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June 9th, 2014

Current Economic Situation on the Unemployment System

Information for PEOs and their Clients on the Impact of the Current Economic Situation on the Unemployment System – What it means for all employers!

The current economic recession has impacted virtually all businesses.

Whether it is decreased consumer demand, restrictions in financing, shrinking workforces, or increased operational costs, these are indeed challenging times for everyone. Employers who have partnered with a PEO have many human resource related benefits that help in getting through economic downturns.

This is particularly true in the area of unemployment insurance. PEO professional management practices and administrative efficiencies allow clients to successfully minimize cost and exposure in both staff reductions and staff expansions. PEO benefits help to retain key staff and PEO administrative services can guide clients in effectively handling unemployment insurance (UI) issues.

However, no business (PEO or client) will escape some of the major impacts that the recent economic turmoil will mean for all businesses across the country – especially in the area of UI. Both PEOs and their clients must understand that the staggering costs of the recession will require contributions from all businesses for the unemployment system to recover.

Q: What factors impact UI costs?

A: Increased utilization of the system is the greatest cost driver. The current high employment, coupled with extended and expanded benefits, has imposed enormous burdens on every state system in the United States. Exact costs are determined by a number of factors relative to the type of system utilization they have (i.e. layoffs), new hires, and claims management. However, all employers share the cost of other employers who go out of business and no longer contribute to the system.

How has the current recession impacted employers?

A major impact of the current economic recession has been increased unemployment. According to the U.S. Bureau of Labor Statistics, the unemployment rate has more than doubled from 2006 (4.1 percent) to the current rate (9.7 percent).

How long will unemployment remain high?

A: Experts differ on how and when the economy will fully rebound from the most recent recession. However, historically the recovery in employment has usually trailed other elements with employers relying initially on productivity through reduced workforces.

Where do unemployment funds come from?

The state-federal unemployment system is funded by employer contributions. An individual employer’s contribution is made of essentially two components – fixed cost contribution and experience rating charges (i.e. the more layoffs or undisputed claims an employer incurs, the more all employers must contribute to the system). Both fixed costs (those for operating the system) and increased use (additional benefits cost) increase during bad economic times.

Q: I have heard a lot about Congress expanding UI benefits. How does that impact overall costs?

A: The American Reinvestment and Recovery Act of 2009 (a.k.a. “The Stimulus Bill” or ARRA) contained provisions that incentivized the states to expand and/or extend UI benefits to additional workers thereby increasing the burden on the system, and consequently driving up the cost of UI for all employers. Additional Congressional action is anticipated to further add to the UI system costs.

Q: Do we know how much UI costs will increase for employers?

A: If we use past recessions as a guide, the employer costs associated with UI doubles during periods of high unemployment. Given the severity of the most recent cycle, this is not an unrealistic estimate and may in fact be low. In some cases, states not only increase the UI rates by the amount of wages which are subjected to UI taxes.

Q: I have a good record, why would my costs increase?

A:There are several reasons that all employers’ costs can be expected to increase. These all fall under a phenomenon called “socialization” where costs of the system are spread over all employers.

  • Fixed cost increases – All employers share a portion of the fixed costs of the UI system which essentially means the costs of administering the program. Of course, in times of high unemployment there are increased administration costs (e.g. more claims to process, more workers to assist in work search).
  •  Statewide Unemployment Impact – All employers share some cost for the UI system regardless of their individual hiring experience.
  •  Borrowings – Additionally, if a state UI fund runs out of money, they must borrow from the federal government and the interest charged to the state borrowing money is assessed to the employers in the borrowing state. One method of recapitalizing the fund and paying off borrowing is for a state to raise the wage base and this affects all employers regardless of their experience.
  • FUTA Credit Reduction – Where a state is unable to repay federal borrowings in a timely manner, the credit for state payments (SUTA credit) against the FUTA tax is reduced for employers in that state, adding cost to each employer in the state.
  •  Recapitalization of State Trust Funds – With the vast majority of state UI trust funds out of money, it will be necessary for states to adjust employer contributions to ensure the trust funds are recapitalized.

Q: How long will increased costs last?

A: Again, depending on a variety of factors, costs can be expected to remain high for five to 10 years. States whose funds are exhausted will have to borrow to fund unemployment costs, which means that employers will have to be assessed to cover the present costs, the funds necessary to pay the interest and principal on the borrowings, and the funds necessary to recapitalize the funds.

Q: How does a PEO help clients with UI?

A: A PEO brings tremendous value to clients in the handling of UI. First, a PEO can provide expertise and guidance in handling personnel terminations and layoffs. The PEO can also assist the client in the administration of legitimate claims and in preventing illegitimate claims for workers that are not entitled to UI. A PEO can provide professional expertise in handling UI issues, dealing with the complexities of the UI system, managing claims and hearings, and, in some cases, providing assistance to employers in finding alternative employment opportunities.

Q: As a client of a PEO, is there anything I can do to help contain costs?

A: As an employer funded system, there is no way around the fact that rising unemployment rates are going to impact all employers. However, there are steps clients can take to help control costs to the greatest extent possible. Among those are:

  •  Documentation and record keeping. Following the established procedures will assist in avoiding unnecessary claims activity. The use of job descriptions and performance appraisals can help when making “for cause terminations.”
  •  Be on the lookout for fraud. According to UI experts, as much as 10 percent of all costs in the UI system are attributable to fraud.
  • Good Hiring Practices. Proper pre-employment screening, training, and supervision assist in the retention of quality employees and reduces for-cause terminations.

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