Lower your UI rates legally.
Before the days of regular garbage pick up, farmers used to dump their unwanted junk in fields and ravines behind their barns. In these rusty trash heaps, much would decompose, while the old cars and tractor parts would just create an unsightly mess. Thus when that great friend of the urban dweller, the sanitation worker came along, signs started sprouting up in the country and outside factories--No Dumping.
Given a better budget situation in California, the Employment Development Department would plaster "No Dumping" signs at businesses statewide to help build awareness and curb the illegal practice of state unemployment tax avoidance, or SUTA dumping.
Businesses and their advisers engage in SUTA dumping to illegally reduce unemployment insurance rates. SUTA dumping involves businesses transferring large blocks of payroll to new or different account numbers that enjoy more favorable UI rates. The EDD estimates that underpayments to California's Unemployment Insurance Fund due to SUTA dumping are in excess of $110 million.
"And that's not the full extent of it," says Richard Curry, division chief for the EDD's Field Audit and Compliance Division. "There are a lot of businesses that have manipulated their unemployment rate which I'm sure we have not addressed at this point. The $110 million is just a tip of the iceberg."
The most common scheme "is to simply try and register and obtain a new account number," says Curry, "These businesses conveniently avoid providing all the necessary information so that we don't know there is a predecessor with a history."
According to the experts, the best way to keep UI rates down is to simply maintain a stable workforce. That can be a challenge for accountants who often rely on seasonal workers during busy times. Firms that experience high turnover, large fluctuations in payroll or file and pay their taxes late typically have higher UI rates.
Given the inevitability of work force fluctuation, there are various tactics employers can use to help keep their UI rates low, many of which are generally unknown or often go unexplored.
KEEPING RESERVE ACCOUNTS HEALTHY
The reserve account is a book account that tracks UI contributions an employer pays as well as the benefit charges that are paid out to employees who have been laid off. An employer's UI rate is based upon the ratio between what's paid in and what's paid out of the reserve account. "The more positive your reserve account, the more benefit you'll get in terms of a lower rate," Curry says.
Basically, do everything you can to avoid laying off employees. Work with employees to avoid layoffs and voluntary quits. "Every separation has the potential to increase your UI contribution rate," says Curry.
Employers should explore alternatives to layoffs, such as granting leaves of absence to employees. Document all leaves of absence granted, the period of time and any extensions of the leave, and don't forget to document leaves of absence that have been denied. Granting a leave of absence not only adds some payroll relief for the employer but also ensures the continuity of a trained staff. And if someone quits the firm during a leave of absence, they most likely won't be eligible for UI benefits.
DOCUMENTATION AND COMMUNICATION
Give written notices prior to discharging an employee. Build a paper trail by keeping a copy of these written notices and any supporting information for use in justifying your actions.
Unemployed workers ordinarily not eligible for benefits may slip through the cracks if their separation from the firm is not properly documented. Aside from keeping UI rates low, good documentation practices help prevent fraud.
"Sometimes there are legitimate reasons for discharging somebody, where they wouldn't be eligible for unemployment insurance. But if you don't document it, you never know what could happen in subsequent proceedings," Curry says. "It's really a vicious circle."
Employees who are laid off are often out of work through no fault of their own and generally eligible for UI benefits. But if someone is fired for good cause, like chronic absenteeism, theft of company property, drinking alcohol on the job or other misconduct, good documentation practices can help deny a UI claim and spare the company more charges to its reserve account.
Communication is key. Try to understand the reasons employees have terminated their employment with the firm by conducting exit interviews. This could result in changes to your company policies or procedures and may assist in retraining your trained employees. If there is something in the company's policies and procedures that makes it more likely a worker will leave--such as refusing all leaves of absences or requests for flex time--it's more likely that more workers will leave, and file UI claims against the employer claiming a good cause for leaving work.
Be involved in the claims process as much as possible. Respond on time to any claim notices received from the EDD and provide clear answers to telephone interview questions from EDD personnel. If attending an appeal hearing, bring witnesses with firsthand knowledge of the pertinent facts.
In the event you do have to legitimately lay off employees, bring those individuals back into the fold as much as possible. When you rehire former employees who are receiving UI benefits, the charge against your reserve account will disappear. A caveat: Only rehire those with satisfactory performance; don't cause yourself grief and possible future UI rate increases by rehiring employees with mediocre performance
An often-overlooked alternative to keeping UI rates low is voluntary UI contributions. Eligible employers may voluntarily pay an additional UI contribution to obtain a lower UI rate. A Voluntary UI Contribution Notice is sent to eligible employers, reflecting the amounts payable to receive a lower rate.
Keep in mind that the voluntary UI contribution is not a prepayment but an additional payment, and cannot be deducted on a future tax return. Once a voluntary payment is made, the reduced rate is in effect for the full calendar year and the payment is not refundable.
