisions relating to self-employment. The activities may be offered by either private or public entities.

      An individual who fails to participate in a scheduled activity (e.g., failure to attend a scheduled training course) is not considered to be participating in SEA program activities. However, for purposes of receiving a SEA allowance, it is not always necessary for the individual to have actually participated in SEA program activities for the week claimed. What is, at a minimum, necessary is that the individual be participating in a program (approved by the State agency) which provides training programs on an ongoing basis and allows individuals to avail themselves of other SEA program services when they are needed. As long as individuals are under such a program, even though no activities are scheduled for a given week, they will be considered to be participating in SEA program activities and may be paid SEA allowances. It is possible that an individual may be eligible for both regular UC and the SEA allowance. This will occur when the individual is participating in training related to self-employment which is also approved training under State law. In this instance, the State is free to determine whether regular UC or the SEA allowance will be paid as long the eligibility requirements for the respective program are met. However, in no instance may both regular UC and the SEA allowances be paid with respect to the same period.

      Since States do not disqualify individuals under their regular UC laws for failure to participate in SEA program activities, the SEA "equal treatment" provision does not address what disqualifications States may impose in these cases. It is recommended that States disqualify these individuals from receipt of SEA allowances only for the week the failure to participate occurs. Such individuals may be eligible for regular UC for that week if State law provisions relating to regular UC are met. Individuals who fail to meet the participation requirement may be dropped by the State from the SEA program.

      (4)  They are actively engaged on a full- time basis in activities (which may include training) relating to the establishment of a business and becoming self-employed. The Department of Labor ("Department") is researching the relationship of this requirement to the Americans with Disabilities Act. When this research is completed, guidance on what constitutes a "full-time basis" will be provided.

      As is the case with failing to participate in SEA activities, States do not currently disqualify individuals under their regular UC laws for failure to actively engage on a full-time basis relating to the establishment of a business and becoming self- employed. Therefore, the SEA "equal treatment" provision does not address what disqualifications States may impose in these cases. It is recommended that States disqualify these individuals from receipt of SEA allowances only for the week the failure to actively engage on a full-time basis occurs. Such individuals may be eligible for regular UC for that week if State law provisions relating to regular UC are met. Individuals who fail to meet the "full-time" requirement may be dropped by the State from the SEA program.

   3. 5 Percent Rule.  Section 3306(t)(4), FUTA, places a limitation on the number of individuals in a State who may receive SEA allowances. Specifically, it provides that the aggregate number of individuals receiving the allowance must "not at any time exceed 5 percent of the number of individuals receiving regular unemployment compensation under the State law at such time . . . ." The Department will monitor this "5 percent test" on a monthly basis. Therefore, States must use at least a monthly measurement period as well. The calculation relates to individuals actually receiving (i.e., paid) SEA for the week as a percent of those receiving regular UC for the same week. Thus, for example, if 10,000 individuals receive regular UC (including UCFE and UCX) for a given week, then no more than 500 may receive SEA allowances (including UCFE and UCX claimants). (Note: the 5 percent figure is not arrived at by taking 5 percent of the sum of the number of individuals receiving SEA and the number of individuals receiving regular UC.)

      The 5 percent figure is an express limitation which the State may not exceed. Therefore, States must monitor SEA allowance payments closely to assure that the 5 percent limitation is not exceeded. The Department recommends that new individuals not be added to the SEA program if it appears the 5 percent threshold may be exceeded.

   4. No Cost to Unemployment Trust Fund (UTF).  Section 3306(t)(5), FUTA, places an additional requirement on the States as a condition of paying SEA allowances. It provides that the payment of SEA allowances must not result in any cost to the UTF "in excess of the cost that would be incurred by such State and charged to such [Unemployment Trust] Fund if the State had not participated in" the SEA program. Put simply, payment of SEA allowances may not result in any additional benefit charges to the UTF. This limitation applies only to the benefit costs associated with the payment of SEA/regular UC. It does not apply to the charging of SEA allowances to employers.

      Since individuals successfully establishing themselves in self-employment will not collect EB, the UTF will accrue some savings to the Extended Unemployment Compensation Account and the State's account. However, since EB is not always payable in a State, the Department has determined that this "no cost" requirement will be met only if:

      (1)  The State implements a profiling system which assures that only claimants likely to exhaust regular UC will receive SEA allowances. An inadequate profiling system where those likely to not exhaust regular UC are allowed to receive SEA allowances will not meet the "no cost" requirement.

      (2)  The State creates "participation require- ments" designed to assure SEA allowances are paid only to those who actually participate in the SEA program. Participation requirements for determining if an individual is actively engaged on a full-time basis in SEA activities must be at least as stringent as the able and available requirements for regular UC; otherwise the SEA program will not meet the "no cost" requirement.

      More information on what is required of States in these areas is described in item 4.j below.

   5. State Reports.  Section 507(c), NAFTA, provides that any State operating a SEA program authorized by the Secretary of Labor must report annually to the Secretary the number of individuals who participate in the SEA program, the number of individuals who are able to develop and sustain businesses (e.g., business survival data), the cost of operating the SEA program, and compliance with program requirements. The report must also contain other relevant data needed by the Department, including data related to business income, number of employees and wages paid in the new businesses, and incidence and duration of unemployment after business start-up.

