[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]


 
                       IMPLEMENTATION OF THE SUTA 
                     DUMPING PREVENTION ACT OF 2004 

=======================================================================

                                HEARING

                               before the

                    SUBCOMMITTEE ON HUMAN RESOURCES

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 14, 2005

                               __________

                           Serial No. 109-16

                               __________

         Printed for the use of the Committee on Ways and Means

                     U.S. GOVERNMENT PRINTING OFFICE

36-662 PDF                 WASHINGTON DC:  2007
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                      COMMITTEE ON WAYS AND MEANS

                   BILL THOMAS, California, Chairman

E. CLAY SHAW, JR., Florida           CHARLES B. RANGEL, New York
NANCY L. JOHNSON, Connecticut        FORTNEY PETE STARK, California
WALLY HERGER, California             SANDER M. LEVIN, Michigan
JIM MCCRERY, Louisiana               BENJAMIN L. CARDIN, Maryland
DAVE CAMP, Michigan                  JIM MCDERMOTT, Washington
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. MCNULTY, New York
PHIL ENGLISH, Pennsylvania           WILLIAM J. JEFFERSON, Louisiana
J.D. HAYWORTH, Arizona               JOHN S. TANNER, Tennessee
JERRY WELLER, Illinois               XAVIER BECERRA, California
KENNY C. HULSHOF, Missouri           LLOYD DOGGETT, Texas
RON LEWIS, Kentucky                  EARL POMEROY, North Dakota
MARK FOLEY, Florida                  STEPHANIE TUBBS JONES, Ohio
KEVIN BRADY, Texas                   MIKE THOMPSON, California
THOMAS M. REYNOLDS, New York         JOHN B. LARSON, Connecticut
PAUL RYAN, Wisconsin                 RAHM EMANUEL, Illinois
ERIC CANTOR, Virginia
JOHN LINDER, Georgia
BOB BEAUPREZ, Colorado
MELISSA A. HART, Pennsylvania
CHRIS CHOCOLA, Indiana
DEVIN NUNES, California

                    Allison H. Giles, Chief of Staff

                  Janice Mays, Minority Chief Counsel

                                 ______

                    SUBCOMMITTEE ON HUMAN RESOURCES

                   WALLY HERGER, California, Chairman

NANCY L. JOHNSON, Connecticut        JIM MCDERMOTT, Washington
BOB BEAUPREZ, Colorado               BENJAMIN L. CARDIN, Maryland
MELISSA A. HART, Pennsylvania        FORTNEY PETE STARK, California
JIM MCCRERY, Louisiana               XAVIER BECERRA, California
DAVE CAMP, Michigan                  RAHM EMANUEL, Illinois
PHIL ENGLISH, Pennsylvania
DEVIN NUNES, California

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

Advisory of June 7, 2005, announcing the hearing.................     2

                               WITNESSES

U.S. Department of Labor, Employment and Training Administration, 
  Hon. Mason Bishop, Deputy Assistant Secretary..................     7

                                 ______

Kelly Services, Inc., Carl Camden................................    14
Employment Security Commission of North Carolina, David L. Clegg.    18
National Employment Law Project, Rick McHugh.....................    26
Texas Workforce Commission, Larry Temple.........................    34
U.S. Department of Labor, Office of Inspector General, Elliot P. 
  Lewis, Assistant Inspector General for Audit...................    22

                       SUBMISSIONS FOR THE RECORD

American Staffing Association, Alexandria, VA, Edward A. Lenz, 
  statement......................................................    50
Michigan Department of Labor and Economic Growth, Detroit, MI, 
  David Plawecki, statement......................................    51
National Association of Professional Employer Organizations, 
  Arlington, VA, statement.......................................    53


                       IMPLEMENTATION OF THE SUTA

                     DUMPING PREVENTION ACT OF 2004

                              ----------                              


                         TUESDAY, JUNE 14, 2005

             U.S. House of Representatives,
                       Committee on Ways and Means,
                           Subcommittee on Human Resources,
                                                    Washington, DC.

    The Subcommittee met, pursuant to notice, at 10:04 a.m., in 
room B-318, Rayburn House Office Building, Hon. Wally Herger 
(Chairman of the Subcommittee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                    SUBCOMMITTEE ON HUMAN RESOURCES

                                                CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE
June 07, 2005
HR-4

               Herger Announces Hearing on Implementation

               of the SUTA Dumping Prevention Act of 2004

    Congressman Wally Herger (R-CA), Chairman, Subcommittee on Human 
Resources of the Committee on Ways and Means, today announced that the 
Subcommittee will hold a hearing on implementation of the ``State 
Unemployment Tax Act (SUTA) Dumping Prevention Act of 2004,'' (P.L. 
108-295). The hearing will take place on Tuesday, June 14, 2005, in 
room B-318 Rayburn House Office Building, beginning at 10:00 a.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. Invited 
witnesses will include representatives of the U.S. Department of Labor 
and the Department's Office of the Inspector General, State program 
administrators, and employers. However, any individual or organization 
not scheduled for an oral appearance may submit a written statement for 
consideration by the Subcommittee for inclusion in the printed record 
of the hearing.
      

BACKGROUND:

      
    The Unemployment Compensation (UC) program (sometimes referred to 
as Unemployment Insurance or UI) is a Federal-State 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 SUTA 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 and these rates can change yearly, based on annual 
computations. In recent years, program experts have grown concerned 
about unscrupulous business practices such as ``shell'' transactions 
involving the artificial manipulation of corporate structures or 
employees to reduce State tax payments, under a process known as SUTA 
dumping. Such practices undermine the integrity of the unemployment 
system, result in the avoidance of proper unemployment tax payments, 
and unfairly shift costs to other employers.
      
    Following a June 2003 hearing at which the U.S. Government 
Accountability Office reported that three-fifths of the States believed 
their laws were insufficient to prevent SUTA dumping, Chairmen Herger 
and Houghton (R-NY), along with Reps. Cardin (D-MD) and Pomeroy (D-ND), 
introduced the SUTA Dumping Prevention Act, which was signed into law 
on August 9, 2004. This law requires States to implement laws to deter 
employer tax rate manipulation and impose penalties upon those who 
violate these laws. Guidance on development of these State laws has 
been provided by the U.S. Department of Labor. In addition to 
provisions designed to prevent SUTA dumping, the act allows State 
unemployment programs access to information in the National Directory 
of New Hires for program integrity activities.
      
    In announcing the hearing, Chairman Herger stated, ``Last year an 
important law was enacted to protect the integrity of the Nation's 
unemployment benefits system. This law is designed to stop the abusive 
practice of SUTA dumping by certain employers and to give States 
additional tools to identify individuals who continue receiving 
unemployment benefits even after taking a new job. At the hearing, we 
will get an update on the status of State implementation of these 
provisions in the SUTA dumping law, and consider any recommendations 
for further improvement.''
      

FOCUS OF THE HEARING:

      
    The hearing will focus on implementation of the ``SUTA Dumping 
Prevention Act of 2004'' (P.L. 108-295).
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Please Note: Any person(s) and/or organization(s) wishing to submit 
for the hearing record must follow the appropriate link on the hearing 
page of the Committee website and complete the informational forms. 
From the Committee homepage, http://waysandmeans.house.gov, select 
``109th Congress'' from the menu entitled, ``Hearing Archives'' (http:/
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for which you would like to submit, and click on the link entitled, 
``Click here to provide a submission for the record.'' Once you have 
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submission for the record. You MUST REPLY to the email and ATTACH your 
submission as a Word or WordPerfect document, in compliance with the 
formatting requirements listed below, by close of business Tuesday, 
June 28, 2005. Finally, please note that due to the change in House 
mail policy, the U.S. Capitol Police will refuse sealed-package 
deliveries to all House Office Buildings. For questions, or if you 
encounter technical problems, please call (202) 225-1721.
      

FORMATTING REQUIREMENTS:

      
    The Committee relies on electronic submissions for printing the 
official hearing record. As always, submissions will be included in the 
record according to the discretion of the Committee. The Committee will 
not alter the content of your submission, but we reserve the right to 
format it according to our guidelines. Any submission provided to the 
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guidelines will not be printed, but will be maintained in the Committee 
files for review and use by the Committee.
      
    1. All submissions and supplementary materials must be provided in 
Word or WordPerfect format and MUST NOT exceed a total of 10 pages, 
including attachments. Witnesses and submitters are advised that the 
Committee relies 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 
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    3. All submissions must include a list of all clients, persons, 
and/or organizations on whose behalf the witness appears. A 
supplemental sheet must accompany each submission listing the name, 
company, address, telephone and fax numbers of each witness.
      
    Note: All Committee advisories and news releases are available on 
the World Wide Web at http://waysandmeans.house.gov.
      
    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.

                                 

    Chairman HERGER. Good morning, and welcome to today's 
hearing. Just 2 years ago, This Subcommittee, along with the 
Oversight Subcommittee, held a hearing on abusive manipulation 
of State unemployment tax rates. This practice is referred to 
as State Unemployment Tax Act (SUTA) Dumping. At that hearing 
we learned that many States lack sufficient laws to prevent 
SUTA dumping and that unscrupulous employers were wrongly 
minimizing or even avoiding paying their proper share of State 
unemployment taxes. This just did not fit with the idea that 
employer taxes should be based on the experience of their 
employees in collecting unemployment benefits.
    That has been a feature of the unemployment benefits 
program since its inception in the thirties. 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. Unfortunately, 
what our investigation found was that some employers were 
successfully dumping their unemployment costs onto others. They 
did so by manipulating their corporate structure, sometimes 
with the help of financial advisors specializing in these 
tactics. Such actions were hurting the unemployment benefits 
system, workers, and conscientious employers who played by the 
rules.
    To stop this abusive tax practice and help ensure the 
Nation's unemployment system worked more efficiently and 
fairly, we worked on a bipartisan basis in Congress and with 
the U.S. Department of Labor (DOL) and States. Our legislation 
had a distinguished list of bipartisan supporters, including 
our prior Ranking Member, Mr. Cardin, and the gentleman sitting 
next to me, Mr. McDermott. This legislation was approved 
unanimously by both the House and the Senate and was signed 
into law by President Bush in August 2004.
    Soon after, the DOL issued guidance and draft legislation 
to assist States in implementing the new law. Today we will get 
an update on how the States are doing and what issues we need 
to consider. Another provision of the SUTA dumping law provides 
State unemployment benefit agencies access to information in 
the National Directory of New Hires to help improve 
unemployment benefits program integrity. Many States already 
use their own State Directory of New Hires information to 
identify program overpayments when individuals work and wrongly 
collect an unemployment check at the same time. Access to the 
National Directory is designed to help better detect and 
prevent benefit overpayments.
    We also are interested in further proposals to improve the 
integrity of the unemployment compensation system. Several of 
our witnesses today have ideas along those lines, which we 
welcome. Clearly, there is plenty of work to do. For instance, 
an Office of Management and Budget report released earlier this 
year noted that in 2004 about 10 percent of unemployment 
benefits were improperly paid, which resulted in a loss of 
nearly $4 billion. Needless to say, that money could be better 
used, including to help workers find new jobs. We need to 
continue looking for ways to improve the system and make it 
stronger.
    Our witnesses today include representatives from the DOL 
and the Department's Office of Inspector General (OIG), as well 
as two States, an employer, and a researcher. I look forward to 
hearing all of their testimonies. Without objection, each 
Member will have the opportunity to submit a written statement 
and have it included in the record at this point. Mr. 
McDermott, would you care to make a statement?
    [The opening statement of Chairman Herger follows:]
   Opening Statement of The Honorable Wally Herger, Chairman, and a 
        Representative in Congress from the State of California
    Good morning and welcome to today's hearing.
    Just two years ago this Subcommittee, along with the Oversight 
Subcommittee, held a hearing on abusive manipulation of State 
unemployment tax rates. This practice is referred to as SUTA dumping.
    At that hearing we learned that many States lacked sufficient laws 
to prevent SUTA dumping and that unscrupulous employers were wrongly 
minimizing or even avoiding paying their proper share of State 
unemployment taxes.
    This just didn't fit with the idea that employer taxes should be 
based on the experience of their employees in collecting unemployment 
benefits. That has been a feature of the unemployment benefits program 
since its inception in the 1930s.
    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.
    Unfortunately, what our investigation found was that some employers 
were successfully dumping their unemployment costs onto others. They 
did so by manipulating their corporate structure, sometimes with the 
help of financial advisors specializing in these tactics.
    Such actions were hurting the unemployment benefits system, 
workers, and conscientious employers who played by the rules.
    To stop this abusive tax practice and help ensure the Nation's 
unemployment system works more efficiently and fairly, we worked on a 
bipartisan basis in Congress and with the Department of Labor and the 
States.
    Our legislation had a distinguished list of bipartisan supporters, 
including our prior Ranking Member, Mr. Cardin, and the gentleman 
sitting next to me, Mr. McDermott. This legislation was approved 
unanimously by both the House and the Senate, and was signed into law 
by President Bush in August 2004.
    Soon after, the Department of Labor issued guidance and draft 
legislation to assist States in implementing the new law.
    Today we'll get an update on how the States are doing, and what 
issues we need to consider.
    Another provision of the SUTA dumping law provides State 
unemployment benefit agencies access to information in the National 
Directory of New Hires to help improve unemployment benefit program 
integrity.
    Many States already use their own State Directory of New Hires 
information to identify program overpayments when individuals work and 
wrongly collect an unemployment check at the same time. Access to the 
national directory is designed to help better detect and prevent 
benefit overpayments.
    We also are interested in further proposals to improve the 
integrity of the unemployment compensation system. Several of our 
witnesses today have ideas along those lines, which we welcome.
    Clearly, there is plenty of work to do. For instance, an Office of 
Management and Budget report released earlier this year noted that in 
2004 about 10 percent of unemployment benefits were improperly paid, 
which resulted in a loss of nearly four billion dollars.
    Needless to say, that money could be better used, including to help 
workers find new jobs. We need to continue looking for ways to improve 
the system and make it stronger.
    Our witnesses today include representatives from the U.S. 
Department of Labor and the Department's Office of the Inspector 
General, two States, an employer, and a researcher.
    I look forward to hearing all their testimony.

                                 

    Mr. MCDERMOTT. Thank you, Mr. Chairman. About a year ago, 
with your leadership and bipartisan spirit, we produced 
important new legislation aimed at curbing an abuse by 
unscrupulous employers to evade paying their fair share of 
unemployment taxes. It is not true that nothing good ever comes 
out of the Congress. The scam is called SUTA dumping, named 
after the State Unemployment Tax Acts, which provide the pot of 
money that helps Americans when they lose their jobs.
    For those of you who may not know, not the panel but the 
rest of the audience, unemployment insurance is funded by 
payroll taxes paid by employers into State unemployment trust 
funds. These assessments are based on the number of workers who 
file for benefits; in other words, businesses that lay off more 
employees pay higher tax rates. Some employers cheat by 
transferring employees into shell companies created solely for 
tax evasion. States somehow make up the shortfall, and one way 
is to shift more of the tax burden to the responsible honest 
employers. It is not fair and it is not right.
    Last year, we required States to enact laws to prohibit 
SUTA dumping and to penalize the cheaters and advisers who 
market this unethical, fraudulent behavior. Today we will take 
our first look at how the States are actually doing. When 
Congress acted to stop SUTA dumping, we did so under the guise 
of improving the unemployment program's ``integrity.'' We were 
really referring to the integrity of employers, and we still 
have work to do because the shell game is not the only scam 
used to evade paying their fair share of taxes.
    For instance, some employers designate certain workers as 
independent contractors, a step that denies the worker many 
benefits, including unemployment comp. A study commissioned by 
the DOL in 2000 suggested that 80,000 workers may be denied 
unemployment benefits every year because they are misclassified 
as independent contractors. Here is what we know: the U.S. 
Government Accountability Office (GAO) reported that the last 
time the Internal Revenue Service (IRS) looked into it, an 
estimated 15 percent of employers had misclassified 3.4 million 
workers as independent contractors with a net tax loss of $1.6 
billion.
    Here is what we do not know, however: everything since 
1984--because that is the last time the data was collected--for 
two decades, we have routinely lost billions of dollars and 
allowed millions of workers to suffer because they were cheated 
out of benefits they earned. That, Mr. Chairman, I believe is 
the definition of waste, fraud, and abuse. After two decades in 
the dark, I thought it was time to turn the light on, so I 
formally asked Secretary Snow to investigate and provide the 
Congress with data at least in the same century. Common sense 
says the problem has grown exponentially over the last 20 
years, but there is no sign that the Treasury Secretary will 
address this issue any time soon. Some companies may be making 
a honest mistake calling workers independent contractors, but 
we know many others are doing it deliberately. Millions of 
decent, hardworking Americans are being victimized at the hands 
of unethical, dishonest companies, and it is time to level the 
playing field. We should be concerned about the integrity of 
the unemployment system. Honest, ethical companies are being 
forced to pay more to bear the burden of the dishonest 
companies, and workers are left with nothing at all because the 
misclassification stops workers from collecting unemployment 
benefits when they are laid off. It is time we stand together 
in This Committee and demand accountability, and it is my hope 
that you will publicly announce today you are willing to hold a 
hearing on this matter soon. I think that in the bipartisan 
attitude we established last year, we ought to be able to do it 
again. Thank you, Mr. Chairman.
    Chairman HERGER. Thank you, Mr. McDermott. Before we move 
on to our testimony today, I want to remind our witnesses to 
limit their oral statement to 5 minutes. However, without 
objection, all of the written testimony will be made a part of 
the permanent record. On the panel this morning, we have the 
Honorable Mason Bishop, Deputy Assistance Secretary, Employment 
and Training Administration at the DOL; Mr. David Clegg, Deputy 
Chairman for Communications and Chief Legal Counsel, Employment 
Security Commission of North Carolina; Elliot Lewis, Assistant 
Inspector General for Audit at the DOL; Larry Temple, Executive 
Director of the Texas Workforce Commission; and we have a few 
constituents of the gentleman from Michigan, Mr. Camp, and I 
will allow you to introduce them.
    Mr. CAMP. Thank you, Mr. Chairman, and I just want to take 
this opportunity to welcome two witnesses from Michigan: Carl 
Camden, who is president of Kelly Services, and Rick McHugh, an 
attorney with the National Employment Law Project. I also want 
to say it is good to have Mr. Camden back almost 2 years to the 
day after our first hearing on this issue. Again, I want to 
thank the Chairman for holding this hearing and welcome the 
Subcommittee Members to the Subcommittee. Thank you.
    Chairman HERGER. Thank you. With that, Mr. Bishop, if you 
would proceed with your testimony.