The state also has several programs that employers can take advantage of to help reduce UI rates, many of which can be enormous cost-savers.
California's Work Sharing Program was established in 1978 and allows for the payment of UI benefits to employees whose wages and hours have been reduced. To be eligible, employers must have at least two employees participating in the Work Sharing Program with hour and wage reductions of at least 10 percent.
Basically, this a way to keep trained staff close to your business during the down times--an alternative to layoffs. Here's how it works: Let's say your firm has 100 employees and finds it necessary to lay off 20. Instead of laying off these employees, the employer participating in the Work Sharing Program keeps all 100 employees on the payroll, but reduces every employee's hours from five days to four days a week, thereby achieving the same 20 percent reduction in payroll. All 100 employees continue to earn wages for four days and are also eligible for work sharing benefits for the fifth (non-working) day.
When business improves, the employees simply resume their full five-day week.
This method is far less costly to the state in terms of paying out UI, thus they offer the incentive to employers.
The Partial Claims Program allows employers to keep trained staff partially employed during slow business times and allows temporarily laid-off employees to receive partial UI benefits. Employers can use the program if employees are temporarily working reduced hours or have been placed on layoff status for no more than two consecutive weeks. Like Work Sharing, the primary intent of this program is to avoid layoffs.
TIPS FROM THE LIAISON
There are several other ways to help keep your UI rates down, says Jim Counts, CPA, a Hemet-based sole practitioner and CalCPA's EDD liaison.
When an unemployed worker files an UI claim, the EDD looks at a "base period," a 12-month history of the worker's employment, to determine which business will pay what percentage of the unemployment insurance.
Wages of the highest quarter in that base period will be used to determine the amount of the weekly UI benefit. Every employer in that base period will be charged a percentage of the UI benefits paid to the departed worker. The percentage each employer pays is the percentage of wages paid by that employer of the total wages in the base period.
If someone is laid off after only two months of employment, their most recent previous place of employment will probably be charged the bulk of the UI claim, since wages per quarter would most likely be greater with the previous employer.
It benefits the employer then to know when to fish or cut bait. "Do whatever you can to try to get a worker to succeed. But if it becomes clear that a worker isn't going to work out, the sooner you get rid of them, the better you are from an unemployment insurance perspective," Counts says.
Another key is gathering information from a departing employee. In exit interviews or informal meetings, try to find out the departing employee's immediate plans.
"I've had people tell me that they plan on laying around for the summer," Counts says. But to be eligible for UI benefits, you have to actively look for a job. "So make immediate notation of whatever they say," Counts says.
Also important is making a good faith effort at finding a good employee another job. "Try to find a client or a contact in the business community that may be a good fit for the departing employee," Counts says. "Sometimes an employee may be a good worker, but a bad fit for your type of work or office environment." Finding satisfactory workers new employment severely reduces the possibility of their filing a UI claim.
And there are other programs employers should be aware of. If a business is anticipating a drop in business and would like to cut payroll--but doesn't want to lose any employees--the Paid Family Leave Program can be a way to lower UI rates.
"Ask your employees if any of them have had children in the last 12 months," Counts says. "Maybe the employee wasn't aware of the program, or hadn't considered it," but a Paid Family Leave can take salary off of the payroll for a period of six weeks.
A NEW FOCUS ON ADVISERS
The EDD will aggressively pursue those who advise businesses in SUTA dumping, as the practice is often peddled as sound business planning. In September, Gov. Schwarzenegger signed AB 664 into law, legislation that conforms to the federal anti-SUTA dumping legislation signed by President Bush in August, HR 3463.
"The legislation requires that states have both administrative and criminal provisions to go after the businesses engaged in SUTA dumping and anyone who advises those businesses," Curry says. "In the past, the advisers had been sheltered because there were no laws that allowed us to hold the advisers responsible; but with the new legislation, we have new tools at our disposal."
A section of AB 664 allows the EDD to fine advisers either $5,000 or 10 percent of the underpayment of contributions, penalties and interest. "We have cases that involve as much as $40 million, so it can be a very substantial assessment against the adviser," Curry says.
The EDD has assembled an audit staff to work specifically on SUTA dumping. Aside from continually working to provide support on a number of cases under appeal, the EDD is tightening its processes to try to detect SUTA dumping activities before account numbers are assigned and businesses begin reporting.
The EDD has also opened its lines of communication with other interested parties. "We've initiated communication with the DOL and other states to improve our enforcement efforts." Curry says.
Jerry Ascierto is CalCPA's managing editor. You can reach him at firstname.lastname@example.org.
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|Title Annotation:||unemployment insurance|
|Date:||Jan 1, 2005|
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