[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
UNEMPLOYMENT FRAUD AND ABUSE
=======================================================================
HEARING
before the
SUBCOMMITTEE ON OVERSIGHT
and
SUBCOMMITTEE ON HUMAN RESOURCES
of the
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
JUNE 19, 2003
__________
Serial No. 108-25
__________
Printed for the use of the Committee on Ways and Means
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COMMITTEE ON WAYS AND MEANS
BILL THOMAS, California, Chairman
PHILIP M. CRANE, Illinois CHARLES B. RANGEL, New York
E. CLAY SHAW, JR., Florida FORTNEY PETE STARK, California
NANCY L. JOHNSON, Connecticut ROBERT T. MATSUI, California
AMO HOUGHTON, New York SANDER M. LEVIN, Michigan
WALLY HERGER, California BENJAMIN L. CARDIN, Maryland
JIM MCCRERY, Louisiana JIM MCDERMOTT, Washington
DAVE CAMP, Michigan GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota JOHN LEWIS, Georgia
JIM NUSSLE, Iowa RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas MICHAEL R. MCNULTY, New York
JENNIFER DUNN, Washington WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio XAVIER BECERRA, California
PHIL ENGLISH, Pennsylvania LLOYD DOGGETT, Texas
J.D. HAYWORTH, Arizona EARL POMEROY, North Dakota
JERRY WELLER, Illinois MAX SANDLIN, Texas
KENNY C. HULSHOF, Missouri STEPHANIE TUBBS JONES, Ohio
SCOTT MCINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
KEVIN BRADY, Texas
PAUL RYAN, Wisconsin
ERIC CANTOR, Virginia
Allison H. Giles, Chief of Staff
Janice Mays, Minority Chief Counsel
______
SUBCOMMITTEE ON OVERSIGHT
AMO HOUGHTON, New York, Chairman
ROB PORTMAN, Ohio EARL POMEROY, North Dakota
JERRY WELLER, Illinois GERALD D. KLECZKA, Wisconsin
SCOTT MCINNIS, Colorado MICHAEL R. MCNULTY, New York
MARK FOLEY, Florida JOHN S. TANNER, Tennessee
SAM JOHNSON, Texas MAX SANDLIN, Texas
PAUL RYAN, Wisconsin
ERIC CANTOR, Virginia
SUBCOMMITTEE ON HUMAN RESOURCES
WALLY HERGER, California, Chairman
NANCY L. JOHNSON, Connecticut BENJAMIN L. CARDIN, Maryland
SCOTT MCINNIS, Colorado FORTNEY PETE STARK, California
JIM MCCRERY, Louisiana SANDER M. LEVIN, Michigan
DAVE CAMP, Michigan JIM MCDERMOTT, Washington
PHIL ENGLISH, Pennsylvania CHARLES B. RANGEL, New York
RON LEWIS, Kentucky
ERIC CANTOR, Virginia
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public
hearing records of the Committee on Ways and Means are also published
in electronic form. The printed hearing record remains the official
version. Because electronic submissions are used to prepare both
printed and electronic versions of the hearing record, the process of
converting between various electronic formats may introduce
unintentional errors or omissions. Such occurrences are inherent in the
current publication process and should diminish as the process is
further refined.
C O N T E N T S
__________
Page
Advisories announcing the hearing................................ 2
WITNESSES
U.S. Department of Labor, Hon. Mason Bishop, Deputy Assistant
Secretary, Employment and Training Administration.............. 9
U.S. General Accounting Office, Robert J. Cramer, Managing
Director, Office of Special Investigations; accompanied by Paul
Desaulniers, Special Agent, Office of Special Investigations... 19
______
Employment Security Commission of North Carolina, David L. Clegg. 37
Kelly Services, Inc., Carl Camden................................ 44
SUBMISSION FOR THE RECORD
National Association of Professional Employer Organizations,
Alexandria, VA, statement...................................... 57
UNEMPLOYMENT FRAUD AND ABUSE
----------
THURSDAY, JUNE 19, 2003
U.S. House of Representatives,
Committee on Ways and Means,
Subcommittee on Oversight,
Subcommittee on Human Resources,
Washington, DC.
The Subcommittees met, pursuant to notice, at 2:05 p.m., in
room 1100, Longworth House Office Building, Hon. Wally Herger
(Chairman of the Subcommittee on Human Resources) presiding.
[The advisory and the revised advisory announcing the
hearing follow:]
ADVISORY
FROM THE
COMMITTEE
ON WAYS
AND
MEANS
SUBCOMMITTEE ON HUMAN RESOURCES
CONTACT: (202) 225-7601
FOR IMMEDIATE RELEASE
June 10, 2003
OV-5
Houghton and Herger Announce Joint Hearing on Unemployment Fraud and
Abuse
Congressman Amo Houghton (R-NY), Chairman of the Subcommittee on
Oversight, and Congressman Wally Herger (R-CA), Chairman of the
Subcommittee on Human Resources, Committee on Ways and Means, today
announced that the Subcommittees will hold a joint hearing on
unemployment fraud and abuse. The hearing will take place on Tuesday,
June 17, 2003, in the main Committee hearing room, 1100 Longworth House
Office Building, beginning at 2:00 p.m.
In view of the limited time available to hear witnesses, oral
testimony at this hearing will be from invited witnesses only.
Witnesses will include representatives of the U.S. Department of Labor
(DOL), U.S. General Accounting Office (GAO), and other interested
individuals.
BACKGROUND:
The Unemployment Compensation (UC) program (sometimes referred to
as Unemployment Insurance or UI) is a State-Federal partnership under
which benefits are paid to laid-off workers who have a history of
attachment to the workforce. Within a broad Federal framework, each
State designs its own UC program.
Federal payroll taxes paid by employers support Federal
responsibilities in the unemployment system, including certain
administrative expenses, loans to States, and the Federal half of costs
under the permanent Extended Benefits (EB) program. State payroll taxes
support regular unemployment benefits and the State half of the EB
program, among other costs. Both the Federal and State taxes collected
for unemployment purposes are held in trust fund accounts that are part
of the unified Federal budget.
Employers may be eligible for a lower State payroll tax rate based
on the experience of their employees in collecting unemployment
benefits. States use a variety of experience rating systems to assign
tax rates to employers, with those whose employees receive benefits the
least having lower tax rates, and those employers whose employees
receive benefits most frequently having higher rates. These rates can
change yearly, based on annual computations.
A December 31, 2002, Program Letter issued by the DOL alerted
States to ``State Unemployment Tax Act (SUTA) dumping'' activities
designed to undermine effective experience rating. The DOL highlighted
approaches used by some employers to avoid high unemployment tax rates,
including various ``shell'' transactions involving the artificial
manipulation of corporate structures or employees. Such activity,
according to DOL, ``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.'' Some, but not all States, have enacted
legislation designed to prevent SUTA dumping.
In announcing the hearing, Chairman Houghton stated, ``I have to
believe that congressional oversight is critical to the integrity of
the UC program. This hearing will basically review whether tax
strategies have undermined the program, and if so, what can be done to
fix it.''
Chairman Herger said, ``The Nation's UC program provides a much
needed safety net to workers laid off through no fault of their own.
State Unemployment Tax rate manipulation, or SUTA dumping threaten
workers, employers, and States by slowing returns to work, shifting
taxes from businesses responsible for layoffs to other employers, and
undermining trust fund solvency. This hearing will review the extent of
this activity, what its effects have been, and what, if any,
legislative action is needed to protect workers and employers who play
by the rules.''
FOCUS OF THE HEARING:
The hearing will focus on ``SUTA dumping.''
DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:
Please Note: Due to the change in House mail policy, any person or
organization wishing to submit a written statement for the printed
record of the hearing should send it electronically to
[email protected], along with a fax copy to
(202) 225-2610, by the close of business, Tuesday, July 1, 2003. Those
filing written statements who wish to have their statements distributed
to the press and interested public at the hearing should deliver their
200 copies to the Subcommittee on Oversight in room 1136 Longworth
House Office Building, in an open and searchable package 48 hours
before the hearing. The U.S. Capitol Police will refuse sealed-packaged
deliveries to all House Office Buildings.
FORMATTING REQUIREMENTS:
Each statement presented for printing to the Committee by a
witness, any written statement or exhibit submitted for the printed
record or any written comments in response to a request for written
comments must conform to the guidelines listed below. Any statement or
exhibit not in compliance with these guidelines will not be printed,
but will be maintained in the Committee files for review and use by the
Committee.
1. Due to the change in House mail policy, all statements and any
accompanying exhibits for printing must be submitted electronically to
[email protected], along with a fax copy to
(202) 225-2610, in WordPerfect or MS Word format and MUST NOT exceed a
total of 10 pages including attachments. Witnesses are advised that the
Committee will rely on electronic submissions for printing the official
hearing record.
2. Copies of whole documents submitted as exhibit material will not
be accepted for printing. Instead, exhibit material should be
referenced and quoted or paraphrased. All exhibit material not meeting
these specifications will be maintained in the Committee files for
review and use by the Committee.
3. Any statements must include a list of all clients, persons, or
organizations on whose behalf the witness appears. A supplemental sheet
must accompany each statement listing the name, company, address,
telephone and fax numbers of each witness.
The Committee seeks to make its facilities accessible to persons
with disabilities. If you are in need of special accommodations, please
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four
business days notice is requested). Questions with regard to special
accommodation needs in general (including availability of Committee
materials in alternative formats) may be directed to the Committee as
noted above.
* * * NOTICE--CHANGE IN DATE * * *
ADVISORY
FROM THE
COMMITTEE
ON WAYS
AND
MEANS
SUBCOMMITTEE ON HUMAN RESOURCES
CONTACT: (202) 225-7601
FOR IMMEDIATE RELEASE
June 12, 2003
OV-5-Revised
Change in Date for Joint Hearing on Unemployment Fraud and Abuse
Congressman Amo Houghton, (R-NY), Chairman of the Subcommittee on
Oversight, and Congressman Wally Herger, (R-CA), Chairman of the
Subcommittee on Human Resources, Committee on Ways and Means, today
announced that the joint hearing on unemployment fraud and abuse,
previously scheduled for Tuesday, June 17, 2003, at 2:00 p.m., in the
main Committee hearing room, 1100 Longworth House Office Building, will
be held, instead on Thursday, June 19, 2003, at 2:00 p.m.
All other details for the hearing remain the same. (See
Subcommittee Advisory No. OV-5 released on June 10, 2003.)
Chairman HERGER. Good afternoon, and welcome to today's
hearing on Unemployment Fraud and Abuse. It is a pleasure to be
here with Chairman Houghton and other Members of the
Subcommittee on Oversight.
This Congress is very aware of the needs of families with
unemployed workers. We created a special Federal program that
will provide $24 billion in special extended benefits to 8
million workers through March 2004. We provided $8 billion more
to States to assist the unemployed, which has helped to keep
payroll taxes down in 30 States. The President recently signed
the Jobs and Growth Tax Relief Reconciliation Act of 2003 (P.L.
108-27), which includes another $20 billion that States can use
for struggling families. So, we have helped millions of
workers, while taking steps to strengthen the economy and
create more jobs--which is what workers really want.
The issue before us today is a threat to the Nation's
unemployment benefit system. At issue is whether some employers
wrongly minimize, or even avoid, paying their proper share of
State unemployment taxes. In program jargon, this practice is
known as State Unemployment Tax Acts (SUTA) (Social Security
Act, 1935, 49 Stat. 620) dumping--SUTA should prevent this
practice, but apparently doesn't in many cases.
We will hear about several schemes which share a common
thread. They all seek to thwart a basic purpose of the Nation's
unemployment program since the 1930s--that employer taxes
should be based on the experience of their employees in
collecting unemployment benefits. In short, if an employer lays
off lots of workers, that employer is supposed to pay more
taxes to support unemployment benefits than an employer who
rarely or never lays off workers. As we will hear today, that
longstanding role is under attack by some employers attempting
to dump their costs onto others.
There is no better time to review this issue. Now, more
than ever, the Nation's unemployment system needs to be working
at maximum efficiency to provide benefits to workers. There are
a number of reasons for Federal attention. One key Federal role
is to ensure that this program is working efficiently and
fairly. We are also concerned about the solvency of State trust
funds, and the need for Federal loans for some States to pay
benefits.
I believe that SUTA dumping could quickly undermine program
solvency. That could lead to higher payroll taxes for all
employers, threatening our economic growth and job creation.
Our oversight responsibilities merit a close look at this
issue, and any appropriate responses. At this hearing today, we
will hear from the U.S. Department of Labor, the U.S. General
Accounting Office (GAO), a State that has recently taken steps
to prevent SUTA dumping, and an employer who will tell us of
the risk this practice poses for legitimate businesses. I look
forward to all the testimony we will receive. Without
objection, each Member will have the opportunity to submit a
written statement and have it included in the record at this
point. Mr. Cardin, would you like to make an opening statement?
[The opening statements of Chairman Herger and Mr. Pomeroy
follow:]
Opening Statement of the Honorable Wally Herger, Chairman, Subcommittee
on Human Resources, and a Representative in Congress from the State of
California
Good afternoon and welcome to today's joint hearing on unemployment
fraud and abuse. It is a pleasure to be here with Chairman Houghton and
other Oversight Subcommittee Members.
This Congress is very aware of the needs of families with
unemployed workers. We created a special Federal program that will
provide $24 billion in temporary extended benefits to 8 million workers
through March 2004. We provided $8 billion more to States to assist the
unemployed, which has helped keep payroll taxes down in 30 States.
The President recently signed the Jobs and Growth Tax Bill, which
includes another $20 billion that States can use for struggling
families. We have helped millions of workers, while taking steps to
strengthen the economy and create more jobs, which is what workers
really want.
The issue before us today is a threat to the Nation's unemployment
benefits system. At issue is whether some employers wrongly minimize or
even avoid paying their proper share of State unemployment taxes. In
program jargon, this practice is known as ``SUTA dumping,'' for State
Unemployment Tax Acts that should prevent this practice, but apparently
don't in many cases.
We will hear about several schemes, which share a common thread.
They all seek to thwart a basic purpose of the Nation's unemployment
program since the 1930s--that employer taxes should be based on the
experience of their employees in collecting unemployment benefits.
In short, if an employer lays off lots of workers, that employer is
supposed to pay more taxes to support unemployment benefits than an
employer who rarely or never lays off workers. As we will hear today,
that longstanding rule is under attack by some employers attempting to
dump their costs onto others.
There is no better time to review this issue than now. Now more
than ever the Nation's unemployment system needs to be working at
maximum efficiency to provide benefits to workers. There are a number
of reasons for Federal attention. One key Federal role is to ensure
this program is working efficiently and fairly. We also are concerned
about the solvency of State trust funds, and the need for Federal loans
for some States to pay benefits.
SUTA dumping could quickly undermine program solvency. That could
lead to higher payroll taxes for all employers, threatening economic
growth and job creation. Our oversight responsibilities merit a close
look at this issue and any appropriate responses.
At this hearing today, we'll hear from the U.S. Department of
Labor, the General Accounting Office, a State that has recently taken
steps to prevent SUTA dumping, and an employer who will tell us of the
risks this practice poses for legitimate businesses.
I look forward to all the testimony we will receive.
Opening Statement of the Honorable Earl Pomeroy, a Representative in
Congress from the State of North Dakota
I am pleased that the Ways and Means Oversight Subcommittee is
joining the Human Resources Subcommittee to examine an issue of mutual
interest and concern. Today's hearing deals with our Federal-State
Unemployment Compensation (UC) program and alarming reports of fraud
and abuse by employers.
Briefly, the UC program provides cash benefits to laid-off workers
while they are actively seeking new employment. Their benefits are
funded by employers who pay State UC taxes into State unemployment
trust funds. Employers' tax payments are determined, in part, by a
company's ``experience rating.'' Companies that have fewer employees
drawing UC benefits will have lower tax rates than companies that
routinely lay off workers.
Unfortunately, many employers are engaging in activities to
artificially and fraudulently reduce their State UC taxes. The
Department of Labor and General Accounting Office recently have
reviewed this abuse and determined that ``SUTA dumping'' is a serious
problem for States. When employers fail to pay their fair share of UC
taxes, States lose millions of dollars. This could result in increased
tax rates for all employers.
According to a recent GAO survey, approximately three-fifths of
States believe that their own laws are insufficient to combat this
abuse and that their enforcement efforts are inadequate. Further,
fourteen States recently have identified specific ``SUTA dumping''
employers who created losses to the their States of more than $120
million.
I want to thank Human Resource Chairman Herger and Ranking Member
Cardin for bringing this issue to our subcommittees' attention. As
always, I particularly want to commend Oversight Subcommittee Chairman
Houghton for his leadership on this and other important matters facing
our Country.
Mr. CARDIN. Well, thank you very much, Mr. Chairman. First,
let me start off by commending both you and Chairman Houghton
for holding this joint hearing of the Subcommittee on Human
Resources and the Subcommittee on Oversight of the Committee on
Ways and Means, to take a look at one of our principal
responsibilities--to make sure that the unemployment
compensation system is working in our various States. One of
the things we need to be careful about, is those people who are
not playing according to the rules. It is not fair to the
employers who are doing what is right.
As you point out, this SUTA dumping results in companies
trying to reduce their premium for unemployment insurance (UI)
at the expense of either the solvency of the State fund, or at
the expense of other employers who are required to pay higher
premiums as a result of the SUTA dumping. In either case, that
is not right. Our Committee has the responsibility to make sure
that the laws are being complied with, and that we don't have
these shell companies set up in order to reduce the rates for
companies.
I understand that the Department of Labor will be
testifying. Mr. Bishop, we look forward to your testimony. You
may be offering some suggestions in this area, and I think that
will be very helpful to us in our work. In this context,
though, let me mention one additional problem, Mr. Chairman--
or, Joint Chairmen--that I think we should take a look at. That
is, the companies that avoid paying any of the unemployment
taxes. They do that by classifying people as independent
contractors when, in fact, they are employees in many cases.
These are cases where a person controls the actions of other
individuals, as traditional employment would indicate, but are
classified as an independent contractor in order to avoid, not
only paying the UI taxes, but the other payroll taxes as well.
The Department of Labor, 3 years ago, suggested that 80,000
workers may be denied unemployment benefits every year because
they are misclassified as independent contractors--80,000 a
year. With SUTA dumping, as tragic as it is, normally, it
doesn't deny people benefits; it affects the way employers pay
into the fund. That is very serious, but in this case, 80,000
people, in fact, are denied from receiving any of their
benefits.
So, I would urge this Committee, as we take a look at what
is happening on SUTA dumping, expand our review to also look at
the independent contractor issues and other issues that might
be denying people benefits that they are otherwise entitled to,
or adversely affecting those companies that are trying to play
according to the rules. I look forward to hearing from all of
our witnesses, and working with my fellow Members of the
Committee.
[The opening statement of Mr. Cardin follows:]
Opening Statement of the Honorable Benjamin L. Cardin, a Representative
in Congress from the State of Maryland
Mr. Chairman, let me start by commending you and Chairman Houghton
for conducting this joint hearing on fraudulent practices used by some
employers to evade their fair share of unemployment insurance taxes.
Overseeing the administration and implementation of programs within our
jurisdiction is an important responsibility for this committee.
Unemployment compensation for laid-off workers is funded through
payroll taxes paid by employers to State unemployment trust funds.
These assessments are based on the number of workers who file for
benefits, meaning businesses who lay off more employees have higher tax
rates. Some employers manipulate this system of experience rating by
transferring employees into shell companies formed solely for the
purpose of evading unemployment taxes.
This practice reduces the solvency of the States' unemployment
trust funds, and it ultimately shifts more of the tax burden to
responsible employers who play by the rules.
I understand the Department of Labor (DOL) may provide us with
specific statutory recommendations to prevent this type of fraud, known
as SUTA dumping. I look forward to examining DOL's suggested language
and to working with the agency and my colleagues on this committee to
ensure all employers contribute their fair share to the unemployment
system.
In that context, it is worth mentioning there are other methods
used by companies to avoid paying unemployment taxes.
For example, some employers misclassify certain workers as
independent contractors--a step which denies the worker many benefits,
including unemployment compensation. A study commissioned by the
Department of Labor three years ago suggested that 80,000 workers may
be denied unemployment benefits every year because they are
misclassified as independent contractors.
In some ways this issue of misclassification may be an even greater
problem than SUTA dumping because it deters workers from collecting
unemployment benefits when they are laid-off.
While some complexities surround the definition of an independent
contractor, I hope DOL will provide this committee with recommendations
to prevent the intentional misclassification of employees as
independent contractors.
If a business exerts control over how, when and where an individual
conducts their work, but classifies them as an independent contractor
for the purpose of avoiding UI taxes, that is wrong and it should be
stopped. I look forward to hearing from our witnesses on this and other
forms of fraud. Thank you.
Chairman HERGER. Thank you, Mr. Cardin. Chairman Houghton
of the Subcommittee on Oversight, would you like to make an
opening statement?
Chairman HOUGHTON. I would, thank you very much. Thank you
for letting us be here. We on the Subcommittee on Oversight are
honored to be associated with those of you on the Subcommittee
on Human Resources--although we are slightly outnumbered at
this time. The topic today, of course, is a review of the
practices that may result in abuses of the unemployment
compensation program. Chairman Herger has outlined some of the
key principles of the unemployment compensation system, which
is administered jointly by the Federal and State governments.
As Members of the Subcommittee on Oversight, our interest,
really, is in preventing any abuse of the program. I happen to
believe that congressional oversight is critical to the
integrity of it. So, I would like to yield to my associate, Mr.
Portman, for any comments. I thank you very much for holding
this hearing, and I am honored to be a Co-Chair with you.
Mr. PORTMAN. I thank the Chair. I have no further comments
to add to your good ones, except to thank the Subcommittee on
Human Resources for joining with us in this important look. I
think it is the first of the fraud and abuse Subcommittee on
Oversight hearings we are going to be having. So, I look
forward to hearing from the witnesses, and dealing with the
particular issue of SUTA dumping. I thank the Chair for
yielding to me.
Chairman HERGER. Thank you. Before we move on to our
testimony, I want to remind our witnesses to limit their oral
statements to 5 minutes. However, without objection, all the
written testimony will be made a part of the permanent record.
Mr. KLECZKA. Mr. Chairman.
Chairman HERGER. Yes.
Mr. KLECZKA. As the only other Member who hasn't spoken,
also, as the Ranking Member on the Subcommittee on Oversight, I
want to join my Chairman, Mr. Houghton, by saying how thrilled
we are to be here with you. Listening to the opening remarks, I
must say, I was not aware of the problem, so I look forward to
the testimony of Mr. Bishop, and others, to indicate what is
going on in the field. I do want to associate myself with the
remarks made by Mr. Cardin as they relate to independent
contractors. Not only are they affected, or ill-affected, by
the unemployment compensation dumping that we are going to hear
about, but also by misclassifying these employees as
independent contractors. We know that they lose out on other
benefits, the major one of which is the Federal Insurance
Contributions Act (FICA) (Social Security Act, 1935, 49 Stat.
620)--the Social Security match from the employer. Mr. Houghton
and I introduced legislation a session or two ago that would
redefine what an independent contractor is. We have not done so
again this session. To the folks here from the Department of
Labor, that is a problem that is growing, and one of these days
we are going to have to look at that, also. So, Mr. Chairman,
thank you very much.
Chairman HERGER. Thank you, Mr. Kleczka. Our first witness
today is representing the Administration. I am pleased to
welcome Mr. Mason Bishop, Deputy Assistant Secretary of the
Employment and Training Administration, at the Department of
Labor. Mr. Bishop.
STATEMENT OF THE HONORABLE MASON BISHOP, DEPUTY ASSISTANT
SECRETARY, EMPLOYMENT AND TRAINING ADMINISTRATION, U.S.
DEPARTMENT OF LABOR
Mr. BISHOP. Thank you, Chairman Herger, Chairman Houghton,
and distinguished Members of the Subcommittees. Thank you for
inviting me to testify today. I am extremely pleased to have
the opportunity to discuss options for closing a loophole in
many State UI laws that permit some employers to pay less than
their fair share of State unemployment taxes.
Most unemployment benefits are financed by employer-paid,
State unemployment taxes. An employer's tax rate is determined
in accordance with the Federal Unemployment Tax Act (FUTA)
(1954, 68A Stat. 439), which requires that each employer's tax
rate be related to its experience with respect to unemployment,
as measured by the UI benefits paid to its former workers. Each
employer has an account within the State's unemployment fund
which is charged for the benefits paid when a former worker
collects UI benefits. The more charges to the account, the
higher the tax rate--up to a maximum set by State law.
Conversely, if the employer has a stable work force with few
layoffs, the charges in tax rate are low.
This tax determination system is known as experience
rating. A new employer, who does not yet have sufficient
experience to qualify for a rate based on experience, is
assigned a beginning tax rate, referred to as a new employer
rate. Experience rating has been an important part of the
Federal-State UI system since its enactment in 1935. Experience
rating helps ensure an equitable distribution of costs among
employers, based on an employer's experience with UI. It also
encourages employers to stabilize their work force, and
provides an incentive for an employer to contest claims when
employees quit or are fired for cause, since the cost
attributable to claims may affect the unemployment tax rate of
the employer.
Over the past several years, some employers have found ways
to manipulate experience ratings so that they pay lower State
UI taxes than they would based on their UI benefit experience.
This abuse of practice is commonly called SUTA dumping, and can
deprive States of the revenues they need to provide workers the
unemployment benefits to which they are entitled under State
law. As you know, we are good with acronyms, and SUTA refers to
the State Unemployment Tax Acts.
Briefly, SUTA dumping generally occurs in two ways. First,
the situation concerns employers setting up a shell company,
and then transferring some or all of their payroll to the shell
company to get a lower State unemployment tax rate. We believe
that when an employer transfers its payroll to another employer
with the same ownership and management, the experience of the
transferred business activity should also be transferred to the
acquiring employer.
The second situation involves new owners avoiding new
employer rates. We believe that this type of abuse should be
addressed by prohibiting experience transfers to the new owner
if the State agency finds that a business was acquired solely
or primarily for the purpose of the new owner obtaining a lower
rate of contributions.
Through a Department of Labor-funded study issued in 1996,
and an Inspector General final audit report issued in 1998, we
have learned that SUTA dumping had occurred in some parts of
the employee leasing industry and could be expanded into other
industries. Subsequently, we learned that consulting firms
actively market SUTA dumping to various industries with high UI
costs as a way of reducing taxes and increasing profits.
The act of SUTA dumping can deprive the State's
unemployment fund of revenues, and will shift some benefit
costs to other employers. We believe that those most affected
by cost shifting are smaller employers who have neither the
expertise nor the resources to set up such schemes, and
employers with low UI costs who have no need to participate in
these schemes.
To address this serious issue, the Department of Labor has
issued guides advising States of SUTA dumping, and alerting
them to provisions enacted by some State legislatures that
eliminate or reduce its practice. We were pleased to learn that
North Carolina paid careful attention to this matter, and
enacted legislation that clarified that an employer cannot
avoid its earned experience rating by shifting its employees to
a shell company that enjoys a lower UI tax rate. The witness
from North Carolina can provide details on their specific
action.
The Administration is reviewing legislative remedies that
would curb the practice of SUTA dumping, such as amending the
FUTA to provide for the required or prohibited transfers
previously discussed, along with penalties for willful
circumvention. Any legislative remedies should be crafted in a
way that minimizes the impact on legitimate business mergers,
acquisitions, and reorganizations--and on current State law.
In summation, manipulation of State tax rates is of great
concern to the Department of Labor, and we are willing to work
with this Committee to curb this practice. This concludes my
remarks, and I will be glad to answer any questions you may
have.
[The prepared statement of Mr. Bishop follows:]
Statement of the Honorable Mason Bishop, Deputy Assistant Secretary,
Employment and Training Administration, U.S. Department of Labor
Good Afternoon, Chairmen Herger and Houghton and distinguished
members of the Subcommittees. Thank you for inviting me to testify. I
am extremely pleased to have the opportunity to discuss options for
closing a loophole in many state unemployment insurance (UI) laws that
permits some employers to pay less than their fair share of state
unemployment taxes. As you know, the Administration is concerned that
the administrative structure of the unemployment insurance system is an
unwieldy relic. In both the 2003 and 2004 budgets, we have proposed a
comprehensive package of reforms to respond to demands from employers,
workers, and states, which have clamored for change for the past
decade.
BACKGROUND
Most unemployment benefits are financed by employer-paid state
unemployment taxes. All states currently determine an employer's tax
rate in accordance with the requirements of Chapter 23 of the Internal
Revenue Code of 1986 (commonly referred to as the Federal Unemployment
Tax Act or ``FUTA''). This statute requires that each employer's tax
rate be related to its ``experience with respect to unemployment,''
which is usually measured by the UI benefits paid to its former
workers. Each employer has an account within the state's unemployment
fund. In general, when a worker collects UI benefits, the former
employer's account is charged for the benefits paid. The more charges
to the account, the higher the tax rate, up to a maximum set by state
law. If the employer has a stable workforce with few layoffs, the
charges and tax rate are low. Employers with higher turnover generally
pay higher taxes. This tax determination system is known as
``experience rating.'' A new employer who does not yet have sufficient
experience to qualify for a rate based on experience is assigned a
beginning tax rate, referred to as a ``new employer rate.''
Experience rating has been an important part of the federal-state
UI system since its enactment in 1935. The allocation of unemployment
benefit costs through experience rating incorporates these benefits as
a cost of business borne by employers. States have a great deal of
latitude in deciding what percentage of their benefit costs will be
experience-rated and what percentage will not be assigned strictly to
individual employers, but will be shared by the state's employers as a
whole. Experience rating helps ensure an equitable distribution of
costs among employers based on an employer's experience with UI. It
also encourages employers to stabilize their workforce and provides an
incentive for an employer to contest claims when employees quit or are
fired for cause, since the cost attributable to claims may affect the
unemployment tax rate of the employer.
However, over the past several years, some employers have found
ways to manipulate experience rating so that they pay lower state UI
taxes than they should based on their UI benefit experience. This
abusive practice is commonly called ``SUTA dumping,'' and it can
deprive states of the revenues they need to provide workers the
unemployment benefits to which they are entitled under state law.
(``SUTA'' refers to state unemployment tax acts.)
SUTA dumping generally occurs in two ways. First, some employers
escape poor experience (and high tax rates) by setting up a shell
company and then transferring some, or all, of their payroll to the
shell company after it has operated for several years with low turnover
and earned a low tax rate based on that experience. As a result, in
situations where there has been no change in ownership or management
and no change in the business activity that would justify a reduced tax
rate, the poor experience is ``dumped'' through the use of the shell
company that has been assigned a lower state unemployment tax rate. We
believe that when an employer transfers its payroll to another employer
with the same ownership and management, the experience attributable to
the transferred business activity should be transferred to the
acquiring employer. This transfer would assure that employers do not
set up shell companies to avoid their liability for UI taxes because
the shell company would absorb the prior UI experience, as well as the
business activity itself.
In the second case, a small employer that has a low UI tax rate is
bought by a person who does not currently employ any workers. The new
owner ceases the business activity of the small employer and commences
a different type of business. For example, a person who is not an
employer buys a small flower shop that has a low UI tax rate. The new
owner subsequently stops doing business as a flower shop and begins a
temporary staffing business, while keeping the lower UI tax rate earned
by the flower shop. The result is that the new owner avoids the rate
normally assigned to new employers and receives the flower shop's lower
tax rate. We believe that this type of abuse should be addressed by
prohibiting experience transfers to the new owner if the state agency
finds that a business was acquired solely or primarily for the purpose
of obtaining a lower rate of contributions. However, states should be
free to establish their own criteria for making such a finding that the
acquisition was for the purpose of obtaining a lower rate of
contributions. States that currently prohibit the transfer of
experience in this situation generally look to whether the new owner
continues the same business activity in determining if the acquisition
was for the purpose of obtaining a lower rate of contributions.
Following the same example, if a flower shop is acquired, the new owner
must continue to operate the flower shop in order to obtain a UI tax
rate based on the flower shop's UI experience.
Through a Department-funded study issued in 1996 and an OIG Final
Audit Report issued in 1998, we learned that SUTA dumping had occurred
in some parts of the employee leasing industry and could be expanded
into other industries. We have since learned that consulting firms
actively market SUTA dumping to various industries with high UI costs
as a way of reducing taxes and increasing profits. Some employers feel
pressured to participate in this manipulation to avoid being put at a
competitive disadvantage.
SUTA dumping can deprive the state's unemployment fund of revenues
and will shift some benefit costs to other employers. We believe that
those most affected by cost shifting are smaller employers who have
neither the expertise nor the resources to set up such schemes, and
employers with low UI costs who have no need to participate in these
schemes.
DEPARTMENTAL ACTIONS
To address this serious issue, the Department of Labor's Employment
and Training Administration has issued guidance advising states of SUTA
dumping and alerting them to provisions enacted by some state
legislatures that eliminate or reduce the practice of SUTA dumping. We
were pleased to learn that North Carolina paid careful attention to
this matter and enacted legislation that clarified that an employer
cannot avoid a UI tax rate based on the previous experience of the
employer in the UI system by simply shifting its employees to a shell
company that enjoys a lower UI tax rate. North Carolina's legislation
also raised the penalty for evading UI taxes from a misdemeanor to a
felony. I will defer to the witness from North Carolina to provide the
details of the state's actions.
In addition, the Administration is reviewing legislative remedies
that would curb the practice of SUTA dumping. Our remedy under
consideration would amend FUTA to provide for the required and
prohibited transfers previously discussed. Such a provision would
result in millions per year in UI taxes being paid by the employers
responsible for the costs rather than have those costs shifted to other
employers.
This remedy could also authorize the Secretary to draft regulations
to address any methods of SUTA dumping not already discussed. This
approach would aim to discourage employers from devising new tax
avoidance schemes or loopholes since the Secretary would be authorized
to close them. Finally, the remedy could require the states to impose a
penalty on any person who willfully circumvents those provisions of
state laws implementing the above amendments to FUTA, including
financial advisors who may offer advice leading to willful
circumvention. The intent behind these penalties would be to encourage
compliance. States would be free to determine the penalties for
violations of their laws, which could take the form of fines, increased
state UI tax rates, loss of relevant licenses, and even jail for
egregious violations.
The Administration strongly believes that no new requirements
should be imposed on states unless there is a compelling need. Any
legislative remedy should be crafted in a way that minimizes the impact
on legitimate business mergers, acquisitions and reorganizations, and
on current state law. States should not be required to completely
overhaul their provisions on transfers of experience in order to
eliminate this abuse by a relatively small number of employers.
CONCLUSION
In sum, manipulation of state tax rates is of great concern to the
Department and we look forward to working with the Committee on this
issue. SUTA dumping can have a negative impact on state unemployment
funds by forcing all employers to pay more UI taxes to compensate for
the revenue lost as a result of the few who avoided taxes. To maintain
the integrity of their experience rating systems and unemployment
funds, states should enact legislation to deter UI tax rate
manipulation schemes, and they should ensure such schemes are detected
early and immediately corrected.
This concludes my remarks. I will be glad to answer any questions
you may have. Thank you.
Chairman HERGER. Thank you, Mr. Bishop, for your testimony.
I now will turn to questions. I would like to remind the
Members that they each have 5 minutes for witness questions.
Chairman Houghton, would you like to inquire?
Chairman HOUGHTON. Well, the question that was just going
through my mind is that, with all the good intentions here--the
SUTA dumping could continue through some sort of substance
behind it, behind whatever the activity was. Would you like to
comment on that?
Mr. BISHOP. Excuse me--I am not sure I understand.
Chairman HOUGHTON. Well, one company, it says here in this
piece of paper I have in front of me, suggested moving your
employees on paper into another type of organization to assume
a better rate--and that it more or less becomes a kind of shell
game. Another company said that such activity was legal if
there was some kind of a substance behind it. Would you like to
comment on that?
Mr. BISHOP. Sure. Essentially, what we are targeting here,
Mr. Chairman, is when a company specifically sets up a shell
company for the express purpose of trying to lower their
experience rating--specifically to pay lower unemployment taxes
at the State level. That is what we are targeting. If a company
has a legitimate business merger, we would not want any
legislation to impact that legitimate business merger. What we
are seeing now--a phenomenon that seems to be occurring more
and more--is the opportunity of companies to set up specific
shell corporations with the express intent to shift their
experience rating to a lower rating.
Chairman HOUGHTON. If I want to set up a shell company, I
am not going to say I am just setting up a shell company in
order to move the employees around. I am going to have some set
of reasonings behind it. Who is going to be making that
judgment?
Mr. BISHOP. Well, the State UI agency would be primarily
involved, because they are the ones that are administering the
State UI laws at the State level. So, in North Carolina, it
would be the Employment Security Department; in other States,
it would be whatever agency that does the UI program. They
would have to make that individual determination based on
whatever Federal law or State law that are in effect, as well
as any guidance in the Department of Labor.
Chairman HOUGHTON. They are not capable of doing that now?
Mr. BISHOP. Well, right now the problem is that not all
States, in a consistent fashion, have set up State laws that
prohibit this activity. So, there are loopholes that,
essentially, are being used to lower the experience rating. So,
it is very inconsistent.
Chairman HOUGHTON. Even in States that have set up a
mechanism?
Mr. BISHOP. Well, States like North Carolina, which you
will hear from later today, have specifically taken steps in
their State law to prohibit this practice and assure that those
business mergers that occur are legitimately done, and not with
the express intent to shift experience rating to a lower rate.
Chairman HOUGHTON. Thank you very much.
Chairman HERGER. Thank you. The gentleman from Maryland,
Mr. Cardin, to inquire.
Mr. CARDIN. Thank you, Mr. Chairman. Mr. Bishop, do you
know when we might expect specific recommendations from the
Administration to deal with this subject?
Mr. BISHOP. Yes, Mr. Cardin. We have been working on
potential legislation, been reviewing that, and would like to
work with the Committee currently, regarding what we would like
to do together to address this issue.
Mr. CARDIN. Well, we always appreciate working with the
Administration, but it is useful if we have specific
recommendations. You have indicated two circumstances where you
set up a shell company where the ownership is identical, or
where you set up a transfer for the sole purpose, or the
primary purpose, to reduce your experience rates. I think we
all would agree, in those two circumstances, that we want to do
something. So, I guess my question to you would be to give us
some direction how--and I think this was Chairman Houghton's
point. How could the Federal law be best crafted to encourage
the States not only to take action in this area, but to take
effective action in this area? These are two separate
questions. I noticed that there are some States that have taken
action, but we believe the enforcement is probably not there.
So, I think guidance from you is going to be important to us.
We want to work with you, but we need some specific guidance. I
think only the Administration can at least get that started.
So, we would appreciate something specific from you. Let me go
to the second point that I mentioned in my opening statement.
Well, first, before we leave the SUTA dumping, do you have any
estimates as to how much might be involved here?
Mr. BISHOP. Unfortunately, Mr. Cardin, we don't have any
real solid data estimates at this time. This is something that
became, as I mentioned in my testimony, aware to us as a
merging practice in the mid-1990s. It is something that in the
last couple of years seems to be practiced more often. We plan
on working with the States to stay on top of it, and try to
gather more evidence as to what is actually happening out there
from a specific data set.
Mr. CARDIN. In the next panel, GAO will report that 14
States have been surveyed, and about $120 million has been
found. Do you have any reason to believe that that is not
within the ball park of what we are talking about?
Mr. BISHOP. I think we would have every reason to believe
that is, potentially, in the ball park.
Mr. CARDIN. Thank you. The last issue I'd like to address,
is the one I mentioned during my opening comments about other
areas where there is fraudulent action within the unemployment
system, particularly dealing with independent contractors.
There is obviously a financial advantage for a company to
classify a worker as an independent contractor far beyond the
unemployment compensation system. Is the Department of Labor
looking at this issue to try to give some guidance to Congress
so, again, those companies that are doing it right are not
being over penalized by those companies that are taking or
doing things that are not permitted under law?
Mr. BISHOP. Mr. Cardin, at this point we have not
specifically issued any reports regarding this particular issue
in the last few months. We would be more than willing to work
with this Committee in looking at this issue and moving it
forward if something needs to be done. I think it is a
reasonable question to ask: what is the relationship of
independent contractors within the context of the UI system,
what are those impacts, and what does that mean? So, we would
be more than willing to work with you on that.
Mr. CARDIN. Well, I very much appreciate your offer. We
will certainly be back to you so that we can try to find some
information in this area. Thank you, Mr. Chairman.
Chairman HERGER. Thank you. The gentleman from Ohio, Mr.
Portman, to inquire.
Mr. PORTMAN. Thank you, Mr. Chairman. Mr. Bishop, thank you
for your testimony and your work on this. I have sort of an
elementary question. I know that we are going to have other
testimony that will address this matter, but this is a
partnership with the States and the Federal Government, that
our Federal unemployment taxes--clearly we have a stake in
this, because if there is dumping, that means we are not
getting as much money into the Federal tax coffers. Is that
correct?
Mr. BISHOP. No, that is not correct, Mr. Portman. This is a
State--again, we have a Federal tax that is collected for the
purposes of administering the UI system.
Mr. PORTMAN. Right.
Mr. BISHOP. We have State taxes that are collected for the
benefit side. We are talking about the State taxes now. It is
employers who are paying less----
Chairman HOUGHTON. Could I interrupt? Could you speak just
a little bit louder?
Mr. BISHOP. Yes, excuse me. I am sorry, Chairman Houghton.
This is a State unemployment tax issue.
Mr. PORTMAN. According to testimony that is coming up next,
the State taxes are actually at the U.S. Department of the
Treasury. Is that correct?
Mr. BISHOP. Right. It is held at the----
Mr. PORTMAN. What I am trying to find is the right nexus at
the Federal level. An obvious question would be, why does there
need to be any Federal law here? Some States, like North
Carolina, have been more aggressive, passed strong legislation,
and are actually enforcing those laws. Other States have passed
legislation. Maybe their enforcement is a little lax. Some
States have chosen not to pass legislation. Some of those
States, based on your own survey, indicate that they think
everything is fine in their State, even though they don't have
legislation.
So, my question to you would be, what is the Federal nexus
here? Why would it be appropriate for us to have new Federal
legislation in this issue? Is it something that really is more
appropriately left up to the States, or should there be some
Federal involvement?
Mr. BISHOP. Well, as you know, in the UI system, that is
one of the core questions on any issue that is brought up--is
it best determined at a State level or at a Federal level? In
this particular case, we believe the appropriate level is at
the Federal level, because we believe that this is an issue of
fraud and abuse of the UI system, and we believe that it is an
appropriate role of the Federal Government to address issues of
fraud and abuse across the UI system.
Mr. PORTMAN. Since the Department of Labor has
responsibility, overall, for administering the program and,
therefore, has a responsibility to ensure that there is not
fraud and abuse?
Mr. BISHOP. Correct.
Mr. PORTMAN. What would you recommend in terms of a Federal
law which would mandate every State to enact legislation; or
would you rather see a Federal law which deals with things like
transfer--and I know one of the witnesses coming up is going to
talk about that. For instance, when there is a merger or
acquisition, there is a transfer of experience. What would you
think the appropriate Federal legislation would say?
Mr. BISHOP. What we are looking at with the context of
Federal legislation, right now, would be language that would
actually say something to the effect of, in the context of a
transfer, it would be for business purposes. So, we would be
looking at that kind of language at the Federal level to
recommend--to assure that this kind of thing does not happen.
Mr. PORTMAN. To avoid the sham company issue?
Mr. BISHOP. Right.
Mr. PORTMAN. Then, how would you address the other issues
that you have raised? Let us talk about the transfer issue
generally. That isn't a shell company or a sham company issue,
is it?
Mr. BISHOP. It is the new employer. It is a new employer
who purchases an existing company that is unrelated to the
business--that they are going to be engaging in for the express
purpose of getting that employer's UI tax rate, so that they
don't have to pay the new employer rate.
Mr. PORTMAN. What would you recommend in terms of Federal
legislation?
Mr. BISHOP. What we would do would be to prohibit the
transfer experience from an acquired employer to the purchaser,
the new employer in those instances, where it is unrelated to
the business of the new employer.
Mr. PORTMAN. In all acquisitions or mergers?
Mr. BISHOP. No. If you were a new employer, and you
acquired an existing business that was in the same industry or
same line of business you were going to be doing, that would be
a legitimate kind of business acquisition. If I am starting an
auto parts store as an independent business owner, I buy a
flower shop, and I don't have anything to do with flowers
anymore, I just take the experience rate of that company--under
our proposal, that would not be allowed anymore.
Mr. PORTMAN. Is your sense that most States know whether
there is dumping or not? The Congressional Research Service
study said that there is $53 billion being paid to over 10
million claimants. Out of that amount, I think the number we
had was $120 million out of the $53 billion maybe being dumped.
That is based on your study, saying that 14 States identified
that. Do you think it is a bigger problem than that--that there
is in excess of 14 States? Ohio, as an example, my State,
indicates that they don't believe they have a dumping problem.
They are concerned about it because they don't want it to
migrate to Ohio. Do you think that it is a bigger problem than
you identified in those 14 States?
Mr. BISHOP. Well, we think it is an emerging problem that
has the potential to get very big. We have firms that are
actively promoting, doing this kind of activity. We think the
GAO study is in the ball park of where we are at currently, but
this has the potential of turning into a much bigger issue.
Mr. PORTMAN. From $10s of millions to billions?
Mr. BISHOP. Potentially.
Mr. PORTMAN. Thank you, Mr. Chairman.
Chairman HERGER. Thank you. The gentleman from Michigan,
Mr. Levin, to inquire.
Mr. LEVIN. Thank you. Mr. Portman asked appropriately for
the linkage here with the Federal role and the Federal
Government. The monies based on experience rating are
essentially usable by the States to pay unemployment
compensation, right?
Mr. BISHOP. Correct.
Mr. LEVIN. If the States have less money than they need,
then they can borrow from the Federal Government. Right?
Mr. BISHOP. Correct.
Mr. LEVIN. So, there is that additional linkage, is there
not? Now, a number of States are borrowing from the funds in
the federal trust funds. Right?
Mr. BISHOP. Currently, we have three States in a borrowing
status with a couple more about to borrow, it looks like.
Mr. LEVIN. So, there is that nexus, is there not? I think
there is--in terms of why there should be a Federal interest.
Also, the amount of funds that the States have available also
affect what they do about eligibility, for example, right?
Mr. BISHOP. Well, they can make eligibility decisions based
on how much money they have to pay out in benefits,
potentially.
Mr. LEVIN. Look at the question of extended benefits. They
don't generally provide that, but that could also affect the
issue of whether they are going to have any funds to extend
benefits in terms of high unemployment. So, I think there is
not only the issue of the integrity of the State funds--if you
want to call them that--but there are these linkages to the
Federal Government, and another reason I think for there to be
concern and action. So, let me ask you this. Is it necessary
that there be action? Don't you think it is important that
there be action this year?
Mr. BISHOP. Yes. I think that you will find that the
Administration will be wanting to work with the Committee on
moving something this year with regard to this particular
issue.
Mr. LEVIN. When you say working with the Committee, are you
going to present some proposals to us?
Mr. BISHOP. I think we plan on doing so, yes.
Mr. LEVIN. When would they be forthcoming?
Mr. BISHOP. Again, we have legislative language that we
have been working on in the Department of Labor. We believe
that we could present the Committee with legislative language
in fairly short order.
Mr. LEVIN. That is really necessary if we are going to act
this year, right?
Mr. BISHOP. Yes.
Mr. LEVIN. It is June. It is almost July. Then we are not
here in August. Then there is September. So, you would hope in
short order to have some proposals here?
Mr. BISHOP. Yes.
Mr. LEVIN. Isn't it true that this is likely to be a
continually growing problem?
Mr. BISHOP. Well, as I indicated in the other gentleman's
question, we are concerned that this is the kind of problem
that has the potential to grow and get bigger.
Mr. LEVIN. It tends to grow as there is economic
difficulty?
Mr. BISHOP. Well, we don't have data in the context of--
does it seem to occur more during a recessionary period, or
not? Anecdotally, one might assume that it has the potential to
do so, as folks are looking at the State-level employers,
potentially, for lower cost in the UI program.
Mr. LEVIN. There is some evidence that this practice has
been growing the last few years?
Mr. BISHOP. Yes. As I said, in the mid-1990s, we had two
studies where it was documented as a practice that was just
starting. It seems to be a practice that is growing, and we
have evidence of certain companies actually promoting the use
of this as a way to lower employer taxes.
Mr. LEVIN. That evidence has been publicized?
Mr. BISHOP. It has been documented, yes. I believe there is
newspaper articles that talk about it, and I think you will
hear, later, some evidence of that happening.
Mr. LEVIN. Thank you.
Chairman HERGER. Thank you. Mr. Bishop, is the real problem
with SUTA dumping a lack of State or Federal legislation, or is
it broader, and include problems with detection and
enforcement?
Mr. BISHOP. Well, I think--and this got to a point that was
made earlier--it really is a two-part issue, which I think you
have just identified, Mr. Chairman. One of which is, we do
believe that it is an issue of tightening the law to say that
the practices are clearly not legal. Then, once we do that, it
will be incumbent upon the Department of Labor to work very
closely with the States to help them be able to put into effect
the appropriate enforcement actions, and to be able to monitor
and assure that the law is being met.
Chairman HERGER. Thank you. Are there any State performance
measures that indicate the number of SUTA dumping enforcement
actions taken by States with existing legislation?
Mr. BISHOP. No. We do not have performance measures on that
currently. However, this may be something we need to take a
look at.
Chairman HERGER. Very good. Thank you. The gentleman from
Wisconsin.
Mr. KLECZKA. Thank you, Mr. Chairman. Just a very quick
question, Mr. Bishop. Is this a problem that can only be fixed
by the Federal Government, and by Federal legislation, or do
the States have within their power the ability to respond to
this dumping situation?
Mr. BISHOP. Well, the States clearly could pass State
legislation. You would have to have 53 State jurisdictions
doing so. If all 53 UI jurisdictions--States and territories--
did that, they could fix it on their own. Again, we believe
that it is an appropriate role of the Federal Government.
Mr. KLECZKA. To foster uniformity throughout the country?
Mr. BISHOP. Yes, correct.
Mr. KLECZKA. This is the place to come?
Mr. BISHOP. Correct.
Mr. KLECZKA. Okay, good. Thank you.
Chairman HERGER. Thank you. Mr. Bishop, the Department of
Labor's 2002 Unemployment Insurance Program Letter, UIPL 34-02,
alerted States to expanded SUTA dumping activity. What prompted
this action, and what response have you gotten from the States?
Mr. BISHOP. Well, again, Mr. Chairman, what prompted the
action was more evidence and anecdote concerning this becoming
a growing problem. We felt it necessary to alert the States
that this is something they need to look at, potentially, to
get the ball rolling and legislate at the State level.
What we have seen happen as a result, I think you are going
to hear later today--a State like North Carolina, which has
taken some action immediately. We have a couple of other
States--Texas, Delaware, and California, for example--that have
also taken some steps and some action to do that. So, we felt
it was important to alert the States of this practice, and also
to say that, in the context of what the Department of Labor
feels, it is not an appropriate activity to continue to occur.
Chairman HERGER. Thank you very much for your testimony,
Mr. Bishop. With that, we call on our second panel today.
Robert Cramer, Managing Director of the Office of Special
Investigations at the GAO. He is accompanied by Paul
Desaulniers, Senior Special Agent in the Office of Special
Investigation at GAO. David Clegg, Deputy Chairman for
Communications for the North Carolina Employment Security
Commission in Raleigh, North Carolina. Carl Camden, President
and Chief Operating Officer of Kelly Services, Inc., in Troy,
Michigan. Thank you. Mr. Cramer, GAO.
STATEMENT OF ROBERT J. CRAMER, MANAGING DIRECTOR, OFFICE OF
SPECIAL INVESTIGATIONS, U.S. GENERAL ACCOUNTING OFFICE;
ACCOMPANIED BY PAUL DESAULNIERS, SPECIAL AGENT, OFFICE OF
SPECIAL INVESTIGATIONS
Mr. CRAMER. Good afternoon, Chairman Herger, Chairman
Houghton, and Members of the Subcommittees. Thank you for the
opportunity to appear before you today to discuss the results
of the work that we have done pertaining to SUTA dumping. I am
accompanied here today by Special Agent Paul Desaulniers, who
is our Chief Investigator in this matter.
To obtain an overview of the extent of the SUTA dumping
problem, the Office of Special Investigations at GAO did two
things. First, we conducted a nationwide survey of State UI
administrators. Second, Agent Desaulniers, posing as a business
owner who was looking for ways to reduce the State UI tax he
pays for his employees, placed telephone calls to four tax
planning consultants he identified through the Internet to
determine whether and how they promote SUTA dumping techniques.
To summarize our survey results, approximately two-fifths
of the administrators indicated that their States are
adequately addressing the problem, or that they are not aware
of any SUTA dumping problems in their jurisdictions. However,
approximately three-fifths of the State administrators informed
us that their State laws are insufficient to deal with SUTA
dumping problems, and that enforcement efforts to combat such
practices are inadequate.
Administrators in 21 States reported that they have no laws
at all specifically addressing this SUTA dumping issue. The
remaining 29 State administrators indicated that they do have
laws; however, seven of those indicated that their laws are not
sufficient.
Additionally, more than half of the 50 administrators who
responded to our survey indicated that SUTA dumping practices
are or may be resulting in a loss of State unemployment tax
revenue in their States. Fourteen States reported that they
have identified SUTA dumping cases within the past 3 years with
losses from these cases totaling $120 million.
Many administrators added comments to our survey in which
they noted that identifying and proving SUTA dumping is a time
consuming and resource intensive process. They also cited poor
detection methods and inadequate funding for investigation and
enforcement efforts as obstacles to addressing the SUTA dumping
issues.
To determine whether and how consulting firms promote SUTA
dumping methods, Agent Desaulniers placed telephone calls to
four tax planning consultants. Again, he found these all
through the Internet. He posed as a construction company owner
having 1,000 employees and doing business in four different
States. He asked each consultant about the feasibility of
switching his employees to another business entity in order to
reduce his UI tax payments.
One consultant he spoke with recommended that he spin off
part of his company and form a new one to obtain a lower tax
rate. The consultant said that as long as the business has good
strategies, and there is, quote, ``Some kind of substance
behind it,'' the practice is legal. Another consultant
suggested moving employees on paper into another type of
organization to get a better tax rate. In his words, quote,
``It more or less becomes a kind of shell game where you are
moving people around periodically to obtain more favorable
rates.'' The consultant stated that this practice is legal. A
third consultant told Agent Desaulniers that if he merely
switches his employees to a newly created company, the State
would transfer the unemployment tax rate of the old company to
the new one. So, he suggested that, instead, one should lower
the rate by merging the existing company with another business
that has a lower tax rate.
The fourth consultant we contacted stated that SUTA dumping
is illegal in many States, but is permitted in some States if
certain events occur, such as an asset transfer, or the
formation of a new business division. This consultant was very
cautious, however, about this type of strategy, and indicated
little interest in providing SUTA dumping services. Mr.
Chairman, that concludes my statement. At this time, Agent
Desaulniers will play excerpts from the tapes of two
conversations he had with the consultants. Appendix I to the
testimony is a transcript of the excerpts he will be playing.
Mr. DESAULNIERS. So, to reiterate, I posed as a
construction company owner having 1,000 employees doing
business in Maryland, Pennsylvania, Delaware, and New Jersey. I
asked each consultant about ways to reduce my UI taxes, and the
feasibility of switching employees to another business entity
for that purpose. This is the first consultant I spoke with.
[Tape played.]
Mr. DESAULNIERS. Here is the second consultant that I spoke
with.
[Tape played.]
Mr. DESAULNIERS. That concludes the conversations.
Mr. CRAMER. That concludes our presentation. We would be
happy to answer any questions that you might have.
[The prepared statement of Mr. Cramer follows:]
Statement of Robert J. Cramer, Managing Director, Office of Special
Investigations, U.S. General Accounting Office, accompanied by Paul
Desaulniers, Senior Special Agent, Office of Special Investigations,
U.S. General Accounting Office
Mr. Chairman and Members of the Subcommittee:
I am pleased to appear before you today to discuss the results of
our investigation of the extent to which states have found that
companies manipulate state unemployment tax rates through a variety of
methods in order to lower their unemployment taxes, a practice known as
``SUTA dumping,'' and of the extent to which some consulting firms
promote SUTA dumping methods.
We conducted our investigation from March 2003 through June 2003 in
accordance with quality standards for investigations as set forth by
the President's Council on Integrity and Efficiency. To obtain an
overview of the extent of the problem, we conducted a survey of
unemployment insurance administrators, including the 50 states,
District of Columbia, U.S. Virgin Islands and Puerto Rico.
Additionally, one of our agents, posing as a business owner who was
looking for ways to reduce state unemployment insurance taxes, placed
telephone calls to four consulting firms we identified through the
Internet to determine whether they promote SUTA dumping techniques. We
also interviewed officials of the Office of Workforce Security,
Department of Labor (DOL) to determine how the federal-state
unemployment program operates.
I am accompanied today by Special Agent Paul Desaulniers.
In summary, approximately three-fifths of the state unemployment
insurance administrators informed us that their state laws are
insufficient to combat SUTA dumping and that enforcement efforts to
combat such practices are inadequate. Many of the remaining
administrators reported that their laws and enforcement efforts are
sufficient to address the problem. Other administrators told us that
they do not have, or are not aware of, SUTA dumping problems in their
states. Additionally, we found that three of the four consulting firms
we contacted were willing to assist us in developing SUTA dumping
methods for our fictitious business. The fourth firm suggested that
SUTA dumping methods are illegal in most states and indicated that they
were reluctant to engage in this type of business.
Background
The federal-state unemployment insurance program, created in part
by the Social Security Act of 1935, is administered under state law
based on federal requirements. The Federal Government sets broad policy
for administration of the program, monitors state performance, and
provides technical assistance as necessary to the states. To finance
the program, states collect unemployment insurance taxes from employers
to supply the unemployment insurance trust fund. When employers
underpay their taxes, states may compensate for these losses by
increasing the tax rate for all employers. Therefore, companies that do
not manipulate their tax rates by engaging in SUTA dumping practices
may be effectively penalized by the SUTA dumping practices of companies
that do. Currently, there is no federal mandate requiring states to
promulgate laws to restrict employers from engaging in SUTA dumping
practices.
States use an ``experience rating'' system to assign tax rates to a
business based on its history of unemployment insurance claims;
generally a business with a large number of unemployment claims will
have a high experience rating and a correspondingly high tax rate.
Employers engage in SUTA dumping when they try to lower the amount of
tax they pay by altering their experience ratings. Some employers lower
their experience ratings using a variety of methods, which include the
following, among others:
Purchased shell transactions. Purchased shell
transactions occur when a newly formed company purchases an existing
business that has a low experience rating and, therefore, a lower tax
rate than the newly formed company would have. Under some state laws
dealing with employer succession, the existing business's low
experience rating would be transferred to the newly formed company.
Affiliated shell transactions. Affiliated shell
transactions occur when an existing business with a high experience
rating forms a number of additional corporations, transfers a small
number of employees to those corporations, and pays unemployment taxes
on their wages until the additional corporations earn a minimum tax
rate. Subsequently, major portions of the original company's employees
are moved to one or more of the new companies to take advantage of the
lower unemployment tax rate, thereby ``dumping'' the original company's
high tax rate.
Survey Results
To obtain an overview of the extent to which these and other SUTA
dumping practices are used throughout the United States, we conducted a
nationwide survey of state unemployment insurance
administrators.[1] More than half of the 50 administrators
who responded to our survey acknowledged that SUTA dumping practices
are, or may be, resulting in a loss of state unemployment tax revenue.
Fourteen states reported that they have identified specific SUTA
dumping cases within the past 3 years, with losses from these cases
exceeding $120 million. The employee leasing industry--followed by the
hospitality and construction industries, respectively--was most often
cited by administrators as engaging in SUTA dumping practices.
---------------------------------------------------------------------------
\[1]\ We sent the survey to the unemployment insurance
administrators in the 50 states, District of Columbia, Puerto Rico, and
the U.S. Virgin Islands. Fifty administrators responded to the survey.
---------------------------------------------------------------------------
Administrators in 21 states reported that they have no laws
specifically addressing SUTA dumping practices. The remaining 29 state
administrators indicated that they have laws addressing SUTA dumping,
but 7 of them felt that those laws were inadequate. Approximately two-
fifths of the administrators indicated that their states are adequately
addressing the problem or that they do not know of any SUTA dumping in
their states. Many administrators noted that identifying and proving
SUTA dumping is a time-consuming and resource-intensive process. They
also cited poor detection methods and inadequate funding for
investigation and enforcement efforts as obstacles to addressing these
practices.
Administrators in 20 states reported that other state laws, often
those dealing with employer succession, adequately address SUTA dumping
practices. These states cite their employer succession laws as
protection against such practices because they require the transfer of
experience ratings from one company to a successor company when
ownership or management is substantially the same. However, DOL advised
us that no states currently have laws prohibiting companies from using
partial transfers of experience rating as a SUTA dumping practice.
The employee leasing industry provides contractor staff to client
firms. The leasing company is usually responsible for the workers'
wages and payroll taxes and may be considered their employer, even
though work is performed at the client firm. Thus, the leasing agency,
not the client firm, will acquire a higher experience rating if these
workers claim unemployment benefits. Several states preclude this SUTA
dumping practice by holding the client company responsible for
unemployment insurance tax on the employees it leases. However, DOL
told us that these laws do not preclude the client company from
subsequently using other SUTA dumping practices, such as affiliated
shell transactions, to lower its tax rate.
Telephone Calls to Consultants
In an effort to determine whether and how consulting firms promote
SUTA dumping methods, one of our agents placed telephone calls to four
firms. The agent posed as a construction company owner having
approximately 1,000 employees and doing business in Maryland,
Pennsylvania, Delaware, and New Jersey. He asked each firm contacted
about the feasibility of switching employees to another business entity
in order to reduce unemployment insurance taxes.
One firm representative we spoke with recommended that we spin off
part of our current company and form a new one to obtain lower
unemployment insurance rates. He said that as long as we ``have good
strategies'' and ``have some kind of substance behind it,'' this
practice is perfectly legal.
Another firm representative suggested ``moving your employees on
paper into another type of organization to assume a better rate.'' He
stated, ``It more or less becomes kind of a shell game where . . .
you're moving people around periodically to obtain more favorable
rates.'' The representative stated that this practice is legal but
added, ``it becomes more of an ethical issue.''
A third firm representative told us that if employees are simply
switched to a newly created company, the state will transfer the
experience rating of the old company to the new one unless you
``misrepresent your company.'' Instead, he suggested lowering the rate
by merging with another company that has a better rate.
The fourth firm representative we contacted stated that some people
file for a new tax identification number and move all their employees
on paper over to that new tax number to obtain a lower experience
rating. The representative stated that this is illegal in many states
but is allowable in others if some discernible event occurs, such as an
asset transfer or formation of a new business division. The
representative was very cautious about this type of strategy, however,
and said, ``If you want that done, we're probably not your best
company.''
Mr. Chairman, this concludes my statement. At this time, Mr.
Desaulniers will play excerpts from the tapes of two conversations he
had with these consultants. (See app. I for these extracts.) We will
then answer any questions that you or other members of the Subcommittee
may have.
Contacts and Acknowledgement
For further information regarding this testimony, please contact
Robert J. Cramer at (202) 512-7455 or Paul Desaulniers at (202) 512-
7435. Individuals making contributions to this testimony included
Jennifer Costello and Barbara Lewis.
______
Chairman HERGER. Thank you very much. We will move to our
next witness, Mr. David Clegg, Deputy Chairman for
Communications for the North Carolina Employment Security
Commission in Raleigh, North Carolina. Mr. Clegg.
STATEMENT OF DAVID L. CLEGG, DEPUTY CHAIRMAN, EMPLOYMENT
SECURITY COMMISSION OF NORTH CAROLINA, RALEIGH, NORTH CAROLINA
Mr. CLEGG. Chairman Herger, thank you. Chairman Houghton,
Members of the Subcommittees, thank you for providing me with
the opportunity this afternoon to speak to you----
Chairman HERGER. If you could move the microphone. There
you go.
Mr. CLEGG. To talk to you about the significance of State
UI Trust Fund solvency. I am proud that North Carolina has
taken a leadership role in identifying both statutory and
programmatic remedies for this practice, which has the
potential to hurt workers and employers who fulfill their roles
in our economy in an honorable and legal manner.
If SUTA dumping can exist in North Carolina, it surely must
exist in every State. Due to a robust economy and a trust fund
balance of over $1.6 billion, North Carolina was able to lower
its UI rate for new accounts, and the tax rate for positive
rated employers in 1993, 1994, 1995, 1996, and 2000. In 1995,
our rate was reduced by 50 percent, and in 1996, all positive
rated accounts received a zero tax rate. We boasted a labor
market of over 4 million people and 178,000 employers.
So, we know that SUTA dumping is present in North Carolina.
The practice arrived contemporaneously with the downturn in
North Carolina's economy, and in our dramatic rise in claims
for UI assistance. We were told about it by employers shocked
when they received literature telling them to do it. Members of
the North Carolina General Assembly, whose constituents
complained that they were being solicited, told us. We contend
that SUTA dumping has always been illegal under North Carolina
law, despite the bold statements of a few to the contrary.
However, with the recent action of the North Carolina General
Assembly, signed into law by Governor Easley, everyone now
knows that it is illegal.
We know that SUTA dumping tax shelter schemes have been
sold to major corporations operating in North Carolina. We also
know that this activity started in at least the third quarter
of 2001.
Initially, clear existence of SUTA dumping was uncovered
when the Employment Security Commission received a late payment
on a voluntary UI tax contribution in January 2002. A taxpayer
had set up a limited liability corporation (LLC), transferred a
tiny fraction of the company's negative experience rating to
that LLC, and then the LLC planned to obtain a zero tax rate
the next year by making a small voluntary contribution.
Voluntary payments are allowed by statutes, and employers can
use them to lower a UI tax rate. However, the payments have to
be made on time.
The parent corporation could have lowered its tax rate to
zero, but the voluntary contribution would have been in excess
of $4 million. By creating the LLC only with employees, the LLC
needed only to pay $30,000 to obtain its new rate. The next
year, the parent corporation would have reported wages of all
of its over 1,500 workers to the LLC with the zero rate.
The Employment Security Commission issued public statements
and a public tax alert. We were aware of the issue through the
Department of Labor program letter. Constituents alerted both
Members of the General Assembly and the Employment Security
Commission, and the General Assembly took quick action, which
was a collaborative effort among legislators, the Employment
Security Commission, certified public accounts, and employer
associations.
Our law became effective May 20th. It makes it a felony for
any person to attempt to SUTA dump. The law is premised on a
continuity of control issue, and carries its stiffest penalties
against employers with more than 10 employees owing more than
$2,000, and/or having a negative experience rating of more than
$5,000. This law does clearly identify that there is an
activity called UI contribution tax return preparer, and
establishes liability for that illegal preparation also. The
felonious components of that bill provide for incarceration
from six to 8 months.
It is too early to tell what our final dollar and liability
amount will be for SUTA dumping. We recently advised an
accounting firm that they had failed to reveal it in their
independent audit. On other fronts, we have received an $18,000
assessment. We have seen protests of over $400,000 be dropped.
We have seen taxpayers reassume liability for over $4 million.
In the next 30 days, we will begin on-site investigations at 10
taxpayer offices where we have reason to believe this has
occurred with liability of over $2 million.
North Carolina has developed a real-time computerized tax
analysis program that does assist us in detecting SUTA dumping.
It looks at voluntary contribution rates, it looks at the
movement of work forces, and it looks at issues of the lack of
filing from corporate taxpayers. Thank you very much for this
opportunity. I look forward to your questions.
[The prepared statement of Mr. Clegg follows:]
Statement of David L. Clegg, Deputy Chairman, Employment Security
Commission of North Carolina, Raleigh, North Carolina
Chairman Houghton and Chairman Herger, thank you for providing me
with the opportunity to speak today about the issue of state
unemployment insurance tax rate manipulation and its significance to
state unemployment insurance trust fund solvency. I am proud that North
Carolina has taken a leadership role in identifying both statutory and
programmatic remedies for this practice that has the potential to hurt
the workers and employers who fulfill their roles in our economy in an
honorable and legal manner. At the North Carolina Employment Security
Commission, we say that ESC stands for ``Economic Stability in the
Community,'' and the existence of SUTA dumping potentially undermines
ESC's mission of providing critically importance transitional
assistance to workers discovering new career paths in a technologically
sophisticated and diverse economy.
If SUTA dumping can exist in North Carolina, it surely must exist
in every state. Due to a robust economy and a trust fund balance of
over $1.6 billion, North Carolina was able to lower its unemployment
insurance (UI) rate for new accounts and the tax rate for positive
rated employers in 1993, 1994, 1995, 1996 and 2000. In 1995, the rate
was reduced by fifty percent, and in 1996 all positive rated accounts
received a zero tax rate. North Carolina boasted a labor market of over
4 million people and 178,000 employers. If SUTA dumping exists in this
progressive economic climate, it must exist in less robust economies
and in states with less attractive tax rate structures. Even today, as
North Carolina's fifty percent UI tax rate discount is discontinued, it
has the fourth lowest UI tax rate in the nation. (Exhibit 1)
We know that SUTA dumping is present in North Carolina. The
practice arrived contemporaneously with the downturn in North
Carolina's economy and the dramatic rise in claims for UI assistance.
(Exhibit 2) We were told about it by employers shocked when they
received literature telling them to do it. Members of the North
Carolina General Assembly whose constituents complained that they were
being solicited told us. We contend that SUTA dumping has always has
been illegal under North Carolina law despite the bold statements of a
few to the contrary. With recent action by the North Carolina General
Assembly as signed into law by Governor Easley, everyone now knows it
is illegal. Millions of tax dollars are at risk through the use of
unlawful UI tax schemes. We know that SUTA dumping tax shelter schemes
have been sold to major corporations operating in North Carolina. This
activity started, at least, in 2001.
The Employment Security Commission of North Carolina (NCESC) levies
and collects unemployment taxes, maintains wage records, processes
benefit claims, and assigns tax charges to employer's accounts. NCESC
issues over 200,000 initial decisions on benefit claims affecting
claimants and employers. It holds over 40,000 hearings and has internal
appeals procedures as well as continuous civil litigation. ESC has a
statewide staff of 90 auditors who conduct forensic audits and often
depend on criminal warrants against employers who fail to file tax
returns. Ten years ago, the Commission adopted a system of employer
self-application. One result of voluntary compliance was more time for
auditors to conduct intense scrutiny of problem accounts.
A key feature of UI law is that employers must pay the tax benefit
costs for their own workforce. This is done by using the experience
rating system in which an employer's tax account is charged for the
costs of claims paid out to former employees--unemployed through no
fault of their own.
Basically, SUTA dumping occurs in the following fashion: A
corporation, (First Corporation) decides its does not want to pay the
high unemployment insurance taxes. Those high taxes were caused by the
corporation's own history of high employee turnover and large
unemployment claims. To avoid the tax, First Corporation sets up new
corporation (Spin-off Corporation.)
Spin-off Corporation files for a new UI account from NCESC. Spin-
off Corporation claims to be a brand new employer entitled to a lower
new employer UI tax rate. Spin-off Corporation does not disclose that
First Corporation controls it. NCESC has no reason to assume that Spin-
off Corporation is not a new taxpayer. In Spin-off Corporation's
application for a new employer tax identification number, Spin-off
Corporation does not admit that First Corporation controls it.
Once Spin-off Corporation is established with NCESC, First
Corporation waits until the next calendar quarter to shift the
reporting of all its employees to Spin-off Corporation at the lower tax
rate. First Corporation hopes that NCESC won't notice the pattern of
transfer. First Corporation retains control of Spin-off Corporation. By
retaining legal control or ownership of Spin-off Corporation, First
Corporation maintains its common law employer-employee relationship
with every employee whose wages were misreported.
It is clear that First Corporation is entitled to establish any
number of business entities it chooses. They can be partnerships, S
corporations, or L.L.C.'s (Limited Liability Corporations). Those
businesses can do anything legal, but they can't escape the fact that
First Corporation has to pay UI taxes on all the employees that it
controls. As long as First Corporation controls Spin-off Corporation,
First Corporation retains the responsibility to pay UI taxes on its own
workforce. Until First Corporation sells or releases control of Spin-
off Corporation, First Corporation retains its tax liability.
Several economic and financial measures confirm that First
Corporation is the taxable employer as defined by North Carolina law.
First Corporation's workforce is now performing the same work for Spin-
off Corporation at the same locations. First Corporation has not sold
or given up its benefit from and ultimate control of Spin-off
Corporation's workers. First Corporation treats the revenue from Spin-
off Corporation's workers and operations as its own. Spin-off
Corporation's profits and losses are reported on First Corporation's
income tax returns by treating Spin-off Corporation as a disregarded
entity under IRS laws. First Corporation retains the legal right to
control and benefit from Spin-off Corporation's profit and loss even if
First Corporation does not directly exercise such rights. Spin-off
Corporation may have the same corporate officers, physical facilities,
payroll and human resources structure. Inaccurate, misleading and
incomplete information was supplied to NCESC in order (1) to obtain a
lower tax rate than allowed by law, (2) to pay a less tax than owed,
and (3) to write off many dollars of accumulated tax liability.
NCESC is fortunate to have a dedicated UI tax staff committed to
full compliance under law. Initially, clear existence of SUTA dumping
was uncovered when ESC received a late payment on a voluntary UI tax
contribution in January 2002. A taxpayer had set up an L.L.C. and
transferred a tiny fraction of the company's negative experience rating
account to the L.L.C. The L.L.C. planned to obtain a zero tax rate for
the next year by making a small voluntary UI tax payment. Voluntary
payments are allowed by statute and employers can lower a UI tax rate
by doing so. However, the payments have to be made on time. The parent
corporation could have lowered its own tax rate to zero, but the
voluntary contribution would have been nearly $4 million. By creating
the L.L.C. with only a few employees and a tiny portion of the parent
corporation's tax liability, the L.L.C. only needed to pay $30,000 to
obtain the low rate. The next year, the parent corporation would have
reported the wages of all its over 1,500 workers on the tax return of
the L.C.C. with the zero tax rate.
ESC issued public statements and a public tax alert about SUTA
dumping. (Exhibit 3) Press releases and the Commission's own website
(ncesc.com) were used to warn of the potential criminal liability for
SUTA dumping. Major news outlets in North Carolina were conducting
independent investigations of SUTA dumping based on the August, 2002
(revised December, 2002) U.S. Department of Labor Program Letter and
responded to NCESC's request to raise public awareness on this issue.
Constituent concerns alerted members of the North Carolina General
Assembly to the need for statutory action about SUTA dumping. The North
Carolina SUTA dumping bill became a collaborative effort among
legislators, ESC, and certified public account and employer
associations.
North Carolina's SUTA dumping bill became law on May 20, 2003.
(Exhibit 4) The law makes it a felony for any person to attempt to SUTA
dump or for a UI tax advisor to aid or abet SUTA dumping. The law is
premised upon continuity of control and carries its stiffest penalties
against employers with more than 10 employees, owing more than
$2,000.00, and/or having a negative experience rating of more than
$5,000.00. This law identifies that there is an activity called ``UI
contribution tax return preparer'' and establishes liability for
illegal preparation. The presumptive sentence for felonious violation
of the law is 6 months incarceration up to 8 months for aggravated
circumstances. Uncapped fines may be imposed in the discretion of the
court. At the present time, the Commission is considering the
possibility of joint investigations with nearby states that are
victimized by multi-state SUTA dumping schemes.
It is too early to tell what the final dollar and liability count
will be for SUTA dumping. NCESC recently advised an accounting firm
that it had failed to uncover SUTA dumping when it performed an
independent audit. The evidence in that case shows SUTA dumping in
November 2001. On other fronts, NCESC received an $18,000.00 assessment
to cover a SUTA dump UI tax delinquency. Taxpayers have dropped
protests seeking the return of over $400,000.00 in UI taxes. Other
taxpayers have re-assumed tax liability of $4 million. Within the next
30 days, NCESC will begin on-site investigations at 10 taxpayer's
offices with UI tax liability of over $2 million. Inquiries arrive at
NCESC nearly every day seeking to address this issue through
negotiation and payment. NCESC has developed a real time, computerized,
tax analysis program to detect SUTA dumping. It includes, in part, a
revised voluntary contribution report that detects lowered rates beyond
ordinary parameters, a management report charting the movement of work
forces from overdrawn negative accounts to newly established positive
accounts, and a management report that shows a lack of filing from
corporate taxpayers.
The vast majority of North Carolina's 178,000 employers is honest
and willingly pays their taxes. A century ago a distinguished corporate
lawyer became Secretary of War, then Secretary of State, and then an
U.S. Senator. He said, ``About half the practice of a decent lawyer
consists in telling would-be clients that they are damned fools and
should stop.'' I would hope that those who attempt to induce others to
illegally manipulate UI tax laws would heed Elihu Root's advice.
______
EXHIBIT 1
Unemployment Insurance Trust Fund:
Recent Changes in North Carolina Employment Security Law
Financial impacts of changes in ESC law were calculated for 1995
forward. However, some changes made in 1993 and 1994 are provided
because of their use of the `50 percent rule' or very similar rules.
Changes effective January 1, 1993
1. The standard contribution rate for new accounts reduced from
2.7 percent to 2.25 percent.
2. The contribution rate for positive-rated accounts was reduced
by 30 percent, beginning April 1, 1993.
Changes effective January 1, 1994
1. The standard contribution rate for new accounts reduced from
2.25 percent to 1.8 percent.
2. The rate for positive-rated accounts was reduced by 50 percent
in any year in which the trust fund balance on the previous computation
date was $800 million or more.
Changes effective January 1, 1995
1. The rate for positive-rated accounts was reduced by 50 percent
in any year in which the trust fund balance on the previous computation
date was $800 million or more and fund ratio was less than 5.0 percent.
The rate for positive-rated accounts was reduced by 60 percent in any
year in which the trust fund balance on the previous computation date
was $800 million or more and fund ratio was 5.0 percent or more.
2. Accounts with a reserve ratio of 5.0 percent or more receive a
zero rate. (Prior to this change, the lowest rate was 0.01 percent, and
it applied to accounts with a credit ratio of 6.2 percent or more.)
3. The method of calculating taxable wages was changed to reduce
taxable wages as a share of total wages. The taxable wage base is the
greater of the federally required taxable wage base ($7,000) or the
average annual insured wage multiplied by 50 percent, and rounded to
the nearest multiple of $100. The above multiplier was reduced from 60
percent to 50 percent.
Changes effective January 1, 1996
1. All positive-rated accounts received a one-time zero rate for
calendar year 1996.
2. The standard contribution rate for new accounts reduced from
1.8 percent to 1.2 percent.
Changes effective January 1, 2000
1. All UI contribution rates were reduced by 20 percent for
calendar years 2000 and 2001.
2. All UI accounts paid a training contribution of 20 percent of
the (reduced) UI rate for calendar years 2000 and 2001. (The maximum
combined UI plus training rate was set at 5.7 percent. Thus if 20% of
the UI rate would result in a combined rate above 5.7 percent, then
that account paid a training rate that, when combined with the UI rate,
would not exceed 5.7 percent.)
3. Accounts with a reserve ratio of 4.0 percent or more received a
zero rate. (Prior to this change, accounts with a reserve ratio of 5.0
percent or more received a zero rate). This was a permanent change; it
has no sunset provision.
Changes effective January 1, 2002
1. All UI contribution rates are reduced by 20 percent and all UI
accounts pay a 20 percent training tax (based on the reduced UI rate)
if the computation balance in the prior year is more than $900 million
and the total unemployment rate is not above 4.3 percent at any time
over the 12 months prior to the computation date. If the latter
conditions are not met, then the training tax does not apply and all
accounts pay their regular UI contribution rates. This is in effect
through December 31, 2005. (The maximum combined UI plus training rate
was set at 5.7 percent. Thus if 20% of the UI rate would result in a
combined rate above 5.7 percent, then that account paid a training rate
that, when combined with the UI rate, would not exceed 5.7 percent.)
______
EXHIBIT 2
Employment Security Commission of North Carolina
UI Tax Alert
For Immediate Release: February 24, 2003
State Unemployment Tax Avoidance (SUTA Dumping)
The Employment Security Commission (ESC) has become increasingly
aware of the practice of State Unemployment Tax Avoidance (also called
``SUTA dumping'') in North Carolina. The agency has also learned that
certain tax advisory companies are promoting this activity as a way of
gaining business by promising potential clients reduced expenses and
increased profits.
The ESC will actively pursue and prosecute employers engaged in
this activity and has the authority to subpoena records and individuals
in its investigations. The maximum punishment is a fine imposed in the
court's discretion and 45 days confinement.
SUTA dumping is a practice of employing units to create new
business entities, transfer employees--and, in some cases, a part of
the organization, trade or business--to deliberately avoid an
unemployment insurance (UI) tax rate and deficit in its experience
rating account. The burden of the deficit is then shifted to all other
employers.
Employers engaged in this activity knowingly misrepresent the
purpose of the new business entity on quarterly UI tax returns and
reports. It is illegal under ESC statutes to knowingly make false
statements and omit material facts on UI tax documents in order to
reduce unemployment taxes. This practice is in violation of N.C. G.S.
96-18(b), with a two-year statute of limitations:
96-18. Penalties.
(b) Any employing unit or any officer or agent of an employing
unit or any other person who makes a false statement or
representation, knowing it to be false, or who knowingly fails
to disclose a material fact to prevent or reduce the payment of
benefits to any individual entitled thereto, or to avoid
becoming or remaining subject hereto or to avoid or reduce any
contributions or other payment required from an employing unit
under this Chapter, or who willfully fails or refuses to
furnish any reports required hereunder, or to produce or permit
the inspection or copying of records as required hereunder,
shall be guilty of a Class 1 misdemeanor; and each such false
statement or representation or failure to disclose a material
fact, and each day of such failure or refusal shall constitute
a separate offense.
The ESC is developing a real-time tax analysis program to review UI
tax account activity in order to detect signs and patterns of fraud.
The agency's tax fraud detection efforts will target both active and
inactive UI accounts.
Employers can help protect the integrity of the UI Trust Fund and
keep UI tax rates at minimum levels by being informed about this
activity. Information may be reported to Anne Coomer, ESC Tax Status
Manager, at 919-733-7156, or Ted Brinn, ESC Field Tax Operations
Manager, at 919-733-7396. Any information provided and the source of
the information will be kept confidential.
______
EXHIBIT 3
------
EXHIBIT 4
GENERAL ASSEMBLY OF NORTH CAROLINA
SESSION 2003
SESSION LAW 2003-67
SENATE BILL 326
AN ACT TO CLARIFY THE LAW ON CHANGING THE FORMS OF BUSINESSES FOR
UNEMPLOYMENT INSURANCE TAX PURPOSES AND TO INCREASE
PENALTIES, SO AS TO DETER THE PRACTICE OF STATE
UNEMPLOYMENT TAX AVOIDANCE (SUTA DUMPING).
The General Assembly of North Carolina enacts:
SECTION 1. G.S. 96-9(c)(4) is amended by adding a new sub-
subdivision to read:
``a1. A new employing unit shall not be assigned a discrete
employer number when there is an acquisition or change in the
form or organization of an existing business enterprise, or
severable portion thereof, and there is a continuity of control
of the business enterprise. That new employing unit shall
continue to be the same employer for the purposes of this
Chapter as before the acquisition or change in form. As used in
this sub-subdivision:
1. `Control of the business enterprise' may occur by means
of ownership of the organization conducting the business
enterprise, ownership of assets necessary to conduct the
business enterprise, security arrangements or lease
arrangements covering assets necessary to conduct the business
enterprise, or a contract when the ownership, stated
arrangements, or contract provide for or allow direction of the
internal affairs or conduct of the business enterprise.
2. A `continuity of control' will exist if one or more
persons, entities, or other organizations controlling the
business enterprise remain in control of the business
enterprise after an acquisition or change in form. Evidence of
continuity of control shall include, but not be limited to,
changes of an individual proprietorship to a corporation,
partnership, limited liability company, association, or estate;
a partnership to an individual proprietorship, corporation,
limited liability company, association, estate, or the
addition, deletion, or change of partners; a limited liability
company to an individual proprietorship, partnership,
corporation, association, estate, or to another limited
liability company; a corporation to an individual
proprietorship partnership, limited liability company,
association, estate, or to another corporation or from any form
to another form. This sub-subdivision shall not modify the
provisions of G.S. 96-10(d)--Collections of Contributions Upon
Transfer or Cessation of Business.
SECTION 2. G.S. 96-18 is amended by adding a new subsection to
read:
``(b1) Except as provided in this subsection, the penalties
and other provisions in subdivisions (6), (7), (9a), and (11)
of G.S. 105-236 apply to unemployment insurance contributions
under this Chapter to the same extent that they apply to taxes
as defined in G.S. 105-228.90(b)(7). The Commission has the
same powers under those subdivisions with respect to
unemployment insurance contributions as does the Secretary of
Revenue with respect to taxes as defined in G.S. 105-
228.90(b)(7).
G.S. 105-236(9a) applies to a `contribution tax return
preparer' to the same extent as it applies to an income tax
preparer. As used in this subsection, a `contribution tax
return preparer' is a person who prepares for compensation, or
who employs one or more persons to prepare for compensation,
any return of tax imposed by this Chapter or any claim for
refund of tax imposed by this Chapter. For purposes of this
definition, the completion of a substantial portion of a return
or claim for refund is treated as the preparation of the return
or claim for refund. The term does not include a person merely
because the person (i) furnishes typing, reproducing, or other
mechanical assistance, (ii) prepares a return or claim for
refund of the employer, or an officer or employee of the
employer, by whom the person is regularly and continuously
employed, (iii) prepares as a fiduciary a return or claim for
refund for any person, or (iv) represents a taxpayer in a
hearing regarding a proposed assessment.
The penalty in G.S. 105-236(7) applies with respect to
unemployment insurance contributions under this Chapter only
when one of the following circumstances exist in connection
with the violation:
(1) Any employing units employing more than 10 employees.
(2) A contribution of more than two thousand dollars
($2,000) has not been paid.
(3) An experience rating account balance is more than five
thousand dollars ($5,000) overdrawn.''
SECTION 3. Section 2 of this act becomes effective December 1,
2003. The remainder of this act is effective when this act becomes law.
In the General Assembly read three times and ratified this the 15th day
of May, 2003.
s/ Marc Basnight
President Pro Tempore of the Senate
s/ Richard T. Morgan
Speaker of the House of Representatives
s/ Michael F. Easley
Governor
Chairman HERGER. Thank you, Mr. Clegg. Now we will hear
from Carl Camden, President and Chief Operating Officer of
Kelly Services, Inc., Troy, Michigan. Mr. Camden.
STATEMENT OF CARL CAMDEN, PRESIDENT AND CHIEF OPERATING
OFFICER, KELLY SERVICES, INC., TROY, MICHIGAN
Mr. CAMDEN. Thank you, Chairman Herger, Chairman Houghton.
I am Carl Camden, President and Chief Operating Officer of
Kelly Services, Inc., and I really do appreciate the
opportunity to come here and talk with you all. This is also a
very critical issue from Kelly Services, Inc.'s perspective.
For a quick profile on Kelly Services, Inc., we were founded in
1946. We are the second largest staffing company in the United
States. We operate in all 50 States. We have 2,400 offices,
but, most germane to today's presentation, we employ, in the
course of a year in the United States, nearly 700,000 people.
The practice of SUTA dumping, while it may have become more
severe now, has been increasing slowly from the middle 1990s
until now. In 1994, Kelly Services, Inc. received its first
solicitation. The accounting firm who sent it to us asked us to
keep it quiet because not very many people knew about it. Every
year, as it has gone on, we receive more and more
solicitations. Today, I will tell you that there is no large
accounting firm who has not solicited Kelly Services, Inc. to
engage in SUTA dumping, and you can add several dozen law firms
and tax consultants. Perhaps what bothered me the most is last
year, when one of my officers rejected the offer of SUTA
dumping, and he received a very angry letter from the
accounting firm which said, does the president of your company
know you are doing this? You are betraying your fiduciary
responsibility to your shareholders by costing your company
several million dollars in profits that they could obtain if
they would engage in this practice.
It is rare, perhaps, to hear a businessperson speak in
favor of a tax, but we at Kelly Services, Inc. believe that the
SUTA tax system is intrinsically fair. If you control your tax,
you control your unemployment experience, you keep your workers
employed, you have a lower experience rate, then you pay less
taxes. If you are unable to keep your workers employed, and you
have a high experience rate, then you pay more taxes. Taxes go
up. The taxes go down the better you do; they go up the worse
you do. We understand that in an economic cycle, you will
perform worse as the unemployment rate goes up, and you will
pay more. Over the last two years--2003, and what we project
into 2004--Kelly Services, Inc.'s contributions that we were
required to pay into the State UI are going up by over $10
million a year. We are not complaining about that. We also know
they will go down in the future as our experience goes down and
the unemployment problem becomes less.
What irks me tremendously, though, is that in addition to
the $10 million that is going up based on our own experience,
we are also paying $1 to $2 million subsidizing people who are,
in fact, engaged in SUTA dumping. That bothers me, and what
really is a problem is that I face a competitive disadvantage
as I compete against companies who engage in SUTA dumping and
we don't. Their cost of service is less than ours--and it is
significantly less. So, those of us who are trying to do what,
in fact, is both legal and ethical, find ourselves at a
competitive disadvantage as we compete against firms who engage
in what in many States is, in fact, a legal but, we believe,
unethical practice of SUTA dumping.
Much of what you have heard today, I could duplicate--but I
won't. I would like to address one particular issue, and that
is the issue of urgency. I believe, in fact, that SUTA dumping
is going to increase. It is in the process of increasing. If I
judge it by nothing more than the rate of solicitations that we
receive, and the number of references those companies are able
to provide, I can tell you that the participation rate is high.
As I dissect the rates that our competitors charge, it is
easy to detect evidence of SUTA dumping. As the unemployment
rate continues to increase, or even stay where it is, you can
expect the contributions companies are to pay, and the
unemployment tax to lag that by 1 or 2 years. In other words,
the potential payback from SUTA dumping is going to increase
over the next 1 to 2 years. While you have heard a number of
$114 million, let me tell you that if Kelly Services, Inc. was
willing to aggressively pursue SUTA dumping, taking everything
all the way to the edge, we alone could save between $20 and
$30 million dollars. So, $110 million strikes me as a low
estimate. More importantly, I am asking you to consider the
potential damage that is going to be done over the next 1 to 2
years if we do not step forward and halt the abuse, and make it
clear that while it may currently be a legal practice, it is
not a practice that should be allowed to continue. We very much
believe that there is a set of small actions that could be
taken that would have a significant impact on reducing this.
We do believe that States should be required to revise
their laws to require mandatory transfer of unemployment
experience for mergers, acquisitions, transfers of trades, or
business. Yes, there is always a legitimate--there are many
legitimate reasons to set up businesses, to break apart
divisions, but there is never a legitimate reason not to
transfer the work experience that those employees had before
they moved into the new unit. We encourage the Department of
Labor to develop tools and training, because I think the States
are willing, but the knowledge is weak as to how you go about
detecting and enforcing it. We would like to see appropriate
enforcement by the States of the laws that are already on the
books.
Let me conclude with a paragraph from one of the last
letters of solicitation that we received where somebody was
asking us to engage in SUTA dumping in the State of
California--and of course they were willing to do so for a fee.
It is important to note that, in accordance with section 135.1
of the California Unemployment Insurance Code, the State could
assert a continuity of control and ownership and thereby treat
Kelly Services, Inc. and the new company as a single employer.
However, it has been our experience that the State will not
impose this section of the law. We have to enforce the laws we
have. We need to require the mandatory transfer of experience,
and we need to provide the States with the tools they need to
take care of the problem. Thank you, Mr. Chairman.
[The prepared statement of Mr. Camden follows:]
Statement of Carl Camden, President and Chief Operating Officer, Kelly
Services, Inc., Troy, Michigan
Good afternoon Chairman Herger, and Chairman Houghton, and members
of the Subcommittees on Oversight and Human Resources. I appreciate the
opportunity to speak with you today regarding our shared goal of a
strong, viable and sustainable unemployment insurance program.
I am Carl Camden, President and Chief Operating Officer of Kelly
Services. For those who may not be familiar with Kelly, the company was
founded in 1946 and today is the second largest staffing services
company in the United States. Our employees work in 50 states and in 26
nations. We own and operate our own branch network of 2,400 offices.
Last year Kelly employed nearly 700,000 people.
Kelly Services recognizes the importance of an effective
unemployment insurance system for workers, employers, and the economy
as a whole. We applaud today's hearings to examine ways to improve and
protect the system and to serve the needs of the unemployed.
Employers pay unemployment taxes at rates commensurate with claims
activities by their employees. Employers with high unemployment
activity are assigned higher unemployment tax rates, and employers with
lower activity pay less. This fundamental principle--called experience
rating--has worked well for years, but is now being undermined. A
growing number of employers are engaged in tax avoidance schemes
designed to disguise their claims experience. This practice, known as
SUTA dumping, is a threat to the integrity and health of our
unemployment system. The practice harms both workers and employers who
play by the rules.
Workers are harmed because this questionable practice eliminates
the incentive for employers to keep employees working--they can escape
the financial harm that otherwise comes with laying off workers. State
trust funds are depleted, taking away the flexibility to even consider
benefit or eligibility changes.
Employers are harmed because they must pay more to make up for the
taxes that other companies avoided through SUTA dumping.
It is important that Congress act promptly to solve this problem.
The long-term labor market trends that make this practice attractive to
some employers will continue--and accelerate. The adverse impact on the
financial health of the unemployment insurance system will also
continue to grow significantly.
As the proportion of service workers in the economy continues to
increase--they comprised 16% of the workforce in 1960, and grew to 36%
by 2000--so will the temptation to engage in SUTA dumping. This is
because payroll taxes are a large and important part of a service
company's total tax burden.
Because of the economic slow down, unemployment rates have risen
significantly. Therefore, it is important to realize that the most
opportune time for SUTA dumping is following a slowdown, when
unemployment tax rates are high, as they are now and will be for
several years.
As you know, state unemployment trust funds are under significant
stress with the states of Illinois, Minnesota, Missouri, New York,
North Carolina and Texas already borrowing from Federal accounts.
California and Massachusetts will likely need to borrow before the end
of the year.
In the staffing industry, people are our business. Therefore,
payroll is our largest single cost. In 2002, Kelly's total U.S. payroll
was $2.1 billion. Our taxable payroll was $1.4 billion, or 66% of our
total payroll. If Kelly can reduce our unemployment tax rate by just
one tenth of a percent, we can save $1.4 million. Small rate changes
have a big impact.
Because it is such a significant cost, we manage our unemployment
compensation activities closely. We work hard to return employees to
work as quickly as possible when economic conditions force layoffs. We
provide training to upgrade employees' skills and increase the number
of jobs they qualify for. We contest claims that we think are without
merit.
The staffing industry has been particularly hard hit by the current
state of the economy. In 2003, Kelly's unemployment taxes increased by
$12 million. But this is how the system is supposed to work. Tax rates
increase following periods of high claims activity. On top of the 2003
increase, we estimate an additional increase for 2004 of $14 million.
Through a systematic SUTA dumping program, we could have avoided the
entire $26 million dollar increase. These are the kinds of increases
that some companies have avoided through SUTA dumping.
These numbers are certainly large enough to get attention.
Therefore, it is easy to understand why SUTA dumping is very tempting
for labor-intensive organizations. I assure you that the numbers are
significant enough to impact the competitive balance in the market
place.
Kelly and the other companies who have said no to SUTA dumping are
faced with two basic choices.
We can ignore the issue, and allow a questionable
practice to continue to threaten our competitiveness.
Or, we can seek appropriate changes to eliminate SUTA
dumping, and to protect and preserve the unemployment insurance system.
At Kelly Services, we choose the latter. We therefore urge Congress
to act quickly to protect the integrity of the experience rating
principle. We are suggesting that Congress:
Require that state laws be revised to require the
mandatory transfer of experience for mergers, acquisitions, and
transfers of trade or business, regardless of the ostensible reason for
the transaction.
Direct the Department of Labor to develop tools and
provide funding to train state agencies to detect the practice.
Require appropriate enforcement by the states, of laws
already on the books.
Chairman Herger, Chairman Houghton, we appreciate the work of your
committees, the work of the Department of Labor, and of the state of
North Carolina--and other states--on this important issue. Thank you
for the opportunity to appear today. We look forward to working with
you in any way we can.
Chairman HERGER. Thank you, Mr. Camden. Chairman Houghton
to inquire.
Chairman HOUGHTON. I think we all agree that this is not a
great practice, and we ought to try to curtail it. I guess the
issue that worries me is how far the Federal Government should
go on something like this. If I understand it correctly, if you
are in compliance in terms of the UI, it comes to about 0.8
percent of payroll--but if you are not in compliance, the tax
jumps up to 6.2 percent of payroll.
Also, it is the testimony of Mr. Clegg that you can get up
to 6 months or 8 months for aggravated circumstances--all sorts
of penalties that are already existing there. So, what can the
Federal Government do to superimpose its will, its might, its
discipline, on this whole system, which seems to me is just
being violated but the structure that is in place? Maybe I am
wrong. Maybe you can explain.
Mr. CAMDEN. I will take a first pass at it, although I find
myself an unlikely character to be arguing for a larger Federal
role in any lives. It is not my particular political bent.
Ultimately, though, a failure at the State level requires the
Federal Government to backstop the failure. Yes, three States
have currently borrowed. We anticipate at Kelly Services, Inc.
that the number is actually going to be closer to eight States
by the end of the year, and of those eight small States,
perhaps we wouldn't mind.
Let me go through the list of States that the Federal
Government can expect borrowing from before this year is over:
Illinois, Minnesota, Missouri, New York, North Carolina, and
perhaps Texas, California, and Massachusetts. These are not
small States with small payrolls. While, if we leave it to the
State issue, we ultimately leave it to the Federal Government
to hold the bag for the borrowings that take place.
Second, you already have current law that requires the
Federal Government to set the standards by which the States
act. This issue of a mandatory transfer of experience has not
been established as a principle by which the States need to
behave--by which the States need to enact legislation. That
principle needs to take place, and it needs to be enforced at
the local level.
Finally, the provision of tools--because ultimately,
enforcement does take place at the State level. The provision
of tools, the provision of training, enables the States to
carry out the actions that I think we all expect them to do. Do
you have a different perspective?
Mr. CLEGG. Yes, thank you. I am certainly not one who is
going to argue for overreaching Federal interference in State
issues either. However, we do have, and currently function as a
State employment security agency under Federal conformity and
compliance issues, which do establish a basic umbrella of
consistency across the Nation.
My overriding concern with the issue of SUTA dumping, if it
is completely left at the States--if I thought every State
would go adopt the law that North Carolina has just passed, I
would sleep well. I don't think that would happen, and
therefore I don't think we need to get into a situation where
people will SUTA shop and deal with multi-state entities in
States with less severe penalties for SUTA dumping. So, I think
that we need to look at it in the larger umbrella context as a
conformity and compliance issue, but leave the specifics to the
State, as we have in so many other benefit areas.
Chairman HOUGHTON. Would you like to answer?
Mr. DESAULNIERS. I would like to point out the results of
our survey, indicating that although there are States such as
North Carolina which are moving aggressively in this area,
three-fifths of the State administrators indicated to us that,
either they had no laws dealing with this issue, or that their
laws were inadequate. So, yes, there are some States that are
handling it well, but three-fifths of the State administrators
report that their States are not addressing this issue
adequately.
Mr. CAMDEN. For a tax evasion scheme that began to appear
in the mid-1990s and has picked up steam today, to have only
one State that we are able to bring forward today as a witness,
argues for the need for a more centralized, collective, and
fast response.
Chairman HOUGHTON. Yes. If I understand it, what you are
saying is the Federal Government should pass the law to make
sure that the States have the proper features, and also enforce
those laws--not to superimpose a Federal law on it so as to
encourage the States. Thank you very much, Mr. Chairman.
Chairman HERGER. Thank you. The Ranking Member, Mr. Cardin,
from Maryland, to inquire.
Mr. CARDIN. Thank you, Mr. Chairman. Mr. Cramer, I guess
after listening to all four of your testimonies here, I am
convinced by the statement of Mr. Clegg that if SUTA dumping
can exist in North Carolina, it surely must exist in every
State. I am concerned that--as Mr. Camden has indicated--there
could be a $20 million hit on one company alone, Kelly
Services, Inc., that when you get two-fifths of our States
saying they have adequate laws or enforcement, I question
whether that, in fact, is true.
Mr. DESAULNIERS. The two-fifths comprises both those who
believe that efforts are adequate, as well as those who are not
aware of, or may not be aware of, the extent of the SUTA
dumping practice in their States. So, it is a----
Mr. CARDIN. In fact, they are the ones worrying me the
most, because they are the administrators who believe they
don't have a problem when in fact they do have a problem. They
are not looking at what is probably happening within their
States. So, I really do think that we don't know the extent of
the problem, but that it is clearly going to continue to grow
unless we have a national policy.
Now, I don't disagree with Chairman Houghton. This is a
State-administered program, so we have to rely upon the States
to enforce their laws. However, there has got to be a clear
message nationally that we won't tolerate this type of action,
because it won't take long for Mr. Camden to get in a position
where he will have no choice but to explore this practice if
his competitors are doing it. I would be curious as to what
impact you think this may have on competition. If you continue
to pay the extra, perhaps, $20 million, and a competitor
doesn't pay that $20 million, it seems to me you can't do that
for too long in too many different categories.
Mr. CAMDEN. I ask myself that question every now and then
also. There are traditional responses. We work very hard at
training, upgrading our employees, and making them more
employable. We are very fast at trying to get them employed at
a temporary staffing firm. We are aggressive at understanding
when assignments are going to end, and reassigning. Through
what I view as just good, solid business practices, we have
managed to keep our unemployment experience lower than most of
our competitors, and so SUTA dumping hasn't put us at as much
of a competitive disadvantage as we have experienced in the
last year or two.
I have a chief executive officer who talks to our
management team about what he calls the Wall Street Journal
test. Which is, he doesn't want to hear about if something is
legal or not; he wants to hear that, if it is on the front page
of the Wall Street Journal, how are we going to feel about
having to explain it to a reporter----
Mr. CARDIN. That sounds like a Member of Congress.
Mr. CAMDEN. I have to tell you, it would be hard for me to
explain to a reporter why it is that we would engage in that
practice. We will continue to not engage in SUTA dumping, but
we will be aggressive at talking to you all here, talking to
others, and doing what we can to bring about--again, rare for
me to say--the active enforcement of what we think is,
intrinsically, a fair tax.
Mr. CARDIN. It is nice to see there are such things as
corporate ethics these days. That is good to hear from you. Mr.
Clegg, I am curious as to what response you are receiving from
the business community in North Carolina. Are you getting
support? Are there companies that are a little bit nervous
about what you are doing?
Mr. CLEGG. North Carolina has about 178,000 employers, and
many of them are represented by two major business lobbying
groups in North Carolina--both of whom joined in support of
this piece of legislation. I think what Mr. Camden says is very
clear. The vast majority of employers do not want their
experience ratings skewed by the actions of some of the folks.
The issue of the trust fund in North Carolina had not been
an issue for many, many years because we had about $1.6 billion
and very low unemployment, and all of a sudden we had 6.4-
percent unemployment and the trust fund was nearly empty.
Everyone's UI tax rate is now an issue of discussion within the
business community, and the Certified Public Accountants
Association, plus the major business lobby promotion
associations in North Carolina, joined with us in very positive
testimony before both the North Carolina House, and the North
Carolina Senate as this bill made its way through the General
Assembly.
Mr. CARDIN. Again, let me thank all of you for your
testimony. That is certainly very helpful.
Chairman HERGER. Thank you very much. Mr. Clegg, I want to
join in commending your State, North Carolina, for very
aggressively going after this which is obvious, and appears to
be becoming a growing problem. I also commend your business
community for supporting you. Mr. Camden, I have to
particularly commend you and your company, Kelly Services,
Inc., for taking the strong ethical stand that you have.
The purpose of this hearing today is to, first of all,
identify if there is a problem and what that problem is, one;
and then, two, to move forward and identify what it is we need
to do as a Congress--what we can do, what would be the most
effective way to alleviate this problem. Mr. Camden, if you
could tell me, in your opinion, what are the prime issues that
need to be addressed to prevent and stop SUTA dumping?
Mr. CAMDEN. I think the critical issue is the transfer of
experience, and we need to not let that issue get clouded up
with the legitimate needs of countries to divide businesses. We
have a health care business. We provide scientists, engineers--
and all of them we have in separate businesses, because they
have very different business practices.
The issue is not that you can form companies, or even
necessarily combine companies. It is to require that the
experience goes with you, because there is no legitimate reason
for that experience not to come with you as you separate and
combine entities. The purchasing of companies just to acquire
their unemployment rate is not a--I don't believe it to be a
rare occurrence. That is just, in my opinion, out-and-out
fraud. Again, we may not have made it illegal yet, but it is
clearly not the intent of the legislation that was passed for
that to occur.
We need to clearly establish that there are principles that
we are following, and one of those principles is the mandatory
transfer of experience. I think that that is a code that can be
passed by this Committee. I think that that is an expectation
that all the States have. I think we could even go beyond that
and do something that would be very common in business--perhaps
not so common here.
Why aren't there performance metrics that we are requiring?
Why don't we require the States to have--to achieve an
increasingly difficult set, to raise the bar--as we talked
about in the corporate setting where we expect to see more
actions, more investigations, and a more complete explication
of the mandatory transfer of experience regulation. I
understand that enforcement is local. The question is, are we
going to make it easier for the States to make that enforcement
effective, by giving them the tools they need, by providing the
training--but, most importantly, by making very clear and very
explicit what is illegal?
I really dislike receiving letters saying that SUTA dumping
is not illegal. It is against the intent of the law. We simply
haven't made explicit how the intent of the law is to play out
in the transfer of work experience as companies go about
combining and dividing. That single change alone, and requiring
States to amend their laws to come to conform with that
principle, would have a massively positive impact. Public
statements by you all, who are much better at speaking at this,
and command a much better podium than we would, perhaps,
individually, would let the business community know there is no
room--and would let those, the promoters, know there is no
tolerance for going around the spirit of the legislation with
something that may be legal, but violates the spirit of the
law.
Chairman HERGER. Thank you, Mr. Camden. Again, what can be
pointed out is, not only are they saving these dollars and
becoming more competitive in an ethically, I believe, dishonest
way. Those who are being ethical, who are abiding by the law,
are paying the difference in higher unemployment rates than
they would be paying had this not been taking place. So, one is
gaining at the expense of all the others like yourself who are
obeying the law. The gentleman from Michigan, Mr. Levin, to
inquire.
Mr. LEVIN. Thank you. Well, I think to my colleagues, the
witnesses have laid out the problem very clearly--and, I think,
the answer. I had the privilege of representing for 10 years--
until 6 months ago--the city in which Kelly Services, Inc. is
headquartered, and had a chance to come and know the company
well. I think we have to do more than admire the company, which
I do very much. The gentleman from Kelly Services, Inc. told me
about what the response was from a person who headed up the
company for so many years, when he asked, knowing the answer,
whether they should engage in this. The answer was, no way. The
State of North Carolina has made it clear how this can be done,
and I think that the GAO has described how, if we don't act,
there will be people promoting activity that should not occur.
So, I wanted to just say a few words about the issue that
Mr. Houghton has raised--and that is the Federal interest. It
seems to me that there is clearly a Federal-State partnership
when it comes to employment compensation. This is a combined
system, and the Federal Government has laid out certain
parameters within which States must act. The question is
whether this will be added to the parameters. It isn't as if
the States simply send the money here, we ship it back, and
there is no role for us. I think this is an especially urgent
issue when we have this high level of unemployment, when States
need more resources, not less, to address the needs of the
unemployed--including addressing the issues of eligibility.
Whatever the figure is, the percentage of people who receive
unemployment compensation is less than 50 percent of the people
who become unemployed.
It is also, I think, a Federal issue. We don't want States
competing for which ones can do worse for their unemployed
personnel or Members. We don't want competition based on that,
and we don't think it is right that employers compete against
other employers as to who can game the system. That is exactly
what is happening here. People are gaming the system. There is
such a clear Federal role--and there is an urgency here. If we
don't act this year with unemployment the way it is, with the
recession continuing in one form or another, or with economic
difficulties, whatever you want to call it, there is going to
be more and more of this, in all likelihood. North Carolina has
shown us a model as to how it can be done. It seems to me that
we have that experience--we have got the experience of States
that know how to do it.
The Department of Labor and the administration ought to
send us some legislation, and do it quickly. Then we need to
get down and work on it, pass it, and do so in the next few
months. If we don't do that, then it won't have any impact for
the next year when the experience ratings come out, and we are
going to be talking about another year and a half of companies
gaming the system to the harm of their competitors--to the harm
of employees who are laid off. There aren't the funds there for
States to work with, and it is to the harm of the Federal
Government, which is now loaning out monies to the States. It
affects all of these resources. So, I think Mr. Houghton's
question is a very appropriate one, and I think that these four
witnesses have given us such a clear answer, that now it is up
to us and the administration. Thank you so much for the four of
you appearing. You have thrown down the gauntlet, and we need
to pick it up.
Chairman HERGER. Thank you, Mr. Levin. The gentleman from
North Dakota, Mr. Pomeroy, to inquire.
Mr. POMEROY. Thank you, Mr. Chairman. I will be brief. I am
very interested in the information you have brought us, and
ascribe myself fully to the comments of the gentleman from
Michigan. If consultants are marketing essentially illegal
practices, we need to put a stop to it. In addition, we need
to, I think, fully air who is doing this and what is out there
by way of competitive pressures. I was very surprised to learn
the major accounting firms are in a frantic competition with
one another relative to tax shelters. I had a friend who was a
partner in one. He hated it. He wanted to be a consultant and
an accountant, not a salesman on shady accounting schemes. That
was what he was reduced to, and competition drove right across
the biggest accounting firms in this country. Who are the
consulting firms that are selling these products? One of the
GAO representatives here, if you could go ahead and name them,
I think that is important information.
Mr. DESAULNIERS. Congressman, GAO has a policy that we do
not, in a public forum, disclose names. I would be happy to
disclose those names to you privately, or with your staff after
the hearing, but it is our policy not to publicly name names.
Mr. POMEROY. Well, let me just see, then, if there is any
other way I can get it out of you. Would I recognize the name?
Mr. DESAULNIERS. I do not think so.
Mr. POMEROY. That tells me it is not one of the major
accounting firms that----
Mr. DESAULNIERS. No, it is not.
Mr. POMEROY. I am relieved to hear that. We don't have any
information that they are doing this, do we?
Mr. DESAULNIERS. Well, I think that Mr. Camden provided
that information.
Mr. CAMDEN. The answer is that they all have over the past
few years. I disagree somewhat with the characterization that
it is illegal, because if it was clearly illegal, it would have
been easier to stop it. We have been careful to use the word
unethical, and not the phrase, ``true to the spirit of the
law.'' They have proposed unethical schemes, maybe pushing
right up to the edge of the gray zone. I know these firms. I
know many of the partners, and I don't believe that they
crossed into an area that they would view as blatantly illegal.
I happen to think that is the wrong standard, but I would
object to the characterization as selling an illegal practice.
Mr. POMEROY. Right. I am reading here from an article that
appeared on Charlotte.Com--in the Charlotte Observer. ``It is
clear at least two major accounting firms, Deloitte & Touche
and Peat Marwick International/Klynveld Main Goerdeler (KPMG),
were pushing the maneuver in North Carolina as recently as last
fall, according to publicly available documents and Observer
interviews with officials from three companies who said they
were pitched the technique.''
So, Mr. Camden, maybe you can tell me how this works. So,
you have got--assuming the information in this is correct--
people from Deloitte & Touche or KPMG coming up and saying, we
think you ought to hire us as a consultant, let us show you
what we can save you in your unemployment compensation
benefits--we think that you can basically shift some of the
risk here. Basically, they then would go on to elaborate a SUTA
dumping procedure, and then hope that the employer would hire
them so they could do the template on SUTA dumping for purposes
of artificially reducing their risk for purposes of UI premium?
[The information follows:]
Accounting firms' role in tax ruse scrutinized
Results in lower N.C. jobless taxes
TONY MECIA
Staff Writer
As Congress holds hearings today on an accounting maneuver some
companies use to skirt unemployment taxes, N.C. investigators are
examining the role major accounting firms played in the controversial
practice.
The accounting move occurs when a company creates subsidiaries that
pay less money than they ordinarily would into a state fund for jobless
workers. Officials with the N.C. Employment Security Commission worry
that the practice is sucking millions of dollars from the fund--and
sticking companies that don't use the technique with higher tax bills.
The General Assembly passed a law last month clearly criminalizing
the practice. Today, North Carolina's enforcement efforts will be
presented in a Subcommittee hearing of the House Ways and Means
Committee in Washington, which is concerned about abuses under the
practice.
Since launching their investigation late last year, N.C. officials
have focused on the companies employing the practice, which the state
says are principally manufacturers and construction firms.
But now, state officials say they have developed a better
understanding of the companies pushing the technique, which officials
call state unemployment tax dumping, or ``SUTA dumping.''
``It appears that major accounting firms believe they can make
money by selling SUTA dumping plans to North Carolina businesses,''
said Fred Gamin, a senior staff attorney with the ESC who is heading
the investigation. ``It's illegal.''
Gamin would not name the accounting firms under scrutiny, although
he said the ESC is looking at companies that advocated the technique as
well as those that performed outside audits of firms that used it. It's
unclear what action the ESC may take.
But it is clear that at least two major accounting firms--Deloitte
& Touche and KPMG--were pushing the maneuver in North Carolina as
recently as last fall, according to publicly available documents and
Observer interviews with officials from three companies who said they
were pitched the technique.
They were pushing the technique in 2001 and 2002, just as a series
of financial scandals subjected the accounting industry to renewed
scrutiny. At the same time, the economy was sluggish, and employers
were beginning to pay higher unemployment taxes to pay for increased
numbers of jobless claims.
Deloitte, which told The Observer in January it believes the
technique to be legal and was advising companies on how to use it,
declined to comment for this article.
KPMG spokesman Tim Connolly said Wednesday, ``Our advice was
consistent with the law, but we don't discuss the work we perform for
clients.''
In a report to be released at the congressional hearing today, the
General Accounting Office said tax consultants are continuing to advise
companies on the maneuver. A GAO investigator, posing as the owner of
an East Coast construction company, asked four consulting firms about
avoiding unemployment insurance taxes. Three of the firms offered to
help; the fourth demurred, explaining that the practice is illegal in
many states. The GAO didn't name the firms.
According to representatives of the three companies interviewed by
The Observer, the pitch generally went like this:
The accounting firms would call the financial offices of targeted
companies, briefly explain the technique and seek to set up a meeting.
The cost of implementing the practice ranged from $50,000 to $150,000.
But the savings, they said, could be far greater. Other companies
are doing it, they said.
One of the companies interviewed by The Observer, an N.C.
manufacturer, said KPMG's Charlotte office promised significant savings
by using the accounting method. In a letter to the company last fall,
which The Observer was allowed to read, KPMG said it had saved an N.C.
textile company $6 million in unemployment taxes over three years.
The company's chief financial officer told The Observer this week
that he found the offer tempting but declined because it didn't seem
ethical, even if it was legal.
``Our feeling from the beginning has been, this is borderline
fraud,'' said the CFO, who said he also received a similar pitch from
Deloitte.
Fearing business fallout from being quoted publicly, he asked not
to be identified.
Another company, R.L. Stowe Mills Inc. in Belmont, said it found no
compelling business reason to use the technique when a major accounting
firm pitched it last fall, even if it would have resulted in ``very
significant'' savings.
``We did not give it a lot of consideration because it didn't feel
right to us,'' said CFO Barry Pomeroy, who would not name the
accounting firm. ``It seemed to us to be more of an evasion technique
rather than an avoidance technique. We'll avoid taxes legally all day
long, but when you get into evasion. . . .''
A manager with the third company told The Observer its executives
relied on assurances from Deloitte when they bought into the maneuver.
In a meeting in the second half of 2001, the manager asked a Deloitte
tax adviser if the move was legal.
``There was not always a direct answer back to me, other than the
fact that there was a loophole there,'' said the person, who asked not
to be identified for fear of retribution.
The plan, the manager said, was to create new subsidiaries every
year, regularly transferring workers into them. That would enable those
units to pay low tax rates because they have no history of layoffs--or
of tapping the state fund established to pay benefits to laid off
workers.
The Charlotte-area company used the practice, saving several
hundred thousand dollars in 2002. But ``things got hot'' in January
2003 when The Observer published an article saying state officials were
examining the practice, the manager said. The workers were then
transferred from the subsidiary back to the original company.
At the time, state law did not specifically address the technique,
and several tax advisers told The Observer they considered it to be
legitimate tax planning. Later, state officials said they considered
the practice illegal. They made sure it was in the N.C. law passed in
May.
The state is continuing to investigate about a dozen companies that
have used the practice. ESC officials have declined to name them. They
have collected $18,000 in back taxes from one Virginia-based
manufacturer with N.C. operations, and say they nixed the company's
attempt to skirt about $400,000 a year.
Nationally, several states including North Carolina identified a
total of $120 million in losses from SUTA dumping in the past 3 years,
the GAO reports.
As recently as this March, Deloitte was still encouraging use of
the practice in other states.
In a March 25 tax seminar archived on the firm's Web site, a
principal with Deloitte's Boston office said state unemployment tax
planning was ``still valid planning'' because other states ``have not
made a movement to change this law yet.''
But in light of heightened attention by N.C. newspapers and by the
U.S. Department of Labor, he recommended transferring into the
subsidiaries not just employees, but also assets. Give the subsidiaries
more heft, he advised, by creating a ``business-purpose document'' and
doing financial statements for them.
``The more substance that we have in these transactions,'' he said,
``the more we can hold our head high.''
Mr. CAMDEN. Yes, sir.
Mr. POMEROY. I think that stinks, and I think that an
important part of the responsibility that Chairman Houghton and
I have in the Subcommittee on Oversight, is to bring this
information out in public forum. I would like to think that, if
business ethics don't mean anything anymore to some of the
firms that we have long held in the highest light--in terms of
their adherence to business ethics and business standards--then
hopefully the prospect of corporate embarrassment ought to mean
something to them. It is an old adage among Members of
Congress: don't do anything you wouldn't want to read about in
the paper.
Well, I would like to see these guys think at least twice
about--don't do anything you don't want tossed around a
Committee on Ways and Means hearing room in public forum. I
really do think that that is beneath the proud reputation of
Deloitte & Touche and KPMG, and beneath the fine people that
work in those firms. I appreciate very much what you have
brought to us in this regard, and look forward to bringing
information out.
Chairman HERGER. I thank the gentleman from North Dakota.
Chairman Houghton, to inquire.
Chairman HOUGHTON. I want to bring this thing back into an
overall perspective. Since the beginning of time, people have
tried to game the system, and they will continue to game the
system. We have seen it, whether it is public accounting white-
washing, or whether it is earnings stripping, or a special
partnership and off balance sheet borrowing--or whatever it is.
As far as SUTA dumping is concerned, clearly it is wrong--it is
not in the spirit of what we are all about, what this country
stands for, what the laws, and its intentions, are. The
question is, what do you do about it--and the thing I think we
have got to be careful of, is that we don't use a sledgehammer
on something where it will have real shock waves in other
areas. I was in business for many, many years, and good laws
were put in under extraordinary circumstances. Yet they had a
paralyzing effect on a variety of different actions which we
wanted to take. So, as we make these decisions up here, we want
to be conscious of that, and we want to make sure that we
attack the problem and just don't ruin the system. I just
wanted to say that, Mr. Chairman, and I thank you very much for
being here.
Chairman HERGER. Thank you, Chairman Houghton. Certainly I
have to echo the comments of Chairman Houghton. We certainly
don't want to do anything that is going to disrupt what our
natural business practice is, but I believe what we have been
hearing about in this hearing are not natural business
practices. These are practices that, as I hear the testimony,
are made to game the system--and this is at the expense of
other employers and other businesses who are placed in a very
unfair competitive position because of this. So, it is
something that this Committee intends to work with you to help
correct. With that, my last question would be to any of you who
would like to comment. How difficult is it for States to
identify companies that engage in this SUTA dumping practice?
Any of you wish to answer?
Mr. CLEGG. To begin with, we knew that it was out there,
but we did not truly uncover it until we looked at our
voluntary contributions. States have got to, number one,
acknowledge the fact that SUTA dumping exists. It is an
emerging issue. Some States are so deep in trying to dig out of
their current unemployment issues, they are not having the
resources to deal with the tax end of the house. Through that
acknowledgment--through an acknowledgment that this is
occurring in a multi-state situation--we are acknowledging that
we don't want people to SUTA shop. Education has a lot to do
with it, but our real time computerized program is allowing us
to make that determination by looking at factors which we have
seen across the board that SUTA dumpers have in common with one
another.
Every entity that pulls up in our system is certainly not a
SUTA dumper, but it is clearly a way to look at very clear
evidentiary factors that we have seen across time that might
bear further investigation. The 10 individual corporations we
will be going to see in the next 30 days were determined from
that very program, and we certainly hope to be able to, in
forums like this, discuss that program. We hope to be able to
help other States determine that, as State employment security
agencies, we are all in the same boat, and what hurts one hurts
us all, particularly with the multi-state and transient nature
of commerce in today's world. We are not living in a vacuum,
and it is very important that we all understand the severity of
this problem, and all do something about it.
Chairman HERGER. Thank you very much. Again, I appreciate
your testimony--for your coming here today. It has been a very
interesting and informative hearing. It has also been a
pleasure to work with our colleagues on the Subcommittee on
Oversight. With that, this hearing stands adjourned.
[Whereupon, at 3:30 p.m., the hearing was adjourned.]
[Submission for the record follows:]
Statement of the National Association of Professional Employer
Organizations, Alexandria, Virginia
The National Association of Professional Employer Organizations
(NAPEO) appreciates the opportunity to submit this statement for the
record of the Subcommittees' June 19, 2003 hearing to examine fraud and
abuse in the Unemployment Compensation program. We commend Chairman
Herger and Chairman Houghton and the members of the Subcommittees for
providing the oversight necessary to protect the integrity of this
important State-Federal partnership and to protect workers and
employers who play by the rules. Like other employers, professional
employer organizations (``PEOs'') benefit from a strong and equitable
Unemployment Compensation program, and NAPEO supports broad-based
efforts to eliminate any practice that undermines the integrity of the
system.
As you are aware, the Unemployment Compensation program is
supported by unemployment taxes paid by employers. Today, state
programs rely on the basic concept of ``experience rating'' to
establish a particular employer's rate of taxation. Under an experience
rated system, an employer with a higher incidence of successful claims
for unemployment benefits pays a higher rate of unemployment tax than
an employer with fewer successful claims. Unfortunately, evidence
suggests that some employers are engaging in aggressive business
practices designed to artificially improve their experience rate,
thereby avoiding their unemployment tax liability. This ``SUTA
dumping'' can undermine the stability and integrity of the experience
rated Unemployment Compensation program. NAPEO has supported, and will
continue to support all efforts to curb SUTA dumping that (1) apply
equally across the board to all employers engaged such practices, (2)
are carefully crafted to recognize legitimate corporate restructurings,
and (3) do not penalize employers who choose to utilize the services of
a PEO.
NAPEO has nearly 500 members found in all 50 states, and represents
more than 70% of the industry. PEOs assist mainly small and mid-sized
businesses, covering almost every American industry, in fulfilling
their responsibilities as employers by assuming many human resource and
employment functions of the PEO customers. The PEO generally assumes
responsibility for paying wages and employment taxes for all the
workers of its client companies. It maintains employee records, handles
employee complaints, and provides employment information to workers.
Significantly, the PEO provides workers a variety of benefits,
including retirement (usually a 401(k) plan), health, dental, life
insurance, and dependent care. For many of these workers, the provision
of such benefits by the PEO represents their first opportunity to
obtain these benefits.
Of particular relevance to this hearing, PEOs enhance and create
efficiencies in the unemployment compensation system by serving as the
entity responsible for unemployment insurance of all worksite
employees. Not only does the PEO maintain extensive records regarding
worksite employees, it has highly specialized personnel dedicated to
complying with various state unemployment compensation programs. This
relieves the small business owner of certain recordkeeping and
compliance burdens, allowing the business to focus on its core function
rather than monitoring filing deadlines and other compliance oriented
matters. This arrangement not only reduces the governmental burden of
collecting unemployment obligations from a myriad of small businesses,
it also assures consistent compliance with complex unemployment tax
laws and the timely payment of unemployment taxes--clearly an
improvement for both PEO customers and state unemployment compensation
systems. Additionally, since the PEO is collecting and remitting
unemployment taxes for a larger pool of workers, the PEO is required to
remit taxes on a more frequent basis than the small or mid-sized
business client, which serves to boost compliance and to get the
unemployment taxes into state coffers on a more timely basis.
Importantly, by providing small and mid-sized employers with human
resource management services, the PEO relationship reduces unemployment
compensation claims. It has long been recognized that quality,
proactive human resource tools, such as accurate job descriptions,
performance appraisals, and improved employer/employee communications
can improve employment retention, resulting in fewer unemployment
claims. In addition, some PEOs have reassigned worksite employees from
one client to another to minimize unemployment claims, when
reassignment does not interfere with the business interests of the
client. Once again, these proactive practices not only reduce claims,
but, more importantly, result in working Americans retaining gainful
employment.
PEOs assist the unemployment system by contesting and documenting
wrongful claims for unemployment benefits. By delivering these
services, a PEO helps stabilize unemployment tax rates, thereby
protecting the PEO's viability in a competitive marketplace and
eliminating some of the incentive to engage in SUTA dumping.
We applaud the efforts of the Subcommittees to draw attention to
the problems caused by SUTA dumping. We encourage the Department of
Labor and the States to continue to coordinate broad-based efforts to
deal with abusive situations.
In closing, we would also bring to the attention of the
subcommittees PEO legislation introduced by Representatives Rob Portman
and Ben Cardin--H.R. 2178, the Professional Employer Organization
Workers Benefits Act of 2003. Although that bill does not directly
affect SUTA, it would provide small and mid-sized business and PEOs
with much needed guidance on the intricate web of rules that govern the
payment of payroll taxes and would create a certification process for
PEOs dealing with Federal unemployment taxes. Companion legislation, S.
1269, has been introduced in the Senate by Senator Grassley.