   STATEMENT OF THE HONORABLE MASON BISHOP, DEPUTY ASSISTANT 
    SECRETARY, EMPLOYMENT AND TRAINING ADMINISTRATION, U.S. 
                      DEPARTMENT OF LABOR

    Mr. BISHOP. Good morning, Mr. Chairman. Thank you very much 
for giving us this opportunity to testify and give you an 
update on the implementation of the SUTA Dumping Prevention Act 
of 2004 (P.L. 108-295), as well as highlight several new 
Administration proposals to strengthen the financial integrity 
of the unemployment insurance program.
    As you know, Federal law requires each employer's 
unemployment tax to be related to its experience with respect 
to unemployment, which is usually measured by the unemployment 
insurance (UI) benefits paid to former workers. Some employers 
and their tax advisers found ways to manipulate experience 
ratings so that they paid lower State unemployment taxes than 
they should have based on their history of laying off workers. 
This abusive practice, known as SUTA dumping, unfairly burdens 
employers who play by the rules and end up paying more than 
they should.
    In June 2003, I testified before you to outline the 
Administration's concerns about SUTA dumping. Since then, much 
has happened. In September 2003, Secretary Chao transmitted a 
draft bill to Speaker Hastert. In November 2003, Chairman 
Herger, former Ranking Member Cardin, current Ranking Member 
McDermott, and others introduced H.R. 3463. On August 9, 2004, 
President Bush signed the Act.
    The Act requires States to amend their UI laws to provide 
for mandatory transfers of experience when employees are moved 
from one business to another and there is common ownership, 
management, or control between the two businesses involved; 
prohibition on transfers of experience when a business is 
acquired solely or primarily for the purpose of obtaining a low 
tax rate; meaningful civil and criminal penalties for those who 
violate or advise others to violate these provisions; and 
establishment of procedures to identify potential instances of 
SUTA dumping. All States must amend their UI laws to include 
these requirements effective either by January 1st of 2006 or 
July 1st of 2006.
    We issued guidance to States that explain the new 
requirements and provided them with information they needed to 
draft amendments to their laws. We have been reviewing all 
draft bills and providing technical assistance to the States. 
To assist States to identify SUTA dumping, we worked with North 
Carolina, which is represented here today, to develop software 
that can be implemented by any State at a minimal cost. While 
investigation and prosecution of cases is labor-intensive, we 
believe that these activities will result in State UI tax 
assessments valued at many times the staff costs involved.
    States have reported the following activity as of June 9th: 
40 States have either enacted legislation or it is awaiting the 
Governor's signature; two States have seen bills pass one House 
of their legislature; three States introduced bills; five 
States and territories have seen no legislative activity; three 
State legislatures have adjourned without enacting SUTA dumping 
legislation. Although we are concerned with the progress of 
some States, we do believe, overall, the outlook is very good. 
Mr. Chairman, I do have a map here that we can make available 
for the record as well and we can handout to Members of the 
Subcommittee.
    [The information was not received at time of printing.]
    Even though the new requirements are not yet in effect in 
most States, attention to this issue has resulted in stronger 
enforcement of current laws, and some anecdotal information 
from the States includes the following: California billed 40 
employers $158.6 million. Connecticut billed $5.8 million in 
additional taxes and $3.2 million has already been collected. 
Pennsylvania uncovered $6.7 million, and Washington has billed 
over $800,000 to date.
    I would also like to update you about the other key 
component of the Act enabling State UI agencies to gain access 
to the National Directory of New Hires to quickly detect and 
prevent payments of UI benefits to individuals who continue to 
claim benefits after returning to work. Access to this 
directory will provide States with new hire data from other 
States and from multi-State employers who report to a single 
State, and wage and new hire information from the Federal 
Government. We are currently working very closely with the 
Department of Health and Human Services, the Social Security 
Administration, and States to provide access to this directory. 
We are also running a three-State pilot to determine the most 
effective methods of accessing and utilizing this data. We 
believe that investigation of hits discovered from use of this 
directory will result in reduced overpayments and substantial 
savings to the unemployment fund.
    Finally, I would like to mention briefly the President's 
fiscal year 2006 budget proposal to amend Federal law to give 
States new tools and resources to prevent, detect, and collect 
benefits that were paid to ineligible individuals; collect 
delinquent taxes from employers; encourage employer compliance; 
and upgrade aging State information technology systems. We 
propose the following:
    First, letting States use up to 5-percent of recovered 
overpayments for additional overpayment prevention, detection, 
and collection. Second, allowing States to compensate 
collecting agencies that recover overpayments by permitting 
them to retain up to 25 percent of the amounts they recover. 
Third, imposing at least a 15 percent fine on overpayments due 
to fraud. Fourth, adding delinquent overpayments to debts 
offset from Federal tax refunds. Finally, requiring States to 
charge employers for any UI benefit overpayments caused by the 
employer, except those that result from a good-faith error.
    To enable States to update their information technology 
infrastructure, we propose allowing States to borrow from the 
unemployment trust fund for this purpose. In conclusion, we are 
pleased that excellent progress is being made to strengthen the 
integrity of State UI tax administration, and we are excited 
about our proposals. We look forward to working with you and 
answering questions after all the panelists have spoken. Thank 
you.
    [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 morning Chairman Herger and distinguished members of the 
Subcommittee. Thank you for inviting me to testify. I am pleased to 
have the opportunity to update you on activities to implement the SUTA 
Dumping Prevention Act of 2004 (Act). Thanks to your efforts, Chairman 
Herger and Ranking Member McDermott, and the efforts of the 
Subcommittee, loopholes in many state unemployment insurance (UI) laws 
that permit some employers to pay less than their fair share of state 
unemployment taxes are being closed. In addition, I want to highlight 
for you a set of legislative proposals designed to improve the 
financial integrity of state UI programs.
BACKGROUND
    Most unemployment benefits are financed by state unemployment taxes 
paid by employers in every state. Federal law requires 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. As the amount of UI benefits paid to former workers increases, 
the employer's tax rate increases up to a maximum set by state law. 
Thus, employers who have a stable workforce with few layoffs have low 
tax rates while employers with higher turnover generally have higher 
tax rates. 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. It helps ensure an equitable 
distribution of costs among employers based on an employer's experience 
with unemployment. It also encourages employers to stabilize their 
workforce and minimizes fraud and abuse by providing an incentive for 
an employer to provide state agencies with information about former 
workers who quit or were fired for cause.
    However, some employers and their tax advisors found ways to 
manipulate experience rating so that they paid lower state unemployment 
taxes than they should have based on their history of laying off 
workers. This abusive practice, known as ``SUTA dumping,'' unfairly 
burdens employers who ``play by the rules'' and end up paying more in 
unemployment taxes than they should. (``SUTA'' refers to state 
unemployment tax acts.)
    SUTA dumping generally occurs in two ways. First, some employers 
escape their layoff histories (and high tax rates) by setting up shell 
companies and then transferring some, or all, of their payroll to the 
shell companies after they have operated for several years with low 
turnover and earned a low tax rate based on that experience. In the 
second case, a person who does not currently employ any workers buys a 
small establishment that has a low unemployment tax rate and the new 
owner ceases the business activity of the small establishment and 
commences a different type of business. The new owner then hires many 
new workers and pays the low tax rate that was earned by the previous 
owner.
                      FEDERAL LEGISLATIVE ACTIVITY
    In June 2003, I testified before this Subcommittee and the 
Oversight Subcommittee to outline the Administration's concerns about 
SUTA dumping and to continue our dialogue on the necessity of enacting 
legislation to combat this problem. Since then, much has happened. In 
September 2003, Secretary Chao transmitted a draft bill addressing SUTA 
dumping to Speaker Hastert, and Chairman Herger, former Ranking Member 
Cardin, current Ranking Member McDermott and others introduced H.R. 
3463 in November 2003. With strong bipartisan support, H.R. 3463 passed 
the House and Senate in July 2004, and on August 9, 2004, President 
Bush signed the SUTA Dumping Prevention Act of 2004 into law. Among 
other things, this Act (P.L. 108-295) requires states to amend their UI 
laws to provide for:

      mandatory transfers of experience in cases where 
employees are moved from one business to another, and there is 
substantial commonality of ownership, management, or control between 
the two businesses involved;
      prohibition of transfers of experience when the state 
agency finds that a business was acquired solely or primarily for the 
purpose of obtaining a tax rate that is lower than the new employer tax 
rate that would otherwise have been assigned;
      meaningful civil and criminal penalties to be imposed for 
those who knowingly violate or attempt to violate and for those who 
knowingly advise another to violate the above provisions; and
      establishment of procedures to identify potential 
instances of SUTA dumping.
      All states must amend their UI laws to include these 
requirements effective January 1, 2006 or July 1, 2006, depending on 
when the state's regularly scheduled legislative session begins and 
when UI tax rate years begin in that state.
                     EARLY IMPLEMENTATION ACTIVITY
    Four days after enactment of the Act, the Department of Labor 
(Department) issued guidance to the states that explained the new 
requirements and the need for states to amend their laws, provided 
model legislative language for state use in amending their laws, and 
included a conformity checklist for states that opt to draft their own 
legislative language. In response to requests for greater clarification 
and to address new issues, the Department issued additional guidance to 
the states in October 2004.
    To ensure that all state enactments conform to the requirements of 
the Act, staff at the Department have been reviewing all draft bills 
and each version of a bill as it moves through a state's legislative 
process, and has been providing technical assistance to the states 
including a series of teleconferences with the states to answer their 
questions. SUTA dumping has been highlighted at a variety of national 
meetings attended by state officials, and best practices for SUTA 
dumping detection, investigation, and enforcement will be the major 
focus of a national conference for state UI tax staff in August.
    In addition to legislative changes, the Act requires states to 
establish procedures to identify transactions that may, in fact, be 
attempts to dump SUTA liability. To assist states, the Department 
entered into a cooperative agreement with the North Carolina Employment 
Security Commission to develop SUTA Dumping Detection System software 
that can be implemented by any state at minimal cost. This system 
compares tax data with a variety of criteria that may indicate tax rate 
manipulation. It was pilot tested successfully by North Carolina, 
Nebraska, Rhode Island, Texas, Utah, Virginia, and Washington through 
February 2005, and pending the signing of licensing agreements, the new 
detection system is ready to be distributed to all interested states. 
The Department will also provide technical assistance and supplemental 
funding to states for implementation of the SUTA Dumping Detection 
System. While implementation of the SUTA Dumping Detection System 
software will make identifying potential cases of SUTA dumping more 
efficient, investigation of potential cases and, in some instances, 
subsequent prosecution of cases is labor intensive. Although it may 
require a substantial commitment of administrative resources, we 
believe that resolution of SUTA dumping cases will result in state UI 
tax assessments valued at many times the staff costs involved.
                  STATUS OF STATE LEGISLATIVE ACTIVITY
    As of June 9, all states have submitted draft SUTA dumping 
legislation to the Department for review. States have reported the 
following activity:

      Legislation has either been enacted or is awaiting the 
governor's signature in 40 states.
      Bills have passed one house of the state legislature in 2 
states.
      Bills have been introduced in the state legislature in 3 
states.
      There has been no legislative activity in 5 states/
territories.
      Three state legislatures adjourned without enacting SUTA 
dumping legislation.

    Although we are concerned with the progress of the legislative 
changes in some states, overall, the outlook is good. For example, even 
though 8 states (including the District of Columbia, Puerto Rico, and 
the Virgin Islands) have not reported any legislative activity to date, 
the legislative sessions in many of these states will continue until 
the end of the year. Thus, there is still sufficient time for these 
states to act.
                RECENT SUTA DUMPING ENFORCEMENT ACTIVITY
    Even though the new Federal requirements are not yet in effect in 
most states, enactment of H.R. 3463 highlighted the SUTA dumping 
problem, and states have strengthened enforcement of their current laws 
which prohibit some SUTA dumping activities. Thus, the Act is already 
having a positive effect. Anecdotal information from states includes 
the following:

      California assessed 40 employers $158.6 million in 
underpaid UI taxes, penalties, and interest for SUTA dumping. Twenty-
seven of these employers are now reporting properly resulting in $57.6 
million in additional tax revenue.
      Connecticut completed 120 investigations of SUTA dumping; 
$5.8 million in additional taxes has been billed and $3.2 million has 
already been collected.
      Pennsylvania has completed 76 SUTA dumping 
investigations, and uncovered $6.7 million in net underreported UI 
taxes.
      Washington put legislation meeting the new Federal 
requirements into effect January 1, 2005, and has already assessed over 
$841,000 in underpaid unemployment taxes from SUTA dumping and has 
identified approximately 30 additional cases to investigate.

    In addition, states that pilot tested the SUTA Dumping Detection 
System software found a number of instances of SUTA dumping that were 
legal at the time they occurred but will be illegal under the state 
laws implementing the Act.
    As you know, the Department will study the implementation process, 
assess the status and appropriateness of compliance by the states, and 
by July 15, 2007, will submit a report to Congress on these findings 
including recommendations for any congressional action necessary to 
improve the effectiveness of the Act.
                 NATIONAL DIRECTORY OF NEW HIRES UPDATE
    I'd like to take a moment to update you about the other key 
component of the SUTA Dumping Prevention Act of 2004--enabling state UI 
agencies to gain access to the National Directory of New Hires (NDNH) 
to quickly detect and prevent certain benefit overpayments. Access to 
the NDNH provides states with additional data not available in State 
Directories of New Hires, namely new hire information from multi-state 
employers who report to a single state and wage and new hire 
information from the Federal government. We are working closely with 
the Department of Health and Human Services, the Social Security 
Administration, and states to determine technical and operational 
aspects of access to national directory. In addition, we are running a 
3-state pilot to determine most effective methods. Preliminary results 
of the pilot crossmatch to detect potential overpayments attributable 
to individuals who collect UI benefits while they are in fact earning 
wages are promising. Complete results of this pilot are expected this 
summer and will inform development of guidelines for implementation by 
all states. Although it may require a substantial commitment of 
administrative resources, we believe that follow-up on all of the 
``hits'' from the NDNH will result in reduced overpayments and 
substantial savings to the unemployment trust fund.
        STRENGTHENING THE FINANCIAL INTEGRITY OF THE UI PROGRAM
    The President's FY 2006 budget includes a set of amendments to 
Federal law designed to promote and strengthen the financial integrity 
of the UI program. These amendments will give states access to new 
tools and resources to: prevent, detect, and collect benefits that were 
paid to individuals who were not entitled to them, collect delinquent 
taxes from employers, encourage employer compliance, and upgrade aging 
state information technology systems. These proposals are key to 
achieving our goals for the UI program related to preventing, 
detecting, and recovering improper payments.
    A thorough investigation of a small number of weekly payments 
indicates that states actually detected about 57% of overpayments ($1.1 
billion in 2004) we believe they should be able to prevent and detect. 
They recovered about half of those payments detected. While there are 
techniques states can use to prevent, detect, and recover these 
overpayments, a high level of staff effort is involved. For example, 
potential overpayments detected though computer crossmatches must be 
verified, individuals must be provided a chance to respond before an 
overpayment is established, and collection efforts are often lengthy. 
In order to augment states' current efforts, we developed a set of 
legislative proposals that will give them additional resources and 
tools to significantly reduce overpayments, increase the amount of 
overpayments that are recovered and delinquent taxes collected, and 
encourage employer compliance.
LEGISLATIVE PROPOSALS FOR OVERPAYMENTS, DELINQUENT TAXES, AND EMPLOYER 
                               COMPLIANCE
    I will now give you a brief overview of our legislative proposals.

      Use of Up to 5% of Recovered Overpayments for Benefit 
Payment Control Activities

    States' efforts to reduce and recover overpayments are limited by 
the amount of administrative funding available. Currently, Federal law 
requires that all recoveries of overpayments be deposited into the 
state's account in the Unemployment Trust Fund, where they may be 
withdrawn only to pay unemployment benefits. We propose boosting 
resources available to states to pursue integrity activities by 
permitting them to use a portion of those recovered funds to deter, 
detect, and collect overpayments. States may specify the amounts--up to 
5%--of overpayment recoveries to be used exclusively for these 
purposes. This would provide a new source of funds for states to use to 
reduce fraudulent and improper payments, giving them the resources they 
need to expand their efforts.

      Allow Collection Agencies to Retain Up to 25% of 
Recovered Overpayments

    Currently states are reluctant to use collection agencies, 
primarily because they would have to divert UI administrative grants 
from other services to pay the collection agency costs. We propose 
permitting states to allow collection agencies to retain a limited 
portion--up to 25%--of the fraud overpayments and delinquent employer 
taxes they recover. States would be expected to first exhaust their 
established means of collecting overpayments and delinquent taxes 
before engaging such collection agencies. To prevent abusive or unfair 
tactics, any state contract with a private collection agency must 
specify certain safeguards, including that the collection agency follow 
the Fair Debt Collection Practices Act.

      Impose At Least 15% Fine on Overpayments

    All states impose monetary penalties on employers who pay their 
taxes late. However, most states do not impose monetary penalties on 
individuals who obtain benefits fraudulently. Penalties can serve as a 
deterrent to overpayments. We propose requiring states to impose a fine 
of at least 15% of the overpayment on individuals who defraud the 
system. States' use of the penalty funds would be limited to additional 
efforts in deterring, detecting, and collecting overpayments. The State 
of Washington imposed such a penalty and has seen a considerable 
increase in overpayment collections.

      Add Delinquent Overpayments to Debts Offset by Federal 
Tax Refunds

    About half of overpayments identified each year are not recovered. 
Under current law, individuals' Federal income tax refunds are used to 
offset delinquent child support obligations, debts owed to Federal 
agencies, and state income tax debts. We propose adding delinquent UI 
overpayments to the list of debts that can be offset by Federal tax 
refunds.

