Rise in jobless claims sparks more disputes.

California businesses have become more aggressive in disputing unemployment claims, generating unprecedented numbers of appeals from employees who have lost their jobs.

Amid the economic downturn of the past three years, many employers have begun to automatically question certain unemployment claims as they seek to avoid higher payroll taxes.

"Most employers protest a claim automatically," said Jernay Cannon, a regional sales manager in Los Angeles for Talx Corp., a St. Louis-based payroll company that has become, the largest unemployment cost management firm in the United States.

When workers are let go from a company, they don't automatically receive unemployment benefits. Under existing rules, employees who are laid off because of job cuts or poor performance can collect jobless benefits, while those who quit or are fired for "misconduct" cannot.

The employee files a claim, and the company, or its outside claims administrator, tells the state Employment Development Department the reason for the termination. The EDD then decides whether a person can receive benefits.

Either side can appeal.

With the state unemployment rate at 6.6 percent, rising unemployment claims can translate into higher tax rates for businesses.

"This is one of those silent crises that California seems to have and nobody wants to talk about it openly," said Julianne Broyles, lobbyist with the California Chamber of Commerce.

But to keep claims down, some employers have been known to fire several people individually, instead of as a group, thereby avoiding the appearance of layoffs. Or they allege that employees were fired for misconduct when the ex-employee maintains there was no cause.

Third party administrators who handle the claims for employers often dispute every claim on behalf of an employer on the theory that some ex-workers won't fight, said Mika Spencer, a plaintiffs' attorney in San Diego.

Appeal bottleneck 

The problem will become more acute next year when the state is expected to impose a 15 percent "emergency solvency surcharge" on all employers in an effort to rebuild the depleted unemployment insurance trust fund.

According to the EDD, the trust fund is expected to fall to $1.7 billion by the end of this year, down from $3.7 billion on Dec. 31. Broyles said those numbers underestimate the problem and the fund is near depletion already.

The rising number of appeals is having a big impact on the state's Unemployment Insurance Appeals Board, the quasi-judicial body with 12 offices statewide that hears unemployment disputes between companies and former employees.

The number of appeals has jumped 31 percent in each of the past two years and is up 9 percent through May of this year. The board has added 27 administrative law judges to its ranks of 200 judges statewide. The judges handle 260,000 appeals each year, of which 68 percent are resolved in favor of employers.

Last month, 558,761 Californians received unemployment insurance benefits, an 8 percent increase from the like period a year earlier.

Ironically, the rise in appeals has forced the appeals board into its own labor dispute with the union representing administrative law judges. Earlier this year, the board increased the number of claims handled by each judge and the union protested the action.

Unemployment benefits are funded entirely by taxes paid by California employers. The taxes range from 0.1 percent to 5.4 percent of payroll. Employers pay the tax on the first $7,000 of each employee's salary and put the money into a special unemployment insurance reserve account. Industries such as restaurants and temporary staffing firms pay among the highest tax rates because they have high employee turnover.

As part of an incentive to reduce employee turnover, each employer's tax also is based on past claims. In addition, the state sets a tax schedule that rises and falls depending on the condition of the unemployment insurance trust fund - a reserve funded by taxes on employers that is used to pay benefits to employees of bankrupt companies, among other categories.

For the first time in two decades, California is set to tax employers in 2004 at the highest rate possible. That has gotten the attention of business groups like the California Chamber of Commerce, which believe the entire system needs to be reformed.

The small companies the chamber represents are paying disproportionately higher rates than larger ones, Broyles said.

She estimated that California will have the highest average unemployment insurance tax rate in the nation next year, at 4.71 percent of payroll, up from 3.13 percent this year and 2.62 percent in 2002. (Those figures exclude the potential 15-percent emergency solvency surcharge.)

Another reason claims have risen is higher benefits.

Legislation that became effective in January 2002 increased the maximum weekly jobless benefits in California to $370 from $230. The maximum will rise again in 2005, to $450.

In addition, unemployed workers are having a tougher time finding new jobs, lengthening the average of each claim.

"Today when a person is laid off because an employer is cutting its workforce, they are collecting for 26 weeks," said Bill Flayer, owner of Employers Consulting Group, art unemployment cost management firm in Glendale. "I think employers are pretty fed up because there's not a whole lot they can do about it."

In anticipation of higher rates, some outside administration firms are advising employers to begin conducting audits to identify their potential tax rate for next year. Others suggest companies explore the possibility of making onetime voluntary contributions to their reserve accounts that can lower the overall tax rate.

"The unemployment insurance system is one of those costs that can actually be controlled if employers are smart and aggressive about it," said Jim Potts, principal of Potts & Associates, a Los Angeles-based unemployment cost management firm.

"I'm sure there are those employers that will try to look for a reason to get rid of people so they won't qualify for unemployment and their rates won't go up," he said. "But employers also run the risk of being sued if they're going to mask why they let an individual go."