      State reports will be submitted with respect to a calendar year and will be due the June 30 following the report year. This means the first report may be for only part of a year. For example, if a State's SEA program is effective April 1, 1994, then the first annual report will be due on June 30, 1995 and will cover a nine-month period.

      Failure to submit the report as required will create an issue under Section 303(a)(6), SSA, which requires that, as a condition of receipt of administrative grants for the UC program, State law provide for "the making of such reports, in such form and containing such information, as the Secretary of Labor may from time to time require . . . ."

      Under Section 507(d), NAFTA, the Secretary of Labor is required to submit a report to Congress with respect to the SEA program not later than four years after the date of enactment of NAFTA. Since NAFTA was enacted on December 8, 1993, this report is due no later than December 8, 1997. This report will be based on the reports from the States operating SEA programs.

   6. Individuals Receiving SEA considered to be Unemployed.  As noted in item 4.a, Section 3306(h) defines "compensation" as "cash benefits payable to individuals with respect to their unemployment." Payments to self-employed individuals are not compensation since they are not payable with respect to unemployment. However, under Section 3306(t)(2)(c), FUTA, individuals to whom the SEA allowances are payable "are considered to be unemployed for the purposes of Federal and State laws applicable to unemployment compensation, as long as such individuals meet the requirements" of Section 3306(t). The effect of this provision is that, with respect to SEA, individuals are considered to be unemployed and payments made to them are considered to be "compensation." Thus, the term "compensation" is considered to include individuals eligible for SEA allowances. The term "regular compensation" does not, however, include SEA allowances. This is because under Section 3306(t)(1), FUTA, SEA is payable "in lieu of" regular UC.

   7. Equal Treatment Requirements Elsewhere in Federal Law.  In addition to the SEA "equal treatment" requirement in Section 3306(t)(2), FUTA, Federal law contains two other equal treatment requirements mandating payment of compensation "in the same amount, on the same terms, and subject to the same conditions" as UC payable under State law. One requirement is found in Section 3304(a)(6)(A), FUTA, and pertains to payment of UC based on services performed for State and local governments and certain nonprofit entities, commonly called "reimbursing" employers. The other requirement is found in 5 U.S.C. 8502(b) and pertains to payment of UCX and UCFE. As noted in item 1.f, above, the term "compensation" is considered to include SEA allowances. Therefore, individuals who perform services covered under these two additional "equal treatment" provisions must be given the option of receiving SEA allowances. The payment of SEA allowances does not require an amendment to the UCFE/UCX agreement.

      The "equal treatment" requirement contained in Section 3306(t)(2), FUTA, provides that SEA allowances will be "payable in the same amount, at the same interval, on the same terms, and subject to the same conditions, as regular unemployment compensation under the State law . . . ." Thus, SEA allowances must be paid to all eligible individuals to whom regular UC is payable under State law, including individuals who performed services to which Section 3304(a)(6)(A), FUTA, and 5 U.S.C. chapter 85 apply.

      These equal treatment requirements extend to all aspects related to the payment of SEA.

   8. Financing of SEA Allowances.  It will be necessary for States to review their laws to determine how the allowances will be financed. Financing depends on the type of employer for which the individual receiving the allowance previously performed services.

      (1)  Experience Rated Employers.  Section 3303(a)(1), FUTA, requires, as a condition of employers in a State obtaining the additional credit against the Federal unemployment tax, that no reduced contribution rate be assigned an employer, except on the basis of "experience with respect to unemployment or other factors bearing a direct relation to unemployment risk . . . ." All but one of the existing experience rating systems consist of charging payments of compensation or benefit wages to an employer who had previously provided employment to the compensated individual.

      As noted in item 1.f, under Section 3306(t)(2)(c), FUTA, individuals to whom the SEA allowance is payable "are considered to be unemployed for the purposes of Federal and State laws applicable to unemployment compensation . . . ." Under this provision, SEA allowances reflect "experience with respect to unemployment or other factors bearing a direct relation to unemployment risk" for purposes of Section 3303(a)(1), FUTA. Therefore, the measurement of an employer's experience through charges based on SEA allowances is appropriate.

      In charging SEA allowances, States must use the same method of charging (e.g., charging base period employers proportionately) and noncharge in the same situations (e.g., noncharging claims where the individual has voluntarily quit) as apply to regular UC. To fail to do this would raise an issue under the "uniform method" requirement of Section 3303(a)(1), FUTA. See UIPL 29-83, Change 1, dated September 24, 1991.

      The Department will address the issue of whether SEA allowances may be noncharged when it develops a comprehensive noncharging policy.

      (The one experience rating system not using payments of compensation or benefit wages is Alaska which uses a payroll decline system. The Department believes this system will not be affected by the payment of SEA allowances.)

