DIRECTIVE	:	UNEMPLOYMENT INSURANCE PROGRAM LETTER NO. 09-01
TO	:	ALL STATE EMPLOYMENT SECURITY AGENCIES
FROM	:	GRACE A. KILBANE Administrator Office of Workforce Security
SUBJECT	:	Required Preparations for Final Implementation of the North American Industry Classification System (NAICS) Coding

1. Purpose. To remind State Employment Security Agencies (SESAs) of the importance of NAICS coding, to provide an updated implementation schedule, and to define the State unemployment insurance (UI) program responsibilities for NAICS implementation.

2. References. Unemployment Insurance Information Bulletin No. 19-96; Federal Register Notice, April 9, 1997, 62 FR 17287; and Federal Register Notice, September 30, 1999, 64 FR 53135.

3. Background. NAICS was developed through a cooperative agreement between Canada, Mexico and the United States. It replaces the Standard Industrial Classification (SIC) system as the primary tool to collect business establishment level data. All Federal government agencies are required to collect industry data based on NAICS. States must have NAICS codes on their files for the Bureau of Labor Statistics (BLS), ES-202 program as well as other statistical programs, and for UI reporting purposes. It is imperative that UI program staff work cooperatively with Labor Market Information (LMI) staff or other appropriate State staff involved in industry classification coding to ensure that the coding is consistent, accurate and timely.

4. Implementation. NAICS implementation is comprised of two major phases.

   1. First Phase of Coding.  The first phase involves the conversion from SIC codes to the 1997-based NAICS codes for all business establishments. During the first phase, which began in Fiscal Year (FY) 1998 and had a targeted completion date of August 2000, States reviewed SIC codes and assigned NAICS codes to all records on their ES-202 files based on the 1997-based NAICS codes. All new accounts were also assigned these codes. For purposes of the ES-202 program, SIC codes are to be retained for existing records and coded for new units until the end of reference year 2002.

   2. Second Phase of Coding.  The second phase involves the needed conversion of approximately one quarter of the universe to new codes utilizing the 2002-based NAICS codes in certain industries in which changes were made under the auspices of the Office of Management and Budget. Phase two began in September 2000 and involves a records review for selected SICs where the 1997-based NAICS code is to be replaced with a 2002-based NAICS code. This process is scheduled for completion by August 2001. As stated in item a. above, for purposes of the ES-202 program, SIC codes are to be retained for existing records and coded for new units until the end of reference year 2002. BLS will publish the ES-202 data on the 2002-based NAICS codes beginning with release of calendar year 2001 data expected in the fall of 2002. Therefore, all new accounts will be assigned SIC codes as well as 2002-based NAICS codes.

5. NAICS treatment of Auxiliary Units. Under NAICS, auxiliary units carry the industrial code that represents the actual activity that the establishment performs (referred to as "AuxNAICS" in the BLS system). Under the SIC system, auxiliary units carry the industrial code of the enterprise served. NAICS' treatment of auxiliary units will be the basis for sample selection, benchmarking, analysis and other statistical functions performed by States and the BLS. Therefore, the correct assignment of these NAICS codes is essential to the quality and accuracy of the data published and used under NAICS.

6. State Responsibilities. 

   1. State UI Tax Files.  Those States that maintain industry codes on their UI tax files (as opposed to LMI files) must ensure that their codes agree with the ES-202 file for the same employer. The UI tax files should use the codes contained in the field name "AuxNAICS" in the BLS systems. UI tax program staff must work closely with staff responsible for the ES-202 report when making any changes involving these codes. Modification of State UI computer systems to accommodate the new six digit AuxNAICS codes should be completed by January 1, 2001.

   2. State UI Tax Forms.  States must ensure that sufficient space is provided on the Employer Liability (Status) forms to allow adequate information to be entered by employers upon which NAICS codes can be assigned. Changes to the Status form, if necessary, should be completed by January 1, 2001.

   3. State UI Tax Rates.  A number of States use industrial classification to establish both new and maximum employer tax rates. NAICS includes changes that may affect the assignment of UI tax rates in these States. As described above, auxiliary units are being reclassified according to their actual activity rather than the activity of the establishment that they are serving. Thus, auxiliary establishments will move out of sectors such as mining, construction and manufacturing, and into sectors in which their own production or service best fits. For example, headquarters units will be moved to the sector entitled "Management of Companies and Enterprises." Therefore, States that assign tax rates based on industry coding should be cognizant of these changes.

7. Action Required. State Administrators are requested to provide copies of this directive to the appropriate staff.

8. Inquiries. Questions should be directed to the appropriate ETA Regional Office.