      Encourage Employer Response to State Requests

    Information provided by employers is essential in determining the 
eligibility of unemployed workers who file a claim for UI benefits. 
However, employers sometimes fail to respond to state queries about the 
reasons workers are separated from employment, and this can lead to 
improper UI payments to ineligible workers who quit their jobs without 
good cause, or were discharged for work-connected misconduct. Despite 
the administrative and benefit costs created by these mistakes, 
employers often do not bear any responsibility for the costs of these 
overpayments. Indeed, after an overpayment is established, states may 
relieve the employer of those benefit charges. We propose requiring 
states to impose benefit charges on employers for any UI benefits 
improperly paid as a result of their late or incomplete responses to 
state agencies, unless the non-response is due to a good faith error. 
This will encourage employers to respond promptly to state requests for 
information about their former workers.
             LEGISLATIVE PROPOSAL FOR INFRASTRUCTURE LOANS
    An additional legislative proposal is designed to address another 
UI program need: updating information technology (IT) infrastructure. 
State UI programs require large and complex benefit and tax processing 
systems, and service delivery by telephone relies heavily on 
telecommunications hardware and software. Aging IT systems present a 
significant risk to states. Older systems are also more difficult and 
costly to maintain. However, not all states have an effective funding 
mechanism available to replace and enhance aging technology components.
    We propose allowing states to borrow funds from the Unemployment 
Trust Fund in order to replace/update their UI IT systems, including 
using new technology to establish linkages with programs that offer 
reemployment services to UI beneficiaries. This proposal is similar to 
the current arrangement in that states can borrow from the Unemployment 
Trust Fund when their benefit accounts become insolvent. Borrowing 
states would be liable for repayment of principal and interest. By 
giving states the opportunity to address their IT needs, this proposal 
will promote timely and accurate benefit payment to unemployed workers, 
prevention and detection of improper benefit payments, and facilitation 
of reemployment.
                            BUDGETARY IMPACT
    In aggregate, we estimate that our proposals relating to UI 
integrity would produce net outlay savings of $4.423 billion over 10 
years, of which $3.082 billion is scorable. We also estimate that the 
proposals would produce indirect tax reductions of $2.856 billion over 
10 years.
                               CONCLUSION
    As you can see, we have been working on many exciting and 
innovative initiatives to improve the financial integrity of the 
unemployment insurance program. We look forward to continuing to work 
with you, Chairman Herger, Ranking Member McDermott, and Members of the 
Subcommittee and Committee in our efforts to make sure that our program 
has the resources it needs to continue to assist workers who are 
unemployed through no fault of their own and want to work while 
minimizing employer taxes.
    This concludes my remarks. Thank you for the opportunity to speak 
with you today. I will be glad to answer any questions you may have.

                                 

    Chairman HERGER. Thank you very much, Mr. Bishop. Now, Mr. 
Camden, president and Chief Operating Officer of Kelly 
Services, Incorporated and, I might mention, someone who was 
very instrumental in bringing this to our attention. Mr. Camden 
to testify.

    STATEMENT OF CARL CAMDEN, PRESIDENT AND CHIEF OPERATING 
         OFFICER, KELLY SERVICES, INC., TROY, MICHIGAN

    Mr. CAMDEN. Thank you. Good afternoon, Chairman Herger and 
Members of the Subcommittee. It is hard to believe that it has 
been 2 years since I first had the opportunity to appear before 
you all, and I think that you probably gathered when I 
testified I was fairly skeptical about the ability to move 
quickly and effectively against SUTA dumping. I am pleased that 
I was wrong and much of my cynicism has been reduced. I applaud 
the actions of both the DOL and both branches of the Government 
at solving and taking steps to do this. I have just been 
nothing but surprised by the speed that you all and the DOL 
have taken to address this problem.
    Significant progress has been made. I not only track your 
activities through reports like you were given as to what 
States have collected from what funds, but I am also able to 
watch through the public filing of staff leasing firms and 
other firms who have to make allowances in their capital 
reserves for the anticipated result of State action. I will 
tell you that they anticipate several tens of millions of more 
taxes collected and penalties to come.
    Now, you asked for a progress report beyond the efforts 
that you have already made. We look and analyze this problem in 
three parts. First, we look at the area of loopholes, and a lot 
of progress has been made in closing the loopholes, and 
primarily that progress has been made in eliminating games 
played among commonly owned and controlled entities. The Act 
does effectively eliminate shell games that employers use when 
they create subsidiaries, come down to a lower rate, and then 
transfer their workforce from a high-rated company to one that 
has a lower tax rate. These intra-company transactions are no 
longer permitted, and as we watch the State laws, a pretty good 
job is being done to move along in that area. Employers have 
the freedom that they need to move people between various 
business structures, but without being able to pick up SUTA 
dumping.
    Congress also recognized that instead of trying to 
establish a one size fits all, you gave the States the ability 
to work off of a minimum set of requirements and then to tailor 
their requirements, tailor the additional things that they 
needed to do according to each State law.
    Now, somewhere along the wall f < > States missed the point 
of the flexibility that you were trying to grant them. I worked 
particularly hard with Michigan and was shocked when I was 
giving testimony when I heard some of the legislators say, 
``Well, this is what Congress required us to do. That is all 
they wanted us to do.'' I said, ``I was at the hearings. I know 
that was not the case. In Michigan, the Michigan Governor will 
sign the law that was passed a week from Tuesday. I will be at 
the signing.'' She signed it with reservations. We did not 
close all of the loopholes because all the State of Michigan 
did was what This Committee minimally required them to do. I 
think working with the DOL and so on, we will need to work at 
identifying, as you all have already done, additional loopholes 
that need to be closed and sending out program letters to the 
various States. If we merely meet the minimum requirements of 
the SUTA Dumping Prevention Act and follow the current 
guidance, it will not be enough to stop SUTA dumping. There is 
a lot of cleverness out there, and new loopholes have been 
identified, ones I was not aware of. I always admire the 
creativity of some of my colleagues.
    I will tell you that tremendous pressure is being put on 
State lawmakers to preserve these known loopholes that are 
beyond the minimum requirements that you all established for 
the States to do. Those loopholes are remaining open more often 
than we want them to. As I noted, in my home State of Michigan 
employer groups were divided between those who wanted to stop 
SUTA dumping completely and those who wanted to limit action to 
only meet the minimum conforming requirements. Unfortunately, 
that group managed to win the day there.
    During the hearings, one promoter was heard to say, 
unfortunately not on the record, that he was okay with the 
legislation because he could still make money off of this. No 
one has ever had the political nerve yet in any of the battles 
that we have fought to argue in public that SUTA dumping was 
good, but there is still a lot of activity behind the scenes. 
The danger of focusing on the minimum requirements versus truly 
fixing the problem has now become more apparent, and the 
biggest hole that we see remaining is in transfers between not 
commonly owned and controlled entities. In many States it is 
still possible for an employer to leave behind the experience 
of a known workforce with a variety of business models there. 
The Michigan Unemployment Agency recently made public a single 
incident that cost the trust fund over $10 million, and even 
though Michigan has passed conforming legislation, you need to 
understand that the loophole that cost the State of Michigan 
$10 million is still open. The passed legislation did not close 
it.
    Some States still allow the unemployment experience to be 
left behind if the transfer was not done ``solely or 
primarily'' for the purpose of SUTA dumping. Believe it or not, 
some employers who have been challenged for dumping have 
actually managed to successfully argue the transfer was all 
right because it was not done primarily to avoid SUTA dumping. 
In fact, one of them publicly stated it was done to dump their 
workers' compensation costs.
    Now, that was not against the law. Obviously, in fact, when 
we looked at the numbers, they saved a lot more by dumping 
their workers' comp experience than they did by dumping their 
SUTA experience, so they were in compliance. So there are still 
these loopholes that we need to close. What is more, I will 
tell you, it is a continuous effort because as fast as we close 
them, people seem to be very inventive at finding other ones.
    Moving on to the detection front, I will be brief since I 
understand David will be providing an update. Just a few quick 
comments. It has been the easiest of the three areas to 
address. I applaud the DOL and North Carolina for the efforts 
they have made. You cannot get to the next step of enforcement 
without it. I think they have done a very good job at creating 
detection tools.
    Moving on to my personal favorite, enforcement, because it 
does no good to have the legislation, it does no good to have 
the detection tools if the States are not aggressive at 
enforcement. We have got great laws on the books, but I think 
enforcement is still sketchy. Many States are doing a stand-up 
job. Most notably, North Carolina, Michigan, and California 
agencies should be commended for getting it done. They have 
devoted a lot of significant State resources to enforcing 
violated statutes and, again, as I have told you, we see it in 
terms of 10K disclosures and other SEC filings. It has been 
limited to a handful of States, and we believe the States 
aggressively enforcing are an exception versus the norm.
    We think that one key problem that could be addressed is 
the coordination among the States in going after identified 
dumpers. As I told you when I testified 2 years ago, when 
people brought proposals to us to engage in SUTA dumping, it 
was never just do it in State A, B, or C. It was a national 
plan. A company that dumps in one State is almost certainly 
dumping in many other States, and what we do not see that we 
would like to see more of is cooperation between the States at 
sharing names of companies that they have identified and 
successfully collected SUTA dumping funds from. They should be 
sharing those names with other States because almost certainly 
those problems are existing in other States also. I am a little 
bit over time. Quickly, one company's perspective. Thank you 
again for your time and attention. It is an area that I care 
much about, and again, thank you. I have been amazed at the 
speed of action. You all have done a great job. I appreciate 
it.
    [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 members of the Subcommittee. I 
appreciate the opportunity to be with you today, and thank you for 
holding this hearing to examine the progress in stopping the practice 
known as SUTA Dumping.
    My name is Carl Camden, and I'm the President and Chief Operating 
Officer of Kelly Services. Kelly is a temporary staffing firm that 
operates in all fifty U.S. states. Our employees range from secretaries 
to scientists. Scientists to programmers. Programmers to substitute 
teachers. Day to day we're actively involved in the hiring, training, 
and development of over 750,000 workers annually.
    As you can expect, we're deeply interested in the health of our 
workforce development system. Our success in competing in today's 
global economy is directly impacted by how well we manage the system. 
Success requires all the key stakeholders . . . Congress, states, 
workers and employers to be vigilant in making the system the best it 
can be. Since we work regularly with each of these stakeholders, we're 
thankful for the opportunity to share our observations.
    It's hard to believe it's been nearly two years since I first had 
the opportunity to appear before you to discuss SUTA dumping. As you 
recall, those hearings highlighted how employers take steps to disguise 
their true unemployment experience to avoid paying their rightful share 
of unemployment insurance taxes. It's a practice that harms employers, 
workers, threatens state trust fund solvency, and ultimately damages 
the safety net of our workforce development system.
    When I testified, I was somewhat skeptical about our chances to 
move effectively against SUTA dumping.
    But today, I'm pleased to report significant progress has been 
made. You were dead serious about ending the practice, and as a result 
of your leadership, the Congress swiftly took bi-partisan action that's 
made a real difference. I applaud your actions and continued interest 
in protecting the integrity of the UI program. I must also acknowledge 
the Department of Labor and many of the states for their significant 
efforts.
    As I testified at the original hearings, there are three parts to 
the problem:

      Loopholes
      Detection, and
      Enforcement

    Progress has been made in the area of loopholes. The greatest 
progress has been made in eliminating the games played among commonly 
owned and controlled entities. The Act effectively eliminates the shell 
games employers have used when they create a subsidiary, cook down to a 
low rate, and later transfer their workforce from a higher rated 
subsidiary to a lower rated one. These intra-company transactions are 
no longer permitted. Employers are still free to move their employees 
around for whatever business purpose they have, but now the 
unemployment experience must also follow.
    Consistent with the shared nature of the system, the Congress 
properly recognized that instead of trying to establish a one-size fits 
all solution (that ends up turning each state's unique experience 
rating system on it's head) the legislation should highlight the 
problem, establish minimum guidelines to get the states going, and 
leave them the flexibility to solve the problem in ways that best suit 
their unique circumstances.
    Somewhere along the way, too many states and employers have missed 
the point of the flexibility allowed by the statute. The Act was never 
intended to be a silver bullet, or a step by step prescription for 
ending SUTA dumping.
    Rather than fully addressing all aspects of SUTA dumping, some 
states have unfortunately chosen to look at the Act as a set of minimum 
requirements. Reflecting the attitude, ``If that's all we have to do, 
then that's all we will do.'' Such an approach leaves loopholes in 
place.
    Merely meeting the minimum requirements of the SUTA Dumping 
Prohibition Act, and following current guidance by DOL will not fully 
stop SUTA Dumping. Tremendous pressure has been put on state lawmakers 
to preserve known loopholes not specifically addressed by the Act. The 
stakes are simply too high. And those loopholes are remaining open more 
often than they should. In Kelly's home state of Michigan, employer 
groups were divided between those who wanted to stop SUTA Dumping, and 
those who wanted to limit action to meet only the minimum conforming 
requirements. During final reviews, one promoter was heard to say, 
``I'm fine with this legislation. I can still make money with this.'' 
But even then, no one ever had the political nerve to argue in public 
that SUTA Dumping was a good thing.
    The danger of focusing on the minimum requirements versus truly 
fixing the problem is now more apparent. As mentioned previously, the 
biggest hole remaining is in transfers between not-commonly owned and 
controlled entities. In many states it is still possible for an 
employer to leave behind the experience of a known workforce using 
various business models. The Michigan Unemployment Agency recently made 
public a single incident that cost the trust fund over $10 million. 
Even though Michigan has already passed conforming legislation, the 
loophole that allowed the damage is still very much alive.
    Some states still allow the unemployment experience to be left 
behind if the transfer wasn't done ``solely or primarily'' for the 
purpose of avoiding UI taxes. Believe it or not, some employers who've 
been challenged for dumping are successfully arguing the transfer was 
alright because it wasn't done ``solely or primarily'' to avoid 
unemployment costs. The primary purpose was to avoid workers' 
compensation costs!
    I don't pretend to know all the loopholes that exist. Promoters 
have been imaginative, and will continue to figure out creative 
techniques. When we were here two years ago, only three techniques had 
been identified. Today there are more than a dozen.
    The key part of the solution will be found in requiring the 
experience of a given workforce to be preserved--regardless of any 
organizational structure or business model an employer may choose to 
follow. It shouldn't matter whether the transfer is among commonly 
owned entities (which the Act addresses) or among not commonly-owned 
entities (the Act is silent). Why should any distinction be made? The 
experience is what it is and should never be allowed to be ignored. 
Dumping is dumping regardless of the ownership structure, and it always 
leaves all other employers picking up the tab.
    Let's move on to the detection front. I'll be brief since I 
understand David Klegg has/will be providing an update. Just a few 
quick comments. . . .
    First, this is probably the easiest of the three areas to address. 
I applaud DOL and North Carolina for the efforts they've made in 
developing a tool to make it easier for states to detect dumping. You 
can't get to the next step of enforcement without it. However, you 
can't dump without moving large segments of payroll. It's not much more 
complicated than following the payroll. If you see a company go from 
$100 thousand in taxable payroll to $100 million . . . something's up. 
Lack of detection tools has been a lame excuse. Believe it or not, a 
few states are still in denial, and are asserting that there is no 
problem in their state. It's extremely important that we continue with 
the vigorous deployment DOL and NC are leading.
    Now to my personal favorite . . . Enforcement. You can have the 
tightest laws on the books, you can have the slickest detection tools 
in place, everything else can be right . . . but it's all meaningless 
if you drop the ball with enforcement. Enforcement is the single 
biggest issue remaining as we move forward. You may recall the 
promoters' message I shared last time . . . ``this is not allowed but 
go ahead and do it. It's been our experience the state will not 
enforce.'' Although the environment in which that statement was made 
has improved, it hasn't been eliminated. We need to continue to watch 
this closely as we move forward.
    Many states are doing a standup job. Most notably, the North 
Carolina, Michigan, and California agencies must be commended for 
``getting it done.'' They've devoted significant resources to enforcing 
violated statutes and have had significant results.
    Some enforcement efforts have been successful. Based on 10K 
disclosures and press releases, you'll see multiple assessments have 
recovered millions. $6 million here, another $2.4 million over there. 
And over there another $3 million. It starts to really add up. But it's 
been limited to a handful of states. Those states are the exception 
versus the norm.
    A key problem is that there is little coordination among the states 
in going after identified dumpers. Every single dumping proposal Kelly 
received involved a national strategy. If you're going to dump in one 
state, you're more than likely to follow suit in states B, C and D. But 
I have yet to see a dumper caught in one state, and then be caught 
again in a different state. There is no visible cooperation in the 
tactics and approaches to effective multi-state enforcement. DOL has 
made efforts to pull states together, and it is essential that those 
activities continue.
    I said earlier I get angry about the enforcement issue. How would 
you react as a businessperson who has to make up for the evasions of 
other employers? Would you be mad if a frontline state auditor told you 
their boss told him/her to back off an investigation? ``A little fraud 
never hurt anyone.'' I'm sure that's the exception, but its happening. 
In some states there doesn't seem to be the political will for an 
aggressive enforcement plan. Some states would prefer to pass the 
conforming legislation, explain the new rules, and move on. Let the 
past be the past. After all, it's a whole lot easier.
    So there you have it--one employer's perspective.
    Although I've highlighted some areas that continue to deserve our 
attention, by no means do I want to leave this Committee with the 
impression that we're in bad shape. Tremendous efforts have been made 
over the past two years, and much has been accomplished. Many at DOL, 
in the states, and in Congress have worked tirelessly to get us this 
far.
    But because of the relentless creativity of the promoters of these 
schemes, it is critical that we all work together to make sure the 
effort is sustained. The Congress must remain attentive to the issue. 
The Department of Labor must continue to share best detection 
practices, and actively communicate newly identified dumping 
techniques. State agencies must aggressively detect and prosecute 
violators. Ethical employers must continue to talk about why the 
integrity of the system is so important to all stakeholders.
    If we all do our part, I'm confident that we can continue toward 
where we need to be--a UI system where there's no such thing as SUTA 
Dumping.
    Thank you for your time and attention. If you have any questions I 
will be happy to address them.

                                 

    Chairman HERGER. Thank you, Mr. Camden. Mr. Clegg to 
testify.