      (2)  Reimbursing Employers.  Section 3309(a)(2), FUTA, provides that costs "of compensation attributable under the State law" to service performed for State and local governments and nonprofit organizations to which that section pertains must be reimbursed by such entities. Since, as discussed in item 1.f, SEA allowances are considered to be compensation, this requirement also applies to SEA allowances.

      (3)  Federal Military and Civilian Employers.  Under 5 U.S.C. 8509(b), moneys in the Federal Employees Compensation Account shall be "available only for the purpose of making payments to States pursuant to agreements" with the Secretary of Labor. Since payments of SEA are payments of compensation for purposes of Federal law, SEA allowances attributable to Federal military or civilian service may be charged to Federal employers.

   9. Payment of Administrative Costs.  Costs of administering SEA allowances (including those paid to UCFE and UCX claimants) are payable from grants received for the administration of State's UC law under Title III of the SSA. Costs of providing SEA program services such as entrepreneurial training, business counseling and technical assistance are not, however, payable from these Title III funds.

   10. Required Plan.  Section 3306(t)(6), FUTA, provides that a State SEA program must meet "such other requirements as the Secretary of Labor determines to be appropriate." Secretary's Order No. 4-75 (40 FR 18515) gives the Department the authority to make this determination. The Department has determined that, prior to implementing a SEA program, the Department must approve a State plan. This approval process will assure an orderly start-up of the SEA program in a State. To be approved the plan must contain:

       (1)  A description of the profiling system used to identify SEA program participants.  The State has three options for choosing a profiling system:

       (A)  Using elements of the statistical model developed by the Department for purposes of providing technical assistance in implementing Section 303(j), SSA. (Section 303(j), SSA, requires States to establish and use a system of profiling all new claimants for regular UC.) The report on the profiling model, Profiling Dislocated Workers for Early Referral to Reemployment Services by Kelleen Worden (October 6, 1993), is available from the appropriate Regional Office. If this model is used, States must re-estimate the coefficients using State data.

       (B)  A statistical model developed by the State.

       (C)  Another profiling method developed by the State.

       Regardless of which option is chosen, the State must demonstrate that its system has a high degree of accuracy for purposes of meeting the cost-neutrality requirement discussed in item 4.d. For this reason, the State must submit with its plan a baseline analysis of historical data indicating the extent to which the exhaustion rate of individuals identified by the proposed system exceeds the exhaustion rate of the population of all beneficiaries under the regular UC program. The determination of whether the system is sufficiently accurate will be made by the Department.

       (2)  Assurances that the annual report will be submitted as required and contain such information as required by this UIPL.

       (3)  A description of participation requirements including:

       (A)  The structured set of services provided to individuals in the SEA program. The description must address the working relationship of the State agency with any entity (such as a State economic development agency or an agency administering the Job Training Partnership Act) providing services under the SEA program.

       (B)  A description of what actions (such as certification procedures) the States will take to assure SEA participants are engaged "on a full-time basis" in self-employment activities.

       (4)  Legislative language implementing the SEA program consistent with the requirements of this UIPL. (Draft language is provided in Attachment II and a Commentary in Attachment III.)

       (5)  A description of the source (and amount of) funds for paying for SEA program activities such as entrepreneurial training, business counseling, and technical assistance, and assurances that Title III, SSA, funds will not be used for these activities.

       (6)  Assurances that the payment of SEA allowances will not create any additional benefit costs to the UTF.

       Since no State may commence operation of a SEA program without approval of a plan by the Department, States may expedite implementation of the SEA program by submitting their plans prior to obtaining legislation. Although the Department may provide provisional approval of a plan prior to enactment, it will not approve any plan until certified copies of SEA legislation are provided by the State. Any modifications to an approved plan are to be submitted to the Department.

       Proposed plans and modifications to approved plans are to be submitted to the appropriate Regional Office.

   11. Counting of SEA Claims for EB Trigger Purposes.  SEA claimants are to be included in the calculation of the insured unemployment rate (IUR) for purposes of determining whether EB is payable in a State.

   12. Reporting Requirements.  Any changes required in reporting to the Department will be addressed in future issuances.

   13. Effective Date and Termination Date of SEA Programs.  Under Section 507(e), NAFTA, the provisions of Federal law relating to SEA programs are effective on the date of enactment of NAFTA. In addition, these provisions provide only temporary exceptions to the withdrawal standard. The authority to operate SEA programs expires five years after the date of enactment of NAFTA. Since NAFTA was enacted on December 8, 1993, the SEA program provisions were effective on that date and expire on December 8, 1998.

5. Action Required. The establishment of SEA programs is optional for States. However, States must enact enabling legislation and obtain this Department's approval of a plan prior to implementing a SEA program.

6. Inquiries. Inquiries should be directed to the appropriate Regional Office.

7. Attachments.

   1. TEXT OF SECTION 507, NAFTA.

   2. DRAFT LANGUAGE TO IMPLEMENT A SELF-EMPLOYMENT ASSISTANCE PROGRAM.

   3. COMMENTARY ON THE DRAFT LANGUAGE TO IMPLEMENT A SELF-EMPLOYMENT ASSISTANCE PROGRAM.