Employment and Training Administration Advisory System U.S. Department of Labor
Washington, D.C. 20210 |
CLASSIFICATION
UI CORRESPONDENCE SYMBOL OWS DATE August 9, 2002 |
ADVISORY: | UNEMPLOYMENT INSURANCE PROGRAM LETTER NO. 34-02 |
TO: | ALL STATE WORKFORCE AGENCIES |
FROM: | CHERYL ATKINSON /s/ Administrator Office of Workforce Security | |
SUBJECT: | Tax Rate Manipulation - State Unemployment Tax (SUTA) Dumping |
RESCISSIONS | EXPIRATION DATE |
None | August 31, 2003 |
This type of UI tax rate manipulation, or "SUTA Dumping," by the leasing industry was documented in a study completed in August 1996, by KRA Corporation. The study, funded by the U.S. Department of Labor (Department), was entitled, Employee Leasing: Implications for State Unemployment Insurance Programs. It was again documented in October 1998 in the Department of Labor, OIG, Final Audit Report No. 03-98-007-03-315: Effect of Employee Leasing on the State of Georgia Unemployment Insurance Trust Fund.
Both the KRA study and the OIG audit concluded that such manipulative activity could result in a loss of state UI tax revenue. This loss of revenue translates into a socialization of costs as all employers would pay increased taxes to offset the loss in unemployment funds. Both reports also concluded that these types of transactions could occur in industries other than employee leasing.
The Department recently learned that "SUTA Dumping" has been detected in other industries that tend to have high turnover of staff and high UI costs, including temporary help, construction, and service organizations such as the hospitality industry. The Department has also learned that certain advisory companies are promoting this type of activity as a way of reducing expenses and increasing profits.
4. Discussion. "SUTA Dumping" compromises experience rating systems by eliminating the incentive for employers to keep employees working and returning claimants to work as soon as possible and unfairly shifts costs to other employers. In order to maintain the integrity of their experience rating systems and unemployment funds, states should promote legislation to deter UI tax rate manipulation schemes and ensure they are detected early and immediately corrected when found.
Examples that deter "SUTA Dumping" can currently be found in several state laws:
While California law makes the determination that the same employer is in existence and therefore maintains the same tax rate, Delaware and Texas require a transfer of experience when there is a continuity of ownership and management from the predecessor to the successor companies. Both of these approaches deter owners of a company that have formed additional companies, owned by basically the same individuals, from transferring all their employees into the company with the lowest tax rate and dumping the higher tax rate.
Some state laws have incorporated language that precludes a PEO from being considered a successor to one of its client companies. Similar language could be utilized for other industries where activity such as buying small businesses for the purposes of obtaining a low tax rate is found to be occurring.
Delaware law further states at §3353(b): "Transfers of employment and benefit wage experience from a predecessor to a successor employer may be approved by the Department, upon request of the successor employer, if there is a continuation of essentially the same business activity as the predecessor employer by the successor employer. For the purpose of this section, such a transfer will be considered a 'voluntary transfer.'" The requirement to continue the business activity of the predecessor employer prevents a company from buying an unrelated business simply to acquire its experience and then discontinue the business activity of the predecessor.
In addition to the above, the Department recommends that instead of simply correcting the files when discovered, states should amend their laws to allow the imposition of penalties on companies found to be illegally manipulating tax rates. For example, state law could require assigning the maximum tax rate under state law for a specified period of time. Such a penalty could also be imposed on advisory firms promoting illegal schemes. If it is found to be a serious violation of law, a state may wish to consider criminal charges.
5. Action Required. State Administrators are requested to provide copies of this advisory to the appropriate staff.
6. Inquiries. Questions should be directed to the appropriate Regional Office.