       STATEMENT OF DAVID L. CLEGG, DEPUTY CHAIRMAN FOR 
 COMMUNICATIONS, AND CHIEF LEGAL COUNSEL, EMPLOYMENT SECURITY 
     COMMISSION OF NORTH CAROLINA, RALEIGH, NORTH CAROLINA

    Mr. CLEGG. Chairman Herger, thank you so much for inviting 
me back to talk about North Carolina's continuing fight to 
protect the solvency of our UI trust fund. Being here on the 2 
year anniversary of our first meeting, we do have a lot of 
preliminary success to enjoy. Two years ago when I was here, I 
testified about the reality of SUTA dumping in North Carolina. 
I spoke about how honest businesses and legislators became 
angry about the victimization of honest employers and those 
workers who needed transitional assistance in a complex and 
challenging economy. In near record time, the North Carolina 
General Assembly passed legislation demanding that the 
Employment Security Commission not assign new UI tax account 
numbers to tax rate manipulators and established felony 
penalties for SUTA dumping.
    Finally, I reported on our first investigative audits and 
the start of our efforts to develop a fraud detection system 
based on a computerized analysis program.
    Today, my role is that of an accurate reporter, but that 
task is a lot harder. There is so much more to report on in 
North Carolina's continuing fight against UI tax fraud. Our 
initial efforts at investigating SUTA dumping began with five 
people. That team initially reported their belief that North 
Carolina may have had as many as 250 major employers who had 
raided our trust fund of more than $50 million.
    The Employment Security Commission has made a decision 
during this 2 year period to dedicate six auditors to 
investigate SUTA dumping on a full-time basis. Additionally, 
two tax specialists, four senior audit supervisors, and one 
lawyer are committed on a part-time basis. The entire audit 
staff of our Employment Security Commission is being trained in 
the identification of SUTA violations because they are becoming 
increasingly complex.
    To date, we have collected $12 million in recovered UI tax. 
These cases are getting bigger and they are getting harder. 
Further, some of the employers appear to want to gamble on a 
judge and jury instead of paying what is owed. Our first cases 
are headed toward civil litigation. We will handle whatever 
litigation brings with our own legal staff. We are committed to 
seeking any needed litigation help from the DOL and Justice and 
the IRS. Yet I suspect there will be no Federal legal help 
without Federal legislation.
    North Carolina now appears to be operating the most 
successful UI tax collection program in the 70-year history of 
our national unemployment insurance system. Back home, we 
consider our recovery policy to be a simple ``firm hand'' 
enforcement policy. With certain allowance for bankruptcy, we 
expect every employer who engages in SUTA dumping to fully pay 
the tax that they owe and recognize that their obligation to 
report their employees' wages as every statutory common law 
employer is required by State and Federal UI law.
    Our enforcement policy has recovered that $12 million from 
tax schemes that happened before the enactment of Federal 
legislation in 2004. In fact, the majority of the $12 million 
is for misconduct that occurred even before North Carolina 
passed its own legislation in May of 2003. Our tax recovery and 
enforcement policy is based on North Carolina's understanding 
and appreciation of the power of basic State and Federal UI 
law. We are currently amending North Carolina law to conform to 
the Federal statutory standards. Our strong conviction that our 
existing law prohibited SUTA dumping does not prevent us from 
supporting stronger penalties and added safeguards.
    Almost all States, including North Carolina, use the same 
UI Model Act common law definitions of ``employer'' and 
``employment'' and ``employing unit.'' Those still valid 1936 
era definitions bar employers from engaging in SUTA dumping. 
The definitions preclude employers from setting up shell 
corporations, associations, and limited liability companies to 
evade UI taxes.
    It has been suggested that many States will choose to 
implement SUTA dumping enforcement only prospectively. By doing 
that, they will be writing off millions of dollars in past 
losses. Whether that is done by design or out of fear, those 
write-offs will create an enormous hidden social cost to be 
borne by the rest of us. Perhaps This Committee will express 
Congress' sense that the DOL, the IRS, and all of the States 
have a fiduciary duty, as stewards of the trust fund that 
protects our economy, to recover this money.
    State Unemployment Tax Act dumpers have been deterred by 
the enactment of this Federal legislation. However, the States 
will need resources for advanced forensic training of audit and 
legal staff. The Treasury, FBI, IRS, and the academic community 
can assist in this effort with your support. While tax 
attorneys and accountants understand the law, business leaders, 
who work on their own UI taxes, have been less available for 
our educational efforts.
    Federal legislation is fully supportive of every State's 
right to seek recovery for past SUTA dumping activity. More 
importantly, Congress has funded the DOL effort to provide the 
North Carolina Dumping Detection System to every State. That 
system was piloted in seven States from June 2004 through April 
2005. All the States reported new cases had been identified. 
While we were developing the program, even after our research, 
we detected nine more employers with a potential tax liability 
in excess of $30 million. The largest single employer liability 
that we detected during the development of our detection system 
was over $6 million, and we expect to recover that probably 
within the next 90 days. That detection program works by 
showing past SUTA dumping. Therefore, the new State users of 
the North Carolina UI fraud detection system will soon see how 
violators have established their pattern over several years. 
State policymakers will then have to decide whether to seek 
recovery of those past sums. I hope I have raised some issues 
today with you as confirming to you that Congress did the right 
thing in addressing this issue with the strength and speed that 
it did.
    [The prepared statement of Mr. Clegg follows:]
   Statement of David L. Clegg, Deputy Chairman, Employment Security 
         Commission of North Carolina, Raleigh, North Carolina
    Chairman Herger, thank you for inviting me back to report on North 
Carolina's continuing fight to protect the solvency of the unemployment 
insurance (UI) trust fund by stopping unemployment insurance tax rate 
manipulation.
    We are here on the two-year anniversary of our first meeting. We 
have all enjoyed great preliminary success in those two years. That 
success includes the enacting of federal legislation requiring all 
states to actively combat SUTA and UI tax fraud.
    Two years ago, I testified about the reality of SUTA dumping in 
North Carolina. This included how accountants openly solicited 
employers to commit UI tax fraud. I used the term fraud then and repeat 
it now because SUTA dumping is a world of fake employee transfers, sham 
business structures and false tax returns designed to steal millions of 
dollars by exploiting experience-based tax rate programs.
    I spoke about how honest businesses and legislators became angry 
about the victimization of honest employers and those workers who 
needed transitional assistance in a complex and challenging economy. In 
near record time, the NC General Assembly passed legislation demanding 
that NCESC not assign new UI tax account numbers to tax rate 
manipulators and establishing felony penalties for SUTA dumping.
    Finally, I reported on our first investigative audits and the start 
of our efforts to develop a fraud detection system based on a 
computerized analysis program.
    Today, my role is that of an accurate reporter but that task has 
become harder. There is so much more to report on North Carolina's 
continuing fight against UI tax fraud. I will just touch upon those 
highlights that may best assist the committee and help state 
administrators understand the tasks, burdens and opportunities they 
will soon face when the North Carolina UI fraud detection system is 
made available in their states.
    I begin with a brief history. Our initial efforts at investigating 
SUTA dumping began with five people. This team of three auditors, one 
tax specialist and one lawyer was given the job of uncovering SUTA 
violations in North Carolina. They worked cases, reviewed new employer 
applications and poured over the massive amount of tax history buried 
in our files. Eventually, the team reported their belief that North 
Carolina may have had as many as 250 major employers who had raided our 
trust fund of more than $50 million dollars.
    We knew that five people on the first team could not combat SUTA 
dumping alone. Our staff is currently being downsized from 90 to 80 
auditors, and could be augmented if there were federal resources for 
dedicated SUTA staff at the state level. These auditors have the duty 
to serve all of NC's 185,000 employers and their 4.2 million employees. 
They do everything from explaining laws, serving judgments, and 
resolving independent contractor issues to monitoring the underground 
economy. NCESC had to decide how to respond to the SUTA dumping threat. 
Too often, tax enforcement languishes while tax lawyers and advisors 
devote enormous resources to understand and overcome patterns of 
enforcement.
    Despite our shrinking audit staff, NCESC has made a decision to 
dedicate six auditors to investigate SUTA dumping on a full-time basis. 
Additionally, two tax specialists, four senior audit supervisors and 
one lawyer are committed on a part-time basis, but that does not 
represent our full commitment. These professionals with a part-time 
commitment often work full-time on SUTA while some how squeezing in 
other work. Further, the entire audit staff is being trained in the 
identification of SUTA violations.
    To date, we have collected $12 million in recovered UI tax. The 
cases are getting bigger and harder. Further, some of the employers 
appear to want to gamble on a judge and jury instead of paying what is 
owed. Our first cases are heading towards civil litigation. We will 
handle whatever litigation brings with our own legal staff. We are 
committed to seeking any needed litigation help from the U.S. 
Departments of Labor and Justice and the IRS. Yet, I suspect there will 
be no federal legal help without federal legislation.
    This is not an elegant system, but it has been designed with 
existing resources and no new staff. Yet, the success of our 
enforcement program is unmatched. North Carolina now appears to be 
operating the most successful UI tax collection program in the 70-year 
history of our national unemployment insurance system. Back home, we 
consider our recovery policy to be a simple ``firm hand'' enforcement 
policy. With certain allowance for bankruptcy, we expect every employer 
who engages in SUTA dumping to fully pay the tax that they owe and 
recognize their obligation to report their employees' wages as every 
statutory common law employer is required by state and federal UI law.
    Our enforcement policy has recovered that $12 million from tax 
schemes that happened before the enactment of federal legislation in 
2003. In fact, the majority of the $12 million is for misconduct that 
occurred even before North Carolina passed its own legislation in May 
2003. Our tax recovery and enforcement policy is based on North 
Carolina's understanding and appreciation of the power of basic state 
and federal UI law. We are currently amending NC law to conform to the 
federal statutory standards. Our strong conviction that our existing 
law prohibited SUTA dumping does not prevent us from supporting 
stronger penalties and added safeguards.
    That power lies in the definitions. Almost all states, including 
North Carolina, use the same UI model act common law definitions of 
``employer'' and ``employment'' as well as a common definition of 
``employing unit.'' Those still valid 1936 era definitions bar 
employers from engaging in SUTA dumping. The definitions preclude 
employers from setting up shell corporations, associations and limited 
liability companies to evade UI taxes. Finally, even if employers have 
other reasons for setting up tax-avoidance devices, the employers are 
not entitled to avoid their common law responsibility as a true UI 
employer. In other words, North Carolina's enforcement policy is based 
on the still valid original UI law. All of our recovery efforts are 
grounded on the basic UI law notion that states have the full legal 
authority to determine the identity of UI employers regardless of the 
creation of shell entities.
    It has been suggested that many states will choose to implement 
SUTA dumping enforcement only prospectively. By doing that, they are 
writing off millions of dollars in past losses. Whether that is done by 
design or out of fear, those write-offs create an enormous hidden 
social cost borne by the rest of us. Perhaps, the committee will 
express Congress' sense that U.S. DOL, the IRS and the states have a 
fiduciary duty, as stewards of the trust fund that protects our 
economy, to recover this money. The FUTA law allows federal government 
to receive an additional ten percent penalty payment on UI tax payments 
improperly withheld to the states. No federal agency has shown much 
interest in the collection of those penalties.
    SUTA dumpers have been deterred by the enactment of the NC and 
federal statutes. However, states will need resources for advanced 
forensic training of audit and legal staff. The Treasury, FBI, IRS and 
the academic community can assist in this effort with your support. 
While tax attorneys and accountants understand the law, business 
leaders, who work on their own UI taxes, have been less available for 
our educational efforts.
    Federal legislation is fully supportive of every state's right to 
seek recovery for past SUTA dumping activities. Importantly, Congress 
has funded the U.S. DOL effort to provide the North Carolina SUTA 
Dumping Detection System (SDDS) to every state. The system was piloted 
in seven states during the period from June 2004 through April 2005 
(Nebraska, North Carolina, Rhode Island, Texas, Utah, Virginia, 
Washington). Six states reported new cases had been identified for 
further research or forwarded on to its investigative unit. The system 
has been readied for distribution to all states, who request it through 
U.S. DOL. North Carolina will continue to support states that opt to 
run the SDDS through September 2007. During the pilot of SDDS, North 
Carolina detected and initiated investigation of nine employers, whose 
potential tax liability could total in excess of $30 million dollars. 
The largest single employer liability exceeded $6 million dollars. That 
detection program works by showing past patterns of SUTA dumping. 
Therefore, all the new state users of the North Carolina UI fraud 
detection computer system will soon see how SUTA violators established 
their pattern of dumping over several years. State policymakers will 
then have to decide whether to seek recovery of those past sums.
    I hope I have raised some challenging issues as well as confirming 
to you that Congress did the right thing in addressing this issue with 
strength and speed.

                                 

    Chairman HERGER. Thank you, Mr. Clegg. Mr. Lewis to 
testify.

 STATEMENT OF ELLIOT P. LEWIS, ASSISTANT INSPECTOR GENERAL FOR 
                AUDIT, U.S. DEPARTMENT OF LABOR

    Mr. LEWIS. Good morning, Mr. Chairman and Members of the 
Subcommittee. Thank you for the opportunity to testify on the 
work of the OIG, DOL, and the UI program. My name is Elliot 
Lewis, and I am the Assistant Inspector General for Audit. 
Today I will highlight some of our recent work in the area of 
overpayments, discuss our audit recommendations, and outline 
legislative recommendations for improving the detection and 
prevention of overpayments. More detailed information is 
included in my written statement, which I request be included 
in the record.
    The UI program, like many large benefit programs, is 
vulnerable to improper payments, including fraud. The ETA 
monitors the accuracy of UI payments and statistically projects 
the amount of overpayments nationwide through the benefit 
accuracy measurement, or the BAM. Each State has a benefit 
payment control unit, or the BPC, that detects and recovers UI 
overpayments primarily through a computerized match with wage 
or new hire data.
    The OIG has raised concerns in recent years that the 
overpayment rate in UI has remained relatively flat between 8- 
and 9-percent per year since 1987. This currently equates to 
approximately $3.4 billion for calendar year 2004. However, 
State BPC units currently detect only about a third of the 
overpayments projected by the BAM, and only a portion of that 
will actually be collected, making prevention and early 
detection of overpayments all the more important.
    Mr. Chairman, our efforts to combat UI overpayments include 
audits, criminal investigations, and cooperative education with 
the Department and the States. In response to concerns about 
continued overpayment problems in UI, the OIG audited the 
Department's Benefit Accuracy Measurement. We also conducted an 
audit to determine whether the use of new hire data is more 
effective and efficient than traditional cross-match methods 
for detecting overpayments.
    Our 2003 BAM audit recommended that the Department analyze 
the vast amount of data collected through the BAM to identify 
trends or patterns of errors that result in overpayments and 
address systemic problems. The OIG also estimated that 
expedited connectivity to State new hire directories throughout 
the country could save the Unemployment Trust Fund as much as 
$428 million annually through a reduction in overpayments. We 
also found and ETA acknowledged that elevating UI overpayments 
to a core performance measure should result in identifying and 
correcting systemic problems.
    We also conducted an audit of BPC methodologies, 
specifically State access to their own State new hire 
directories. We found that despite the benefits of cross-
matching with their own State new hire data, 12 States had not 
done so. In those States that had implemented this type of 
cross-matching, we found the use of State new hire data was 
significantly more effective in identifying overpayments than 
cross-matching benefits against wage data.
    As a result, Mr. Chairman, we made several recommendations. 
Among them is a recommendation for employers to report the 
first day of earnings for all new hires. Current reporting 
requirements do not provide the data needed for new hire 
detection to precisely identify overpayments. Defining and 
requiring employers to report the specific date that new hires 
begin earning wages would increase the screening accuracy of 
new hire detection, thus reducing resources expended on 
identifying and investigating false hits.
    Additionally, we recommended that DOL continue to provide 
technical assistance and resources to the States that are not 
currently using new hire data. We further recommended that that 
DOL encourage and facilitate use of the national directory. To 
this end, ETA has awarded $18 million to the States for UI 
integrity-related projects and is currently working with State 
and Federal agencies to explore how best to use the national 
directory.
    Mr. Chairman, as I mentioned earlier, UI overpayments occur 
for a number of reasons, including fraud. The BAM estimated 
potential fraud-related overpayments in calendar year 2004 at 
$868 million, or approximately 25 percent of projected 
overpayments. The OIG investigations have identified several 
methods used to defraud the UI system that have resulted in 
substantial losses to the Unemployment Trust Fund. Of greatest 
concern are identity theft schemes, which involve the use of 
stolen identities to apply for UI benefits. One key way for DOL 
to mitigate UI fraud is to make States more aware of its 
dangers, so we continue to partner with ETA to provide training 
to states on fraud prevention and detection.
    Mr. Chairman, in my full statement, I discuss two 
legislative recommendations that we believe will improve 
detection and prevention of overpayments. Among these is 
granting OIG and the Secretary of Labor statutory authority to 
easily and expeditiously access State UI wage records, Social 
Security wage records, and information from the National 
Directory of New Hires.
    In conclusion, Mr. Chairman, we believe that overpayments 
can be reduced by better use of existing data, including data 
obtained from the BAM, the UI performance measurement system, 
and the new hire cross-match. We also believe that granting DOL 
and the OIG access to the National Directory will facilitate 
our work to detect and deter overpayments in the UI program. I 
appreciate the opportunity to testify before you, and I would 
be happy to answer any questions you or any Member of the 
Subcommittee may have.
    [The prepared statement of Mr. Lewis follows:]
 Statement of Elliot P. Lewis, Assistant Inspector General for Audit, 
         Office of Inspector General, U.S. Department of Labor
    Good morning Mr. Chairman and members of the Subcommittee. Thank 
you for the opportunity to testify on the work of the Office of 
Inspector General (OIG), U.S. Department of Labor (DOL), in the 
Unemployment Insurance (UI) program. My name is Elliot Lewis and I am 
the Assistant Inspector General for Audit. Today I will highlight some 
of our recent work in the area of overpayments, discuss our audit 
recommendations, and outline our legislative recommendations for 
improving the detection and prevention of overpayments.
BACKGROUND
    By way of background, the Department of Labor's UI program is a 
Federal-state partnership and is DOL's largest income maintenance 
program. While the framework of the program is determined by Federal 
law, benefits for individuals are dependent on state law and 
administered by State Workforce Agencies. Like many programs of this 
magnitude, the UI program, which was designed to assist those who are 
in between employment through no fault of their own, is vulnerable to 
improper payments including fraud.
    The Employment and Training Administration (ETA) monitors the 
accuracy of UI payments made to claimants and statistically projects 
the amounts of overpayments nationwide through the benefit accuracy 
measurement (BAM). Moreover, each state has a benefit payment control 
(BPC) unit that detects and recovers UI overpayments through a variety 
of methods, primarily through a computerized match between either 
employer wage records or new hire data and records of benefits paid to 
claimants.
    The OIG has raised concerns in recent years about the magnitude and 
consistency of the overpayment rate in UI. Since 1987, the estimated 
overpayment rate has remained fairly flat, between 8% and 9% per year. 
BAM projections for calendar year (CY) 2004 estimated overpayments at 
$3.4 billion. However, state BPC units currently detect only about one 
third of the overpayments projected by BAM. For CY 2004, BPC units 
detected only $1.1 billion for possible collection. Only a portion of 
the $1.1 billion will actually be collected due to various difficulties 
exacerbated by delayed detection. The low collection potential 
demonstrates the importance of prevention and early detection of 
overpayments.
AUDIT OVERSIGHT
    Mr. Chairman, our efforts to combat UI overpayments include audits 
of the UI program, criminal investigations, and cooperative education 
with DOL and the states. Our recent audit work has focused on receipt 
of unauthorized benefits, also referred to as overpayments. In response 
to concerns about continued overpayment problems in the UI program, the 
OIG audited the Department's Benefit Accuracy Measurement. We also 
conducted an audit to determine whether the use of new hire data is 
more effective and efficient than traditional cross-match methods for 
detecting overpayments.
Benefit Accuracy Measurement (BAM) Program Audit
    Our 2003 BAM audit recommended that the Department analyze the vast 
amount of data collected through the BAM to identify trends or patterns 
of errors that result in overpayment and address systemic problems. In 
that audit, the OIG also estimated that expedited connectivity to the 
state new hire directories throughout the country could save the 
Unemployment Trust Fund (UTF) an estimated $428 million annually 
through a reduction in overpayments. The Department agreed with this 
finding but estimated a maximum potential savings of $139 million. We 
also found, and ETA acknowledged, that elevating UI overpayments to a 
Core Performance Measure should result in: increased oversight at the 
state and Federal level, identification of systemic problems, and 
corrective action plans for states with unacceptable performance.
Unemployment Insurance Benefit Payment Control (BPC) Performance Audit
    We also conducted an audit of BPC methodologies, specifically state 
access to their own state new hire directories. Just prior to issuing 
the BPC report, the SUTA Dumping Act of 2004 (P.L. 108-295) was enacted 
which granted state UI agencies access to the National Directory of New 
Hires.
    Our audit found that despite the benefits of cross-matching with 
their own state new hire data, 12 states, for a variety of reasons, had 
not implemented cross-matching to their state new hire directory. In 
those states that had implemented a state new hire directory cross-
match, we found that State Workforce Agencies' use of state new hire 
data was significantly more effective in identifying overpayments than 
the traditional technique of cross-matching UI benefits against wage 
records reported by employers. The seven state UI programs we audited 
that were using the state new hire detection method identified 41,404 
overpayments, compared to their wage/UI benefit cross-match that 
identified 29,872 overpayments.
    As a result of this audit, Mr. Chairman, we made several 
recommendations to enhance the effectiveness and efficiency of using 
new hire data to detect overpayments. Among them is a recommendation 
for employers to report the first day of earnings for all new hires. 
Current reporting requirements do not provide the data needed for new 
hire detection to precisely identify UI overpayments. As a result, the 
method identifies a significant number of cases that, upon further 
review, do not involve payment of ineligible benefits. Defining and 
requiring employers to report the specific date that new hires begin 
earning wages would increase the screening accuracy of new hire 
detection, thus reducing the resources expended on identifying and 
investigating ``false hits.''
    Additionally, we recommended that DOL continue to provide technical 
assistance and resources to the state UI programs that are currently 
not using new hire detection to initiate and/or complete plans for 
implementation. We further recommended that DOL encourage state UI 
programs to access the National Directory and coordinate efforts with 
the U.S. Department of Health and Human Services and the state UI 
programs to accomplish this. In response to our recommendation, ETA 
informed the OIG that during FYs 2003 and 2004, a total of $18 million 
was awarded to states for UI integrity related projects, of which, over 
one-third was awarded for benefit payment control cross-matches, 
including implementation or enhancement of new hire detection systems. 
ETA is currently working with state and Federal agencies to explore how 
states can best use the National Directory. ETA has indicated that it 
will be issuing a report this summer on the results of a pilot to test 
the value of connecting to the National Directory.
NATIONAL DIRECTORY OF NEW HIRES
    Based on what we have learned through our audit work, Mr. Chairman, 
the OIG is of the opinion that using new hire data is a better method 
to identify over payments than the more traditional method of cross-
matching UI claims against employers' wage records. The traditional 
method relies on data that is reported quarterly, whereas new hire data 
is generally reported by employers within 20 days. The National 
Directory is the most comprehensive list of new hires because it 
consolidates all state data and includes Federal employment data and 
data on multi-state employers who may report to only one state. If 
fully implemented and utilized by the states, the National Directory 
cross-match should result in earlier detection of overpayments, reduce 
overpayment dollars, and increase the chance of overpayment recovery.
                             INVESTIGATIONS
    Mr. Chairman, as I mentioned earlier, UI overpayments occur for a 
number of reasons, some of which are fraudulent. The BAM estimated 
potential fraud-related overpayments for CY 2004 at $868 million or 
25.5% of projected overpayments. OIG investigations have identified 
several methods used to defraud the UI system that have resulted in 
substantial losses to the UTF. Of greatest concern are identity theft 
schemes, which involve the use of stolen identities to apply for UI 
benefits. These cases often involve non-traditional organized crime 
groups, and are therefore broader in scope and more costly to the UI 
program than individual claimant fraud schemes of the past. One such 
case in California involved a Mexican non-traditional organized crime 
group that systematically filed thousands of fraudulent claims in four 
states. Our investigation ended this fraud scheme, which involved over 
15,000 stolen identities and identified a total of over $58 million in 
losses.
    One key way for DOL to mitigate UI fraud is to make states more 
aware of its dangers and of typical fraud schemes, such as identity 
theft or creation of fictitious companies to obtain UI benefits for 
alleged former employees. We continue to partner with ETA to provide 
training for state UI personnel on fraud prevention and detection.
                      LEGISLATIVE RECOMMENDATIONS
    Mr. Chairman, there are two legislative recommendations that we 
believe will improve detection and prevention of overpayments. First, 
to reduce overpayments and for program evaluation purposes, we believe 
that the OIG and the Secretary of Labor should be granted statutory 
authority to easily and expeditiously access state Unemployment 
Insurance wage records, Social Security Administration wage records, 
and information from the National Directory.
    Secondly, we recommend that the Personal Responsibility and Work 
Opportunities Reconciliation Act of 1996 be amended, or new legislation 
be introduced, to require employers to report a new hire's first day of 
earnings and provide a clear, consistent, nationwide definition for 
this date. Use of a specific, uniform date of wage earning would allow 
for increased efficiency in cross-matching dates of benefits received 
with dates of reported earnings.
                               CONCLUSION
    In conclusion, Mr. Chairman, we believe that overpayments can be 
reduced by better use of existing data, including data obtained from 
the BAM, the UI performance measurement system, and the new hire cross-
match. We also believe that granting DOL and the OIG access to the 
National Directory will facilitate our work to detect and deter 
overpayments in the UI program. We expect that as the states enact 
their own legislation in compliance with the SUTA Dumping legislation, 
and as the Department responds to our recent audit recommendations, 
there will be a beneficial impact on the reduction of overpayments. We 
will continue to follow up with the Department on the status of our 
recommendations.
    I appreciate the opportunity to testify before you and I would be 
happy to answer any questions you or any member of the Subcommittee may 
have.

                                 

    Chairman HERGER. Thank you, Mr. Lewis. Now Mr. Rick McHugh, 
Staff Attorney for the National Employment Law Project.

   STATEMENT OF RICHARD W. MCHUGH, STAFF ATTORNEY, NATIONAL 
            EMPLOYMENT LAW PROJECT, DEXTER, MICHIGAN

    Mr. MCHUGH. Thank you, Mr. Chairman. As you mentioned, I am 
a staff attorney with the National Employment Law Project 
(NELP). We are a research and advocacy group that focuses on 
dislocated and jobless workers. For the past several years, we 
have been monitoring employer activity that harms the integrity 
of the unemployment insurance financing system, include SUTA 
dumping. In the past year, we have worked closely with some 
State administrators, State legislators, and legislative 
staffers, as well as interested labor organizations and State 
policy projects, concerning the implementation of the SUTA 
Dumping Prevention Act of 2004.
    Before I get into the details of my testimony, I want to 
thank the leadership offered by the Chairman and the 
Subcommittee in requiring that States tackle SUTA dumping. I 
think we have already heard some testimony this morning about 
the kind of resistance that the States are facing, and I am 
pretty sure they would not have started down the road they have 
started down without your requiring it.
    I would also say that my number one conclusion from our 
study of State actions so far is that the lion's share of the 
State activity has been to merely comply with what the guidance 
from the DOL has said that your legislation required. States 
that have attempted to go further than the minimum requirements 
to comply with the SUTA Dumping Prevention Act have uniformly 
met opposition, and in nearly every case that opposition has 
been successful. We at NELP have reviewed the text of 26 of the 
enacted and proposed State SUTA dumping laws, and we have come 
to the conclusion that one of the most important loopholes that 
could be addressed that is not required to be addressed under 
the legislation that you passed last year involves the 
professional employee organizations.
    Now, Mr. Camden was polite. He calls it ``organizations 
that are not under the common custody, control, and management 
of other organizations.'' Basically what these staffing 
services and employee leasing firms do is, if I run a widget 
factory, I can take all my employees and basically move them 
over to the Personal Employment Organization (PEO), and the PEO 
has a lower experience rate because, generally speaking, they 
can find placements very rapidly. They would never have to lay 
off somebody. Even if they were working at that factory, they 
would have another factory they would move them to as opposed 
to laying them off. So generally their experience rate is 
lower. If it is not, probably this transaction would not be 
taking place because the way the employer is able to pay the 
fee is basically the money they are going to be saving on the 
taxes.
    Now, the PEO's and their allies do not want this activity 
to be characterized as SUTA dumping, but if anything, the 
legislation you have passed has increased the economic 
incentives for this to occur because you have eliminated other 
avenues that the firms can use to SUTA dump, and so that is 
going to, I think, increase the chances that the PEO loophole 
will be exploited even more so than what we have seen.
    I wanted to just speak generally about the idea of 
integrity and what our priorities should look like. I think we 
have heard from the Administration about their concerns, which 
are mostly about overpayments to workers. I would just like to 
point out that the Administration also is proposing in its 
budget to eliminate $750 million of spending from the 
Employment Service, which is an agency that is designed to get 
workers back to work faster and have them be on benefits for 
less time. They propose no money for additional auditors or 
other resources for the States to implement the SUTA Dumping 
Prevention Act. They have not proposed that the Federal 
enforcement agencies work with the State agencies, and the 
State agencies have a mandate that they get to work with their 
State treasuries and other tax enforcement agencies within the 
States.
    If we want to talk about integrity, I think that is fine, 
but we have to also understand that wrongfully denying a 
benefit or underpaying a benefit is just as important as 
overpaying a benefit. So when I hear the OIG testify about 
overpayments, I would like to also have them put that in the 
context of the fact that benefits are frequently wrongfully 
denied, so that we do take a two-sided, across-the-board 
approach to integrity in unemployment compensation and not give 
the impression that the problem is jobless workers trying to 
cheat the system. Most of the fraud that is going on that the 
OIG testified about dealing with identity theft, that is not 
jobless workers that are out there getting a false identity. 
That is just criminals who are getting a false identity so they 
can draw the unemployment when they should not draw it. So I do 
want to, since I am the worker advocate on the panel, speak on 
that the great majority of jobless workers are just as 
interested in getting a job as all of us would be if we did not 
have one, and they are as honest as people with jobs. Thank 
you.
    [The prepared statement of Mr. McHugh follows:]
   Statement of Rick McHugh, Staff Attorney, National Employment Law 
                       Project, Dexter, Michigan
Introduction
    Mr. Chairman and members of the Subcommittee, my name is Richard W. 
McHugh. I am a staff attorney with the National Employment Law Project. 
National Employment Law Project is a nonprofit law and policy 
organization dedicated to research and advocacy on issues of concern to 
low wage and jobless workers, including unemployment compensation. We 
thank the Chairman for his invitation to offer our testimony on 
implementation of the SUTA Dumping Prevention Act of 2004 (P.L. 108-
295).
About National Employment Law Project
    For over 30 years, National Employment Law Project (NELP) has 
served as the leading voice of jobless workers, with an emphasis on 
policies and practices that impact low wage and part time workers. NELP 
research has identified and supported wider use of alternative base 
periods to qualify more low wage workers for unemployment benefits as 
well as policies that assist jobless workers facing work and family 
conflicts. NELP also serves other low wage workers, including 
immigrants, day laborers, and nonstandard workers.
    My own experience with unemployment compensation includes nearly 30 
years of legal representation and advocacy on behalf of jobless 
workers. In addition to handling hundreds of administrative hearings 
and court appeals, I have testified before this Subcommittee and in 
other Congressional hearings, as well as before the Advisory Council on 
Unemployment Compensation and state legislative committees. I hope that 
this experience and perspective can assist the Subcommittee in its 
assessment of how implementation of the SUTA Dumping Prevention Act of 
2004 has progressed to date.
    For the past several years, NELP has monitored employer activities 
that harm the integrity of unemployment insurance financing, including 
SUTA dumping. In the past year, we have worked closely with some state 
administrators, state legislators and staff members, as well as 
interested labor organizations and state policy projects concerning 
state SUTA dumping legislation. My testimony today will focus on what 
we have learned over the last year regarding the challenges that remain 
in attempts to combat SUTA dumping.
Overview of Progress To Date on SUTA Dumping
    To begin, we would like to recognize the leadership offered by the 
Chairman and this Subcommittee in requiring that states tackle SUTA 
dumping. The Subcommittee's 2003 hearing and accompanying General 
Accountability Office study focused wider attention on this significant 
issue. A legislative initiative led by Chairman Herger and other 
members of this Subcommittee then resulted in bipartisan passage of the 
SUTA Dumping Prevention Act last summer and its signing by President 
Bush in August 2004. Our study of states' reactions to new federal 
requirements set by the SUTA Dumping Prevention Act shows that the Act 
has furnished an important launching point for state activity.
    As this Subcommittee knows, SUTA dumping involves manipulation of 
state experience rating rules that enables employers to dodge 
unemployment insurance taxes rates established by their past claims 
records in order to obtain lower UI tax rates. In its June 2003 
hearing, this Subcommittee heard Government Accountability Office 
testimony that fourteen states had identified SUTA dumping schemes that 
cost state unemployment trust funds an estimated $120 million in lost 
revenues. Most states reported to GAO that they believed their state 
laws were inadequate to address SUTA dumping schemes. Three out of four 
accounting firms interviewed by GAO investigators encouraged GAO 
personnel posing as employers to engage in SUTA dumping as a means to 
avoid UI taxes.
    Since 2003, new evidence has confirmed Congress' determination that 
SUTA dumping is a dishonest business practice that hurts unemployment 
insurance finances. Michigan recently recovered $2.4 million from 
Aramark Corporation in its first anti-SUTA dumping action. Other 
states' experience is similar: Connecticut has discovered a loss of $4 
million since October 2003, and has dozens of enforcement cases 
pending. North Carolina has collected $9 million in just 12 cases, with 
250 SUTA dumping cases still pending in that state alone. In short, 
with additional resources and followup SUTA dumping legislation 
promises to assist states in collecting added UI contributions and 
deterring further violations.
    Given the variation of state UI laws in terms of their experience 
rating and rate transfer provisions, the SUTA Dumping Prevention Act 
necessarily dealt with technical issues involving SUTA dumping in a 
general manner, focusing on two SUTA dumping practices that had been 
clearly identified at the time. To review, the Act required that 
``shell'' entities under common ownership, management, or control were 
barred from obtaining a lower experience rate by mandating the transfer 
of the existing firm's rate to the shell company. Second, the Act 
required that in cases of sham transactions involving acquisitions 
``solely or primarily'' for the purpose of gaining a lower UI tax rate, 
no experience rate transfer would occur.
    While specifically targeting two types of SUTA dumping, there was 
no indication that Congress thought that the 2004 Act should be read as 
more than the beginning response to SUTA dumping. Indeed, in its 
initial guidance to states, the Department of Labor correctly termed 
the 2004 federal law a ``nationwide minimum standard for curbing SUTA 
dumping.'' Despite the fact that states have power to go farther than 
the steps mandated by federal law, there are very few examples of that 
actually happening so far. Most states are approaching the mandates of 
the SUTA Dumping Prevention Act as a typical piece of UI conformity 
legislation. In other words, they see the Act as prescribing certain 
state action and they are taking only those actions. As a result, the 
lion's share of state SUTA dumping laws that have passed so far only 
contain elements required by the Department of Labor's program letter, 
and in some cases, even fall short of these minimum requirements.
    A year after enactment of the federal law, we have learned much 
more about SUTA dumping practices and about the policies that will be 
most effective in addressing SUTA dumping in a comprehensive manner. In 
addition, NELP has reviewed the texts of 26 enacted and proposed state 
SUTA dumping laws, and we have assisted in state campaigns in several 
states. Uniformly, states that have sought to go farther than the 
minimum requirements of federal law have faced significant resistance 
during the current round of SUTA dumping legislation. For that reason, 
further federal action is required if states are going to have all the 
tools required to adequately solve the SUTA dumping puzzle as it is now 
more fully understood.
    In summary, our study of state SUTA dumping legislation finds that 
those aspects of SUTA dumping that were directly targeted by federal 
law are now largely being addressed by state legislation. Yet, what we 
know about SUTA dumping indicates that SUTA dumping is an evolving 
phenomenon and requires new tools if we want to address all its 
aspects. We recommend the following actions.
Recommendation 1: Close PEO Loophole
    First, we recommend the prompt elimination of an existing loophole 
in SUTA dumping law. As currently written and applied, the SUTA Dumping 
Prevention Act does not prevent a common employment arrangement used by 
employee leasing and staffing services. These firms, which we can group 
together under the name of professional employee organizations (PEOs), 
continue to offer employers a lawful means to engage in SUTA dumping in 
the majority of states. States using the model language provided by the 
Department of Labor in implementing the Act will not cover the practice 
of firms leasing their employees through a professional employee 
organization in order to rid themselves of their unemployment insurance 
experience rate.
    PEOs, for a fee, take workers onto their payroll and essentially 
sell or lease them back to an employer. Under the arrangement, 
employees are ``dumped'' from an existing business to a PEO, but since 
the PEO and the firm are not under ``common ownership or control,'' the 
PEO would not be forced to combine its experience rate with the 
existing firm under the current federal law. In addition, PEOs are not 
usually engaged in sham transactions ``solely or primarily'' for the 
purpose of gaining a lower UI rate. Thus, under the model SUTA dumping 
language used in nearly all states passing legislation so far, firms 
are able to avoid their UI experience rate by utilizing a PEO. (A 
number of states already require PEOs to report wages by employer 
account numbers, rather than under their own experience rated account. 
This sometimes means that wages are associated with the employer using 
the PEO and taxed at the applicable rate, insuring that the PEO 
relationship is not used to SUTA dump. In other cases, even though PEOs 
report wages by employer account numbers, state law permits them to 
serve as the employer for purposes of UI.)
    The business of using a PEO is large and growing. Two million 
workers nationwide work through PEOs, which are operated by some of the 
nation's biggest staffing firms as well as numerous smaller operators. 
The 2002 Economic Census results reported PEO gross revenue more than 
doubled from $24 billion in 1997 to $55 billion in 2002. Staffing 
Industry News projected 2003-2005 PEO revenue would grow 8 percent each 
year.
    SUTA dumping through PEOs is very lucrative for employers that 
engage in it. Kelly Services has estimated it could have saved $30 
million in UI taxes in one year if it had engaged in SUTA dumping. 
Because of the competitive disadvantages faced by Kelly Services 
because it has refused to adopt SUTA dumping, Kelly has been a major 
proponent of SUTA dumping legislation. Ironically, as other SUTA 
dumping schemes are cut off by implementation of the SUTA Dumping 
Prevention Act, PEOs may become a more attractive option to firms 
looking to artificially lower their UI tax rates.
    States can effectively address the issue of SUTA dumping by 
employers using PEOs by covering all transfers of employees from one 
business to another in their bills. We believe that Pennsylvania, in 
its recently-passed SB464, is the only state that has addressed PEOs in 
implementing the SUTA Dumping Prevention Act. A New Jersey SUTA dumping 
bill addressing PEOs is still pending. Proposals that would have 
addressed this issue were amended out in Michigan, Minnesota, and 
Washington.
    Michigan's experience in attempting to regulate PEO transactions in 
its SUTA dumping implementation illustrates the difficulties of states 
acting in the absence of a federal mandate. In Michigan, the state 
agency negotiated a bill on SUTA dumping with employer organizations. 
The negotiated bill included a requirement that PEOs report wages by 
the client employer's account and called for taxes to paid under the 
client employer's rate. Ultimately, the issue of regulating PEOs in the 
context of SUTA dumping became a major stumbling block, with some 
business organizations agreeing that PEO transactions should be 
included, and others preferring a law that only addressed those forms 
of SUTA dumping required by the SUTA Dumping Prevention Act. In the 
end, PEOs and their allies succeeded in limiting Michigan's SUTA 
dumping implementation law to only those elements required by federal 
law. PEO representatives characterized this as a ``victory'' that 
``preserves a PEO's ability to report unemployment insurance under the 
PEO's account and rate.'' Of course, reporting employee wages under the 
PEO's account means that the employer using the PEO has dumped its 
existing UI experience rate.
    Given the nearly uniform inability of states to address PEOs in 
their implementation of the Act, we believe that supplemental 
legislation or Department of Labor regulations will be required if the 
use of PEOs for SUTA dumping is going to be addressed in all states. 
Client-level reporting of wages, which associates the wages reported 
with the appropriate employer's account and requires payment of UI 
taxes based upon the client firm's tax rate is the best solution. 
Closing the PEO loophole will be challenging at the federal level, but 
our experience indicates that unless federal rules require the states 
to act, they will not move forward on their own to address the role of 
PEOs in SUTA dumping.
Recommendation 2: Fix Penalties for Sham Transactions By Non-Employers
    In providing guidance to states in implementing the SUTA Dumping 
Prevention Act, we believe that the Department of Labor erred in one 
significant respect. In the case of a sham transaction involving the 
acquisition of a business by a non-employer solely or primarily for the 
purpose of obtaining a lower UI tax rate, Labor drafted its model 
legislation to provide that these persons shall be assigned a state's 
``new employer'' tax rate. In some cases, a new employer rate will 
still provide an offending employer with a substantially lower UI tax 
rate, so Labor's approach is not wholly effective in addressing SUTA 
dumping.
    Sham transactions involve purchases of experience-rated businesses 
with low UI rates. Employees of another higher-rated employer are then 
transferred to the lower-rated business. Under Labor's approach, a 
purchaser that is not an existing employer can get a generally low 
``new employer'' rate and effectively operate a higher tax-rated firm 
under the acquired account, even if the purchaser is caught and 
subjected to the ``new employer'' rate penalty. And, the purchaser can 
still SUTA dump and save on UI taxes, at least in the short term. Under 
the model law language non-employer purchasers engaged in SUTA dumping 
would get the same tax rate as any other law-abiding new employer.
    New employer rates vary widely from state to state. For example, 
the ``new employer'' rate in South Dakota is 1 percent of taxable 
wages, but in New Mexico it is the maximum rate of 5.4 percent. As a 
consequence, because both states' bills have adopted the Labor 
Department model language, a SUTA dumping employer in South Dakota will 
get a penalty rate of 1 percent, and in New Mexico, the employer might 
get a rate of 5.4 percent. In New Mexico, this result is obviously a 
penalty rate, but that is not the case in South Dakota. A better 
approach would apply the maximum tax rate, plus two added percentage 
points, just as the model bill proposes for existing employers who make 
a transfer to evade the provisions of the law.
    Vermont is the only state of which we are aware that effectively 
penalizes persons caught buying an existing unemployment account to 
start a new business under that lower tax rate. In Vermont, the non-
employer acquiring the existing firm suffers a higher penalty than the 
new employer rate. Under H0071, such businesses are taxed at the 
highest tax rate until they have been in business long enough for 
accurate calculation of their experience rating.
Recommendation 3: Ensure Effective SUTA Dumping Penalties
    The SUTA Dumping Prevention Act requires states to adopt 
``meaningful civil and criminal penalties'' with respect to SUTA 
dumping. The Department of Labor recommended that SUTA dumping firms be 
subject to the maximum tax rate (or a 2 percentage point increase, 
whichever is higher) for four years. Unfortunately, nearly half the 
state laws we surveyed are proposing penalties that are weaker than 
Labor's model bills.
    The Department of Labor draft SUTA dumping bills suggests that 
employers who are caught ``knowingly'' violating the SUTA dumping law 
should be subject to maximum UI taxes allowable under a state system 
for four years. If the employer is already paying the maximum rate, the 
Labor Department suggests that the penalty be the maximum rate plus 2 
percentage points. Most of the state bills we have reviewed adopt this 
approach. However, at least nine states have penalties that are lower 
than Labor Department's suggested penalty, and that do not meet the 
standard of the federal bill that penalties be ``meaningful.'' 
Oklahoma's bill provides for 10 percent of actual taxes due for one 
year, rather than the four years maximum tax rate suggested by Labor's 
model bill. Some bills, such as Michigan's, do not add any penalties to 
those already in state law.
    We recommend that Labor take a more active role in reviewing and 
approving state SUTA dumping bills, and advise states that have not 
followed Labor's model penalties that they must do so.
    A second concern regarding penalties is inadequate civil penalties 
for ``non-employers.'' The Labor Department model imposes a maximum 
$5,000 penalty on ``persons'' (generally including those who have no 
``employees'' or those who are not existing employers) who 
``knowingly'' violate or attempt to violate the law. In many cases, 
this may be the maximum penalty that can be imposed on the tax-advising 
entities and accounting firms that have been marketing SUTA dumping.
    It is not clear whether UI tax penalties will apply to the payroll 
of tax or other firms that are not directly involved in a prohibited 
SUTA dumping transaction. Even if UI tax penalties do apply to most tax 
advisors, they will apply only with respect to the tax advisor's own 
payroll, rather than to the payroll of the SUTA-dumping company. If 
these UI tax penalties do not apply, the only penalty that attaches to 
a tax advisor is a maximum $5,000. Given the amount of underpayment of 
taxes that is represented by SUTA dumping schemes that have thus far 
been uncovered by states, $5,000 is clearly not sufficient to deter tax 
advisors to encourage companies to dump their payroll taxes.
    Most states have followed the model bill's approach, and five 
states have even lower penalties. However, some states have recognized 
the deficiency in Labor's model and opted for greater penalties for tax 
advisors. The California law, for example, provides for penalties of 
$5,000 or 10 percent of the UI taxes unlawfully underpaid, specifically 
on tax advisors. North Dakota's recently passed legislation, HB 1195, 
proposes penalties of up to $25,000.
    We believe that the Department of Labor should revise its model 
bills in recognition that its penalties for tax and financial advisors 
are far below the levels required to provide ``meaningful'' penalties 
for SUTA dumping. At the conclusion of our testimony is a table that 
compares the civil penalty provisions of state laws and proposals with 
the Labor Department model, with notes indicating ways in which some 
state laws differ from the model penalty provisions. While some states 
have existing penalties or criminal provisions they feel should apply, 
it is difficult to judge those laws as a group. Certainly, in our view, 
state laws implementing the SUTA Dumping Prevention Act have not 
resulted in the sort of meaningful penalties that Congress called for 
in the Act.
Conclusion: More Honest Tax Enforcement or Legitimate Tax Avoidance?
    The passage of the SUTA Dumping Prevention Act represented a strong 
Congressional statement that SUTA dumping damages state UI financing 
integrity and must be stopped. The Act forced federal and state 
administrators to take action and created a strong momentum toward 
honest tax enforcement.
    Despite progress in recognizing how SUTA dumping undermines UI 
experience rating and shifts UI taxes onto honest employers since the 
Act's passage, an accepting attitude about SUTA dumping among some 
state legislators, administrators, and a significant number of business 
groups persists. This attitude views SUTA dumping as an acceptable 
business practice, and perceives SUTA dumping as legitimately lowering 
state UI payroll taxes. The persistence of this attitude has meant that 
most states have not adopted known measures that would more effectively 
eliminate the practice of SUTA dumping. Instead, the majority of states 
have taken a hesitant approach toward state SUTA dumping laws.
    Mr. Chairman, we thank this Subcommittee for the opportunity to 
offer our testimony on implementation of the SUTA Dumping Prevention 
Act of 2004. We would be pleased to answer any questions.


                         State SUTA Dumping Penalties--Proposed and Enacted Legislation
                                             (Updated June 9, 2005)
----------------------------------------------------------------------------------------------------------------
                                               Penalties on Employers             Penalties on Non-employers
                                       -------------------------------------------------------------------------
                                          Labor       Higher       Lower       Labor       Higher       Lower
                                          Model     penalties    penalties     Model     penalties    penalties
----------------------------------------------------------------------------------------------------------------
Alabama HB 148                                 X                                                 X
----------------------------------------------------------------------------------------------------------------
Arizona HB 2093 (passed)                       X                                    X
----------------------------------------------------------------------------------------------------------------
California AB 664 (passed)                                               X                       X
----------------------------------------------------------------------------------------------------------------
Colorado HB 1092 (passed)                                   X                       X
----------------------------------------------------------------------------------------------------------------
Hawaii HB 708                                  X                                    X
----------------------------------------------------------------------------------------------------------------
Idaho HB 2 (passed)                                                      X          X
----------------------------------------------------------------------------------------------------------------
Indiana SB 612 (passed)                        X                                    X
----------------------------------------------------------------------------------------------------------------
Kansas SB 108 (passed)                         X                                    X
----------------------------------------------------------------------------------------------------------------
Kentucky SB 113 (passed)                       X                                                 X
----------------------------------------------------------------------------------------------------------------
Michigan HB 4414, 4415 and SB 171 and                                    X          X
 174 (passed)
----------------------------------------------------------------------------------------------------------------
Minnesota HB 898 (passed)                                                X                       X
----------------------------------------------------------------------------------------------------------------
Mississippi SB 2472 (passed)                   X                                    X
----------------------------------------------------------------------------------------------------------------
Missouri HB 500 (passed)                       X                                    X
----------------------------------------------------------------------------------------------------------------
Montana HB 159 (passed)                                                  X          X
----------------------------------------------------------------------------------------------------------------
Nebraska LB 484 (passed)                       X                                    X
----------------------------------------------------------------------------------------------------------------
N Hampshire HB 170 (passed)                    X                                    X
----------------------------------------------------------------------------------------------------------------
N Jersey A2941                                                           X                                    X
----------------------------------------------------------------------------------------------------------------
N Mexico HB 520 (passed)                       X                                                              X
----------------------------------------------------------------------------------------------------------------
N Dakota HB 1195 (passed)                      X                                                 X
----------------------------------------------------------------------------------------------------------------
Ohio SB 81 (passed)                            X                                    X
----------------------------------------------------------------------------------------------------------------
Oklahoma SB 763 (passed)                                                 X          X
----------------------------------------------------------------------------------------------------------------
Pennsylvania SB 464 (passed)
----------------------------------------------------------------------------------------------------------------
S Dakota SB 13 (passed)                        X                                    X
----------------------------------------------------------------------------------------------------------------
Utah HB 10 (passed)                                                      X          X
----------------------------------------------------------------------------------------------------------------
Vermont H 0071 (passed)                        X                                    X
----------------------------------------------------------------------------------------------------------------
Virginia H 2137 (passed)                                                 X          X
----------------------------------------------------------------------------------------------------------------
Washington HB 2246                                                       X                                    X
----------------------------------------------------------------------------------------------------------------
Wyoming SB 80 (passed)                         X                                                 X
----------------------------------------------------------------------------------------------------------------
    Total                                                   1            8         18            6            2
----------------------------------------------------------------------------------------------------------------
Chart notes: States proposing higher penalties than Labor Department model for employers who violate law: CO
  (maximum tax rate plus 2.7%); States proposing lower penalties than Labor Department model for employers who
  violate law: CA (max tax rate plus 2% but only for 3 years); ID (10% taxable wages for 1 year); NJ (max rate
  for 5 quarters); MI (no additional penalties in proposal); MN ($5,000 or 2% of payroll for 1 quarter for
  notification violation); MT (6% taxable wages for 1 year, a maximum of $1,218); OK (10% taxes due for 4
  quarters); UT (max rate for 2 years); VA (max rate for 2 years) WA (max rate plus 2% for 1 year, plus costs of
  audit).
States proposing higher penalties than Labor Department model for non-employer tax advisors who violate law: AL
  ($10,000 or 10% of taxes underpaid); CA ($5,000 or 10% of taxes underpaid, specifically applies to tax
  advisors); KY ($5,000 plus higher tax rate for ``persons,'' whether or not they are ``employing units''); MN
  ($5,000 or 2% of quarterly payroll for notification violation); ND ($25,000); WY ($50,000). States proposing
  lower penalties than Labor Department model for non-employers who violate law: MI (no additional penalties in
  proposal, but existing penalties exceed minimum requirements of Act); NJ (no additional penalties); NM ($3,000
  maximum); WA (no new penalties).
Notes: Several states provide for criminal penalties for firms and tax advisers. We focus on the civil penalty
  provisions because it is generally more efficient for state agencies to impose civil penalties than to pursue
  criminal remedies.


References
    Connecticut Department of Labor, SUTA Dumping presentation to UI 
Technology Connection Conference by Carl Guzzardi, Tax Unit Manager, 
available at www.naswa.org/articles/
template.cfm?results_art_filename+ctsutadumping.htm.
    Michigan Department of Labor & Economic Growth Unemployment 
Insurance Agency, New Federal Law Requires States To Crack Down On 
Employers Dodging Unemployment Taxes (September 2004), available at 
http://www.workforceatm.org/articles/
template.cfm?results_art_filename=miantidumping.htm.
    Michigan Department of Labor & Economic Growth, Unemployment 
Insurance Agency, Michigan Recoups $2.4 Million from tax Avoidance 
scheme, (Feb. 2005), available at http://www.workforceatm.org/articles/
template.cfm?results_art_file-name=mi_sutacase.htm.
    National Employment Law Project, State SUTA Dumping Legislation: A 
First Step Towards UI Program Integrity (October 2004) available at 
www.nelp.org/ui.
    National Employment Law Project, The Whole Truth: Employer Fraud 
and Error in the UI System (December 2003) available at www.nelp.org/
ui.
    Stateline.org, Unemployment Tax Cheats on States' Radar, (Jan 
2004), available at http://www.stateline.org/live/
ViewPage.action?siteNodeId=136&languageId=1& contentId=15522.
    U.S. General Accounting Office, Unemployment Insurance: Survey of 
State Administrators and Contacts with Companies Promoting Tax 
Avoidance Practices, Testimony Before the Subcommittee on Oversight and 
Subcommittee on Human Resources, Committee on Ways and Means, U.S. 
House of Representatives (June 19, 2003) and questionnaires submitted 
to the states (on file with author).

                                 

    Chairman HERGER. Thank you, Mr. McHugh, and I think the 
point you have made is very well taken. It is always that 
rarity, that handful who are taking advantage of the system. 
The vast majority are good, honest, law-abiding citizens who 
are trying to do what is right. Our goal here on This Committee 
is to go after those who are purposely misusing the system and 
costing everybody money and hurting the system. Mr. Temple to 
testify.

STATEMENT OF LARRY TEMPLE, EXECUTIVE DIRECTOR, TEXAS WORKFORCE 
                   COMMISSION, AUSTIN, TEXAS

    Mr. TEMPLE. Chairman Herger, Ranking Member McDermott, and 
distinguished members of the Subcommittee, thank you for 
allowing me to testify this morning. My name is Larry Temple. I 
have the pleasure of serving as Executive Director of the Texas 
Workforce Commission, which is charged with the administration 
of the State's unemployment insurance program.
    Mr. Chairman, it is my belief that States must always 
strive to operate an unemployment system that has the 
confidence of both the claimants who receive the benefits and 
the employers who pay the taxes. Our experience in Texas has 
shown that the vast majority of our employers, over 400,000 of 
them, are satisfied with the scope and intent of our 
unemployment insurance program.
    State Unemployment Tax Act dumping has been a significant 
problem in Texas, as unscrupulous employers have gained an 
unfair advantage over their competitors by unloading their 
payroll tax obligations onto their competitors. Those employers 
who follow the spirit of the law find themselves subsidizing 
those who abuse the system. For example, we estimate that one 
prominent national retailer paid an extra $550,000 in payroll 
taxes in the first quarter of 2004 alone simply because they 
followed the spirit of the law and did not resort to SUTA 
dumping. The Workforce Commission's top recommendation to the 
Texas Legislature in the 2005 regular session was the passage 
of legislation to stop SUTA dumping. I am happy to report that 
the legislature responded, and the anti-SUTA dumping bill 
awaits Governor Rick Perry's signature later this week, and it 
will go into effect on the 1st of September of this year.
    The bill, H.B. 3250, was filed by House Economic 
Development Chairman Allan Ritter, a Democrat, and sponsored in 
the Senate by Senate Business and Commerce Chairman Troy 
Fraser, a Republican. Both the AFL-CIO and the National 
Association of Professional Employee Organizations testified in 
favor of the bill. H.B. 3250 passed in both the House and 
Senate Committees with unanimous support, and it was approved 
in both chambers by unanimous consent. We believe that this 
bill, once implemented, will result in savings of over $78.5 
million per year to the Texas's unemployment trust fund.
    I would like to draw attention to an aspect of the issue 
that tends to go generally unnoticed. When an employer engages 
in SUTA dumping, there is really no incentive for them to 
respond to our request for information regarding separation 
issues. The impact is that we are likely paying benefits to 
some individuals who would not be eligible for those benefits 
if we had been informed of the reason for their separation. 
Under our new SUTA dumping law, employers face the potential 
risk of financial penalties when they fail to comply with our 
information requests. In effect, if they do not provide us with 
this information, they will be penalized through tax rate 
increases. It is our strong belief that implementation of such 
a policy will improve our employer cooperation, reduce the 
amount of improper benefits paid out, and further lower the tax 
rates that we have to charge our employers.
    While the passage of proactive, reform-minded legislation 
is a necessary first step in arresting abuse of the system, 
true success can only be achieved when they are coupled with a 
vigorous enforcement mechanism. Since accepting the position of 
Executive Director about 2 years ago, I worked to reorganize 
the commission's resources to put all the anti-fraud mechanisms 
in place, and I created the Office of Program Integrity, which 
was charged with consolidating all of our investigations, 
statistical sampling, fraud detection, performance analysis, 
sub-recipient monitoring, the BAM unit, which was buried down 
in the bowels of the agency somewhere--a lot of people did not 
know it even existed at the time--with the whole goal of 
improving the sharing and cooperation. I am happy to say that 
it has produced immediate results.
    We have reduced our overpayment rate by one-fifth. They are 
now charged with developing a similar plan for underpayments, 
and we are much more capable now of pinpointing our 
overpayments. The Federal goal for States to find overpayments 
is 59 percent. In Texas we are now detecting 89 percent. On 
January 1st of this year, we established a new regulatory 
enforcement division that consolidated all of our collection 
and prosecution initiatives through improved coordination with 
our local prosecutors and the Attorney General's Office. In 
2003, we referred 178 fraud cases for prosecution. That number 
increased to 223 last year. To date, the division has 200 cases 
in the pipeline for referral, and our benefit payment control 
staff have identified an additional 729 that are eligible for 
fraud prosecutions.
    Last year, we collected $21.3 million in delinquent taxes 
owed by employers through tax liens, $20.3 million in 
delinquent taxes through bank freezes and levies, and $384,000 
in delinquent taxes through bankruptcy proceedings, which 
includes getting stock from a national pizza franchise that is 
now worth about $45,000 for the tax. So we held onto it long 
enough that it was worth something we could sell and get the 
money back. So we will endure.
    Through the end of May, our Regulatory Division is ahead of 
last year, and like North Carolina, which I want to thank for 
taking the lead in the pilot, the software has been a success, 
I am pleased to report. Our goal in Texas is to have a system 
where the employers and the claimants both understand that if 
an unemployed individual truly needs help, we are there to 
provide it. Our citizens and our Workforce Commission will not 
tolerate the abuse. Thank you for inviting me to share the 
Texas perspective with you. I have submitted my full testimony 
for the record and will be happy to answer any questions.
    [The prepared statement of Mr. Temple follows:]
 Statement of Larry Temple, Executive Director of the Texas Workforce 
                       Commission, Austin, Texas
    Chairman Herger, Ranking Member McDermott, and distinguished 
members of the Subcommittee, thank you for allowing me the opportunity 
to testify this morning. My name is Larry Temple. I have the pleasure 
of serving as Executive Director of the Texas Workforce Commission. TWC 
is charged with the administration of Texas' Unemployment Insurance 
program.
    Mr. Chairman, it is my firm belief that states must always strive 
to operate an unemployment system that has the confidence both of the 
claimants who receive the benefits and the employers who pay them. Our 
experience in Texas has shown that the vast majority of Texas employers 
are satisfied with the scope and intent of our Unemployment Insurance 
program.
    SUTA dumping has been a significant problem in Texas, as 
unscrupulous employers have gained an unfair advantage by loading their 
payroll tax obligations onto their competitors. Those employers who 
follow the spirit of the law find themselves subsidizing those 
employers who abuse the system. For example, we estimate one prominent 
national retailer paid an extra $550,000 in payroll taxes in the first 
quarter of 2004 simply because it followed the spirit of the law rather 
than resort to SUTA dumping.
    The Texas Workforce Commission's top recommendation to the Texas 
Legislature in the 2005 regular session was the passage of legislation 
to stop SUTA dumping. I am happy to report that our Legislature 
responded, the anti-SUTA dumping bill awaits Gov. Rick Perry's 
signature later this week, and it will go into effect on the 1st of 
September.
    The bill, HB 3250, was filed by House Economic Development Chairman 
Allan Ritter, a Democrat; and sponsored in the Senate by Senate 
Business & Commerce Chairman Troy Fraser, a Republican. Both the AFL-
CIO and the National Association of Professional Employee Organizations 
testified in favor of the bill, HB 3250 passed both the House and 
Senate committees with unanimous support, and it was approved in both 
chambers by unanimous consent.
    We estimate that over the next five years, the implementation of HB 
3250 will result in savings of $78.5 million per year to Texas' 
Unemployment Insurance trust fund. This will visibly reduce the 
replenishment aspect (taxes based on Statewide benefits and taxed 
wages) of the overall unemployment tax rate, which makes up the bulk of 
what most Texas businesses pay.
    Furthermore, I'd like to draw attention to an aspect of this issue 
that tends to go generally unnoticed. When an employer engages in SUTA 
dumping, it doesn't respond to separation requests on its former 
employees. There is no incentive for employers to respond because the 
employer is simply going to change their identity. The impact is that 
states are likely paying benefits to some individuals whom would not be 
eligible for them if their previous employers had informed of the 
reason for their separation. Under the new SUTA dumping law, employers 
face the potential risk of financial penalties when they fail to comply 
with our information requests. In effect, when employers don't provide 
us with this information, they will be penalized through tax rate 
increases. It is our strong belief that implementation of such a policy 
will improve employer cooperation, reduce the amount of improper 
benefits paid out, and further lower the tax rates we must charge 
employers.
    While the passage of proactive, reform minded legislation is a 
necessary first step in arresting the flagrant abuses of this system, 
true success can only be achieved when such laws are coupled with 
vigorous enforcement mechanisms. Since accepting the position of 
Executive Director almost two years ago, I worked to reorganize our 
Commission's resources to put those anti-fraud mechanisms into place. 
One of my first acts as Executive Director was creating an Office of 
Program Integrity. This office was charged with consolidating our 
Investigations, Statistical Sampling, Fraud Detection, Performance 
Analysis, and Sub-recipient Monitoring with the intent of improving 
information sharing, cooperation, and employee morale and has produced 
instant results.
    These changes have not only reduced our overpayment rate by one-
fifth, but have allowed for noticeably more accurate predictions of our 
overpayments. Furthermore, TWC is now much more capable of pinpointing 
those overpayments. The federal goal is for states to find 59% of their 
predicted overpayments. In Texas, we find 89%.
    On January 1st of this year, TWC established a new Regulatory 
Enforcement Division that consolidated all of our collection and 
prosecution efforts into one unit. Even though this was done within 
existing resources, the new structure has increased our effectiveness 
through improved coordination with both local prosecutors and the Texas 
Attorney General's Office. This new division will also help us better 
identify repeat criminal offenders and emerging trends in criminal 
conduct.
    In 2003, the Texas Workforce Commission referred 178 fraud cases 
for prosecution. That number increased to 223 last year. To date, our 
Regulatory Enforcement Division has 200 cases in the pipeline for 
referral and our Benefit Payment Control staff have identified 739 
additional cases that are eligible for fraud prosecutions.
    Prosecutors obtained 39 convictions in 2003, 74 in 2004, and so far 
pursued 48 for 2005. As a result of those prosecutions, the Texas 
Workforce Commission recovered more than $1.5 million in fraudulent 
payments in 2003, nearly $1.38 million in 2004, and $515,000 through 
the first five months of 2005. As the 2005 numbers show, the word has 
gotten out that TWC is aggressively pursuing unemployment fraud, and as 
a result curtailed, fraudulent activity leading to a reduction in 
recovered payments.
    Last year, TWC collected $21.3 million in delinquent taxes owed by 
employers through tax liens, $20.3 million in delinquent taxes through 
bank freezes and levies, and $384,000 in delinquent taxes through 
bankruptcy proceedings. Through the end of May, our Regulatory 
Enforcement Division's tax lien collections were running 10% ahead of 
last year, and we are now collecting 99% of the amount covered by the 
lien. Our Regulatory Enforcement Division's bank freeze collections 
were also up almost 7%.
    Lastly, like North Carolina, Texas was a pilot state for the SUTA 
Dumping Detection System software. I am pleased to report that it is 
working well and we can see that it will be a powerful tool for us to 
identify and crack down on companies who are trying to shirk their 
responsibilities.
    In Texas, it is our goal to have an unemployment system where 
employers and claimants both understand that if an unemployed 
individual truly needs help, we are here to provide it. However, our 
citizens and this Commission will not tolerate any abuse of the system.
    Thank you for inviting me to share the Texas perspective with you 
today. I have submitted my full testimony for the record, and will be 
more than happy to answer your questions.
ATTACHMENTS:
1. HB3250--Texas' SUTA Dumping legislation
                                 ______
                                 
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] 
                                 

2. TWC press release--fraud prevention

FOR IMMEDIATE RELEASE
DATE: September 13, 2004
MEDIA CONTACT: Larry Jones
PHONE: (512) 463-8556

TWC's Program Integrity Policies Save an Estimated $83 Million

    AUSTIN--In an aggressive effort to eliminate all types of 
Unemployment Insurance (UI) overpayments, the Texas Workforce 
Commission (TWC) has strengthened policies to ensure the most effective 
use of tax dollars and that only qualified applicants receive benefits. 
The new policies already have achieved measurable results, preventing 
overpayments of an estimated $83 million, a 19 percent decline.
    ``This proactive approach represents a team effort throughout the 
agency, and those efforts are to be highly commended,'' said TWC 
Executive Director Larry Temple. ``We're making significant progress in 
reducing overpayments, and the numbers support that.''
    Preventing overpayments is a challenging process. TWC continuously 
works to increase UI claimants' understanding of the unemployment 
insurance process and eligibility requirements. By verifying compliance 
with work search requirements and increasing employer participation, 
TWC has made significant strides in reducing overpayments. The agency 
has improved processes and technology to increase accuracy and 
strengthened collection efforts to cut overpayments as well.
    UI benefits distributed to ineligible claimants are the sole cause 
for overpayments. In some cases, overpayments result from error or 
fraud. The fraud detection unit investigates questionable claims, 
represents TWC in appeals and prepares materials for use in 
prosecutions at the local level.
    Workforce boards have increased followup activities after referring 
claimants to job openings, thus identifying claimants who should no 
longer be receiving benefits.
    Texas is a national leader in UI work search requirements, 
insisting on a minimum of three work search contacts per week. TWC Call 
Center Operations staff makes weekly calls to employers to verify a 
claimant's work search. In addition, TWC administrative staff contacts 
businesses listed on the work search forms. More than 50,000 work 
search contacts will be verified through this process by year's end.
    New Hire Crossmatch is another initiative used to detect fraud. The 
names of those new hires are compared with current UI claimants or 
former claimants with outstanding overpayment balances. New Hire 
Crossmatch helped the agency avoid or recover nearly $9 million in 
benefit overpayments in 2003. In a partnership with local law 
enforcement, TWC also crossmatches its database of UI claimants with 
Texas county jail populations to determine if any claimants are 
unavailable to seek work due to incarceration.
    In some cases when employers do not respond during the initial 
determination process, overpayments can result. Claimants begin 
receiving benefits after an initial determination; however, additional 
information discovered in an appeal may determine that the claimant 
does not meet criteria to receive benefits.
    When identifying overpayments, the collection unit follows up on 
active cases with outstanding overpayment balances. The unit pursues 
recovery through phone calls and collection letters. If a new claim for 
unemployment is filed, UI benefits are used to offset the overpayment 
balance.
    ``By strengthening these policies, TWC is making tremendous inroads 
in the effort to direct benefits to qualified claimants and focus our 
efforts on helping people get back to work,'' said Program Integrity 
Division Director Fran Carr.
                                  ###
    The Texas Workforce Commission is a state agency dedicated to 
helping Texas employers, workers and communities prosper economically. 
For details on TWC and the services it offers in unison with its 
network of local workforce development boards, call (512) 463-8556 or 
visit www.texasworkforce.org.

                                 

    Chairman HERGER. Thank you, Mr. Temple. Now we will turn to 
questions. The gentleman from Louisiana, Mr. McCrery, to 
question.
    Mr. MCCRERY. Thank you, Mr. Chairman. Mr. Temple, did the 
Texas law go further than, say, the Michigan law in closing 
some of these loopholes that are not required to be closed by 
Federal law?
    Mr. TEMPLE. It did get unanimous support.
    Mr. MCCRERY. Which leads me to believe that maybe you left 
a few loopholes.
    Mr. TEMPLE. We did propose some penalties that were higher 
than the minimum standard, and they were negotiated down 
through the process. We did go beyond. We have penalties for 
employers who do not respond to us. Unlike North Carolina, ours 
is not a felony. It is a Class A misdemeanor. There are 
substantial fines for the employer and individuals who are not 
the employer but who assist in some of these SUTA dumping 
schemes. So we think we did go beyond.
    Mr. MCCRERY. Mr. McHugh, explain to me a little bit more 
about these PEO's. Is that kind of like a temporary services 
business where they have employees of a certain skill in 
certain areas and they are ready to send them to your factory 
to work? Is that what is going on?
    Mr. MCHUGH. Well, there are a lot of different 
arrangements, but the one that I used in my illustration is 
referred to as ``employee leasing,'' where employees would 
still work in my factory but they would be on the payroll of 
another entity, another corporate entity, which would have a 
different tax rate. Other services might be provided by the PEO 
in addition to the SUTA dump, so it would not be primarily or 
solely for the purpose of getting a lower tax rate, so it would 
not be covered by that section of the Federal law. It truly is 
an arm's length transaction, so they are not under common 
custody, control, management, or whatever the other term is.
    Mr. MCCRERY. So how would you suggest we close that 
loophole, if, in fact, it is a loophole?
    Mr. MCHUGH. Well, some of the States that have at least 
proposed to try to adjust it have basically looked at any kind 
of transaction, getting the power to set aside any kind of 
transaction that seems--that the underlying purpose seems to be 
to get the lower tax rate. Other States have looked to--and 
this was the approach that Michigan tried to take, that even 
though you are using--I am using a PEO, the PEO would have to 
report the wages that were being paid to my employees in my 
workplace under my old account number, and the taxes would be 
paid on those wages under my old account number. I could still 
use a PEO if I wanted to use it for payroll services or health 
insurance administration or other reasons, but I would not be 
able to use it for the purpose of a SUTA dump under that 
approach. So that would be at least two approaches that the 
States have felt that they could use.
    Mr. MCCRERY. Mr. Camden, did you have something you wanted 
to add?
    Mr. CAMDEN. No. We are very different services, and he well 
represented that end. The major problem with the staff leasing 
firms in this area is that the experience does not transfer 
when they transfer the employees. So there is a variety of 
different mechanisms different States could use to require the 
experience of transfer, and the Michigan example is the one 
that we were--that you gave was what we were trying to use in 
that State. There are different ways you could do it, but when 
you lose the transfer--and to make it worse than what some 
staff leasing firms are doing is establishing a new corporate 
entity for every single new customer that comes in, so they are 
automatically set at a low level. It adds up to a tremendous 
amount of dumped experience and a lot of dollars lost to the 
State.
    Mr. MCCRERY. Is there anything that sticks out that would 
identify these kinds of transactions as being clearly for the 
purpose of SUTA dumping? That seems to me to be a difficult 
thing in writing legislation. You have to have a certain 
percentage of your workforce that within a certain period of 
time has been shifted, or what? Or are there guidelines we can 
use to clearly identify when that is the purpose?
    Mr. CAMDEN. It is hard to decipher intent. So when we have 
been giving advice, the States have been urging that instead of 
trying to decipher intent, just require the experience to 
transfer. Now, if, in fact, the leasing firms or other entities 
are able to deliver lower unemployment costs, then the rates 
will adjust down automatically and benefits will be accrued. To 
grant them the benefits of the lower experience rating without 
it having been earned strikes me as kind of a backward as a 
backward approach for States to take. So rather than trying to 
get into the intent game, we have generally advised States to 
just require the transfer of the experience.
    Mr. MCHUGH. That is the advantage of having the common 
reporting. It is fine for them to report the wages for the 
workers that they have that they are leasing, but by 
associating it with the account of the prior employer, they are 
not able to do the SUTA dump. They are not considered the 
employees of the PEO. They are still considered, at least for 
purposes of unemployment insurance, to be the employees of the 
client employer.
    Mr. MCCRERY. Okay. Thank you, Mr. Chairman.
    Chairman HERGER. The gentleman's time has expired. The 
gentleman from Washington, Mr. McDermott, to inquire.
    Mr. MCDERMOTT. Doesn't that defeat the purpose of the PEO? 
What would be the purpose of a PEO if you stopped the transfer?
    Mr. MCHUGH. Well, I think the PEO firms, at least in 
public, would deny that the primary purpose for their existence 
is to help their firms avoid workers' comp and UI premiums. 
They always claim that there are a lot of additional services 
that they are providing to their client firms.
    Mr. MCDERMOTT. Like what?
    Mr. MCHUGH. Well, like health insurance administration, 
fringe benefit administration, payroll services.
    Mr MCDERMOTT. So they transfer the same health plan across 
and pension across? When I take my staff and put them over in 
this PEO that he is running, do they get the same pension and 
health care that they had when I had them, or is that a way of 
cutting that also?
    Mr. MCHUGH. That varies. Sometimes they have a health plan 
that they can use. A lot of small employers can be grouped 
together and afford to purchase health care that they would not 
be able to afford if their little 15-person firm was by itself. 
Sometimes there are no pensions. Sometimes people do lose their 
former pension and get a new 401(k). I think it really varies.
    Mr. CAMDEN. Congressman, we do both. We have a PEO 
business, which is fairly small, and a very large staffing 
business. As we are selling staff leasing or PEO products, we 
are arguing very much that we have better benefit 
administration than smaller companies are able to achieve, very 
much the health care argument that was made here, as well as 
401(k) administration, vacation, and holiday. All of that we 
would tend to argue because it is our expertise we can do that 
better. Most States who have tried to analyze where their SUTA 
dumping problems have emerged would tell you that anywhere 
between 40 to 60 percent, was the testimony that we heard in 
the Michigan hearings, came from the PEO firms. It is a problem 
we need to work on in terms of going beyond the legislation 
that has been done.
    Mr. MCDERMOTT. The way to go beyond it, does it require us 
to pass a law again? Or can DOL change things or States require 
enforcement? What I am looking at, the same question that Mr. 
McCrery sort of asked. You present us a problem. Now, how do we 
fix it? The question is, where do you put the fix--in the Feds 
or the DOL or tell the States to do it? Or what is the way to 
do it? Really it is a question for all of you.
    Mr. MCHUGH. Well, I would like to know if the Secretary of 
Labor thinks that she has the authority to issue regulations 
addressing the PEO issue or not. They seem to have taken a 
fairly cautious approach to enforcing the Act so far. They have 
not talked about any regulatory action. Some of the guidance 
that they have given seems to indicate that they have a limited 
view of what the regulatory authority is. You did say there are 
four things the States have to do, and the fourth one is comply 
with any regulations issued by the Secretary of Labor on this. 
So it seems like at least potentially the DOL could address the 
PEOs, or if they can't or won't do it, then Congress would have 
to address it.
    Mr. MCDERMOTT. She works for us, at least titularly.
    [Laughter.]
    Maybe that is the way to go. Let me hear a little bit more 
about this whole business about misclassification. Is there any 
way we can get that thing going? What do we need to do with it 
in terms of people being classified as contractors?
    Mr. MCHUGH. Well, I think one part of it is a resource 
question. The States do not have sufficient resources to have 
the auditors they need to go out and reclassify misclassified 
employees. Part of it is the test that employers--of employment 
that is used in the States. Mr. Clegg testified that the common 
law test is adequate. Some States have the ABC test of 
employment, which is at least considered by NELP to be a 
superior test. Then part of it is just attitudinal, and there 
has developed in this country a very accepting attitude of law-
breaking in the employment area. Unfortunately, I think at one 
time employers would hesitate to violate wage and hour laws or 
not pay people when they were supposed to pay them or try to do 
some of the things we see them doing with SUTA dumping. I would 
be curious. Of the people that are lined up for prosecution in 
Texas, how many of them are employers and how many of them are 
workers? I would be willing to bet 95 or 99 percent of them are 
workers, not employers. The last time an employer got nailed 
for fraud in Michigan before your focus on it was decades ago. 
So part of it is attitudinal as well.
    Mr. MCDERMOTT. Thank you.
    Chairman HERGER. The gentleman's time has expired. The 
gentleman from Michigan, Mr. Camp, to inquire.
    Mr. CAMP. Well, thank you, Mr. Chairman. Mr. Bishop, I am 
interested in your thoughts on Mr. McHugh's comments and Mr. 
Camden's on the professional employee organizations and that 
loophole and obviously also the weak penalties. Could you just 
comment on that?
    Mr. BISHOP. Sure. Well, it is true that the initial 
legislation that was enacted did not address this issue 
specifically, and we thought it was appropriate in the context 
of those relationships. As we have heard today, those 
relationships can be complex. It can be sometimes hard to 
legislate at the Federal level. So the legislation did not 
address some of the things that are being spoken of today.
    The legislation does require us, by July 15th of 2007, to 
report to Congress, and, of course, that is 2 years away. In 
the meantime, we are more than willing to listen to the States, 
work with the States, and if these kinds of things continue to 
emerge, continue to have a dialogue with this Subcommittee to 
inform you and work together to see if further steps need to be 
taken to close existing loopholes. As was said, people are very 
smart and savvy, and as soon as we try to legislate something, 
another thing will come up. So we just have to be really 
careful that we do things that do not have unintended 
consequences.
    I would like to, if I could for the record, clarify one 
thing that was mentioned. It was stated by a witness that the 
President's budget cut $750 million from Employment Services. 
This is an inaccurate statement. The Administration's budget 
consolidates three funding streams that are currently 
duplicative for employment services, and that consolidation was 
reflected and passed by the House in H.R. 27. So to say that we 
have cut $750 million of services to workers is not accurate.
    Mr. CAMP. Mr. Bishop, I am also interested in Mr. Clegg's 
comment that the States are really passing laws that are 
prospective only in this area and that would, therefore, write 
off millions of dollars in past losses. Can you comment on that 
as well?
    Mr. BISHOP. I do not have in front of me the specific 
information on how many of the laws that are being passed are 
prospective versus retrospective. I think what we could do 
would be to provide the Subcommittee with the information on 
the legislative proposals that have been passed so you would 
have that information.
    Mr. CAMP. Okay. Mr. Camden, do you have any thoughts on the 
prospective-only nature of some of the State laws that are 
passed?
    Mr. CAMDEN. I think it is easier for States to go after the 
prospective because they have got a cleaner legislative fiat to 
work from. I think what North Carolina has shown is that the 
common law and passed laws that are in place are a sufficient 
prosecutorial base, but it takes more work and there are less 
resources to draw on in order to do that.
    Mr. CAMP. All right. Thank you very much. Thank you, Mr. 
Chairman.
    Chairman HERGER. Thank you, Mr. Camp. The gentleman from 
California, Mr. Becerra, to inquire.
    Mr. BECERRA. Thank you, Mr. Chairman. Thank you all for 
your testimony and for helping us better understand and 
hopefully come up with some changes that can help us continue 
with model legislation that DOL can submit to the various 
States for consideration.
    Mr. Camden, a question for you. Can you distinguish--I 
won't say ``easily,'' but with some work, but can you still 
make a clear distinction through the law between a staffing 
agency that is providing, in essence, temporary workers on a 
legitimate basis versus those that are trying to do this for 
tax evasion purposes? Is it easy to try to come up with a 
definition that will clearly leave those who are trying to do 
this legitimately through staffing versus those who are just 
trying to evade taxes?
    Mr. CAMDEN. I don't know. Again, we have chosen to stay 
away from the intent issue and just to say make everybody 
transfer experience and it is the easiest way to bypass the 
whole intent. So we have not tried to do it on intent. Staff 
leasing and temporary staffing firms are very different in how 
they perform and who owns the employment relationship and so 
on. So that part is easy. To identify those who have an intent 
to break the law I think is difficult.
    Mr. BECERRA. So at some point, a legitimate staffing firm 
that provides temp employees can break over into the side of 
conducting or engaging in employment practices that are, for 
tax purposes, illegal. Is there something--what gives us that 
sense of when it is that a firm starts to go over the edge?
    Mr. CAMDEN. It would be difficult for that to happen to a 
temporary staffing firm because we own the employment history 
of our temporary employees, and it is measured in tens of 
thousands of people by State. So a movement in and out of a few 
hundred does not particularly matter. Now, what you do see and 
what we have seen are some temporary staffing firms who seed 
companies, new companies, in order to get the lowest employment 
rate, and then they transfer thousands of employees into the 
seed company. All the detection tools you currently are working 
at putting in place will catch that and have done so.
    Mr. BECERRA. It seems that there is ultimately something 
that triggers you or some inspector in determining that what is 
going on is now beyond just a staffing activity between an 
employer and a staffing or a leasing firm. If there is anything 
that anyone here can come up with that can help guide us more 
in terms of providing further definition for DOL and for 
Congress, we would appreciate it. I suspect you have already 
seen some of this with some of the States that have tried to 
come up with legislation, but perhaps have not quite succeeded 
in getting the legislation passed. Anything that you all think 
would be helpful for us, the more it is done through 
regulation, I think the better, because it is tough to try to 
legislate these parameters well without using an ax and trying 
to do this. So any help you can provide us would be great.
    Another question. Best practices, if you can--I know that 
we have what is considered model legislation that DOL has sent 
to the States for consideration. If you can also just give us 
your one or two points on what would be now given that the 
implementation of the legislation that we passed out a year or 
2 ago, and tell us now what would be the one or two crucial 
things to do. I know some of you in your written testimony have 
mentioned some of these things, and some of you have outlined 
what some of the States have tried to do. Give us a sense of 
what you think we can quickly do, the one or two things that 
should not be that difficult to get through Congress or to see 
if DOL can do through regulation that we can move toward, 
because I know that all of you have said that this is an 
evolving phenomenon here you do one thing and all of a sudden 
clever folks find a different way to get past this. So the one 
or two things that you think we can try to move on most 
quickly, so Mr. Camden could continue coming back saying, 
``Thanks very much for moving faster than we expected.''
    Finally, if you all can--because I know my time is expiring 
and we do have votes. If you can give us any suggestions on 
trying to deal with this independent contractor issue where we 
have the misclassification going on, because my understanding 
is it is fairly substantial, and to allow that to occur is 
another way of allowing States to be underfunded and allowing 
legitimate employers--and, Mr. Camden, yours would be one--to 
have to absorb the costs for unemployment compensation 
insurance. I do not think that is fair. So anything you have 
that would help us deal with the phenomenon where employers are 
misclassifying their employees as independent contractors we 
would appreciate it. Thank you very much for your testimony.
    Chairman HERGER. Thank you, Mr. Becerra. I want to thank 
each of you for appearing here today and giving us updates and 
insights. It will be helpful as we consider additional steps to 
strengthen and improve our unemployment system. If you do not 
mind, I do have a few questions that I might submit to you in 
writing. This has been very helpful. Again, I share the 
thoughts of the gentleman from California in that when we have 
our next hearing we want to be able to have the same comments 
that you led off with, Mr. Camden. Again, I want to thank each 
of you, and with that this hearing stands adjourned.
    [Whereupon, at 11:12 a.m., the hearing was adjourned.]
    [Submissions for the record follow:]
Statement of Edward A. Lenz, American Staffing Association, Alexandria, 
                                Virginia
    On behalf of the American Staffing Association, I am writing to 
express our industry's appreciation for your efforts to protect the 
financial integrity of the nation's unemployment insurance system. ASA 
submits the following statement for inclusion in the record of the June 
14, 2005 hearing on implementation of the SUTA Dumping Prevention Act.
    ASA represents over 1,100 companies that operate approximately 
15,000 offices representing about 85 percent of the $63 billion U.S. 
staffing industry. Our members include the nation's largest publicly 
owned staffing firms as well as privately owned regional and local 
staffing firms throughout the country. Such firms have contributed 
significantly to the well-being of the U.S. economy by providing 
critical labor market flexibility that benefits both employers and 
workers.\1\
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    \1\ See U.S. Dep't of Labor, ``Just-in-time'' Inventories and 
Labor: A Study of Two Industries, 1990-1998, Report on the American 
Workforce, 5 (1999); Economic Report of the President (February 2000) 
at p. 89; U.S. Senate Committee on Banking, Housing and Urban Affairs, 
Hearing on the Nomination of Alan Greenspan (Jan. 26, 2000) S. Hrg. 
106-526 at p. 21; see also Greenspan, Global Economic Integration: 
Opportunities and Challenges (Aug. 25, 2000), Remarks at a Symposium 
Sponsored by the Federal Reserve Bank of Kansas City at pp. 2-3.
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    In 2004, U.S. staffing firms employed 2.6 million people on any 
given day. But taking into account the high turnover inherent in 
temporary work (average employee tenure was just 11 weeks) staffing 
firms employed almost 12 million employees in total over the course of 
the year. Temporary employees are assigned to work in a wide range of 
job categories from traditional industrial and clerical to accounting, 
engineering, information technology, health care, legal, and other 
professional occupations.
    The distinguishing characteristics of temporary staffing firms are 
that they recruit, screen, train, and hire individuals with specific 
skills from the general labor market and then assign them on an as-
needed basis to their clients, generally for short periods of time, to 
support or supplement their workforces, to provide assistance in 
special work situations such as employee absences, skill shortages, and 
seasonal workloads, or to perform special assignments or projects. 
Staffing firms have traditional employer rights and duties with respect 
to their temporary employees, including payment of wages and payroll 
taxes, providing workers' compensation insurance, hiring and firing, 
handling grievances, and reassigning their employees to other clients.
    Payroll taxes are a large part of staffing firms' total tax 
burden--and their SUTA taxes tend to be higher than most other service 
businesses because of the transitory nature of the temporary workforce. 
So when other employers don't pay their fair share of those costs, it 
drives trust fund levels down and SUTA taxes up and staffing firms get 
hit disproportionately. Fortunately, with your leadership, Congress 
acted swiftly last year in passing the SUTA Dumping Prevention Act 
(Act) and significant progress has been made in addressing the abuses. 
While the Act has made a real difference, much remains to be done to 
ensure the integrity of the unemployment insurance system.
    The Act was not meant to be a panacea. Its primary goals were to 
highlight the problem, establish minimum guidelines to move states in 
the right direction, and to give them the flexibility to develop 
appropriate solutions. Unfortunately, some states have chosen not to go 
beyond the minimum requirements, leaving significant loopholes. For 
example, the Act prohibits intra-company transfers to avoid high 
unemployment claims experience, but does not cover transfers of 
experience between entities that are not commonly-owned or controlled. 
In some states, employers can still shed their unfavorable unemployment 
experience if the transfer wasn't done ``solely or primarily'' for the 
purpose of avoiding UI taxes. We believe the experience of a given 
workforce always should be reflected in the premiums paid, regardless 
of the organizational structure or business model employers choose to 
adopt.
    Even if such loopholes are closed, strong enforcement by the states 
is essential. Some states are doing a better job than others and there 
is much room for improvement. To create an effective multi-state 
enforcement system, there should be better cooperation between the 
states on tactics and information sharing. The Department of Labor can 
help by sharing best detection practices, communicating newly developed 
dumping techniques as they are identified, and helping to coordinate 
state enforcement efforts. The Department also should exercise to the 
fullest extent its statutory authority under the Act to issue 
regulations aimed at SUTA dumping in whatever forms it may take.
    The shared nature of the unemployment compensation system requires 
each partner to play its full role. Congress has taken a big step by 
passing the Act and should continue to provide oversight. The 
Department of Labor also has a vital role as outlined above. But state 
enforcement is the key. States have strong financial incentives to 
vigorously enforce the Act and to work cooperatively with other states 
in doing so. But if the states fail to deal comprehensively and 
effectively with the problem, Congress should consider taking other 
steps as may be necessary and appropriate to protect the integrity of 
the system.

                                 
Statement of David Plawecki, Michigan Department of Labor and Economic 
                       Growth, Detroit, Michigan
    Mr. Chairman and members of the subcommittee, my name is David A. 
Plawecki, and I am the Deputy Director for the Michigan Department of 
Labor & Economic Growth with oversight responsibility for the 
Unemployment Insurance Agency. In this role I served with lead 
responsibility for implementation of State Unemployment Tax Act (SUTA) 
Dumping legislation in Michigan. I also currently serve as the Chair of 
the National Unemployment Insurance Committee for the National 
Association of State Workforce Agencies (NASWA).
    My experience includes thirteen years as Deputy Director of the 
Unemployment Insurance Agency, eight years as Chair of the Michigan 
Senate Labor Committee, and four years as ranking minority member. The 
Labor Committee had legislative jurisdiction over all state 
unemployment insurance law. I was the state legislative sponsor of the 
law that converted Michigan from a flat rate tax to an experience rated 
tax for Unemployment Insurance.
Michigan SUTA Experience
    Using the experience rated tax system to finance Unemployment 
Insurance (U.I.) in Michigan maintains broad support amongst both the 
employer and labor community. Over the past few years, however, there 
have been concerns that tax revenues were under expectations. We now 
believe that tax avoidance schemes that have been nationally labeled as 
``SUTA Dumping'' were the likely reason. Because of this we laud the 
national action taken by Congress to require all states to examine 
their laws for tax avoidance loopholes, enact SUTA Dumping prevention 
laws, protect Unemployment Insurance Trust Funds and thus maintain a 
level playing field among all states.
    In Michigan we projected between 62 million and 95 million dollars 
in tax losses to the U.I. Trust Fund in 2004 due to SUTA Dumping. In 
the first six months of active investigation for potential SUTA 
Dumping, the state Unemployment Insurance Agency had 63 cases involving 
approximately 630 employers under investigation with a potential tax 
loss of approximately 25 million dollars. Roughly 60% of those 
employers are Professional Employer Organizations (PEOs).
Federal Legislative Standards Recommendations
    In Michigan, we have learned much about SUTA Dumping practices and 
the policies that would be most effective in addressing this practice 
since enactment of the federal legislation. Generally speaking, the 
changes required of the states under federal law and USDOL guidance 
have effectively covered most of the areas discovered. There appear to 
be, however, three areas which we would recommend all states be 
required to address in order to fully close SUTA loopholes.

    1.  Increased penalties on tax advisors. We would recommend tax 
advisors be subject to a penalty of at least 50% of the improper tax 
avoidance. Most advisors collect a significant fee for their advice. 
Employers often cite an expert who told them the tax practice was OK, 
even though the questionable tax avoidance practice should have raised 
a red flag among tax advisors and employers. We know that improper 
accounting advice impacts companies in many areas. It is time to get 
tough with all involved in tax avoidance schemes. In Michigan, we 
passed a strong law and were able to provide for penalizing tax 
advisors.
    2.  No escaped benefit charges through switchbacks between 
reimbursable and contributing for an employer. Many state laws 
inadvertently provide a mechanism for reimbursable employers to time 
decisions on being reimbursable or contributing, and so they escape 
responsibility for significant amounts of their benefit charges. Our 
new SUTA Dumping legislation in Michigan corrected a loophole in our 
statute that allowed for this.
    3.  Require PEOs to report and pay taxes based on each individual 
client's experience. Individual client reporting will eliminate what 
appears to be a massive administrative burden associated with 
determining whether PEOs are avoiding Unemployment Insurance taxes. In 
contrast, it requires little additional work on the part of PEOs and 
offers them some advantages. It will also close an inadvertent loophole 
that allows PEOs in some states to sell employers a one-time tax 
advantage using Unemployment Insurance trust funds to finance the 
advantage. In many states, an employer with a high tax rate, for 
example 8%, could simply transfer its employees to a PEO with a tax 
rate of, for example 2%, and instantly save 6% on unemployment taxes 
(which is typically split in some fashion between the two).

    A significant issue that has arisen with states involves PEOs 
attempting to manipulate the terms ``sole or primary reason.'' In 
Michigan, PEOs are defending UI tax manipulation as a consequence of 
manipulating payroll to avoid workers compensation premiums and the 
state business tax. Individual client reporting would resolve this.
Conclusion
    We praise the leadership offered by the Chairman and this 
Subcommittee in requiring states to take action on SUTA Dumping. Since 
the Unemployment Insurance system is a true insurance system there is 
no way for fair operation unless all employers are required to pay the 
premiums (taxes) their experience fairly dictates. With the increasing 
number of times workers will be required to switch jobs under today's 
economy, the safety net of Unemployment Insurance benefits is more 
important than ever. I hope the above information and suggestions are 
helpful, and I would be pleased to answer any questions you may have.

                                 
      Statement of National Association of Professional Employer 
                   Organizations, Arlington, Virginia
    The National Association of Professional Employer Organizations 
(``NAPEO'') submits this statement for the record of the Subcommittee's 
June 14, 2005 hearing on ``Implementation of the SUTA Dumping 
Prevention Act of 2004.'' NAPEO supported the enactment of the SUTA 
Dumping Prevention Act of 2004 (Pub. L. No. 108-295) (the ``2004 Act'') 
and submitted supporting statements to this Subcommittee during the 
consideration of the legislation. NAPEO has long supported broad-based 
efforts to eliminate any practice that undermines the integrity of the 
unemployment compensation system. NAPEO strongly believes that SUTA 
rates should be experience based and equally applied to all. NAPEO has 
been actively involved with many state unemployment insurance agencies 
and state legislatures as they developed and passed legislation in 
compliance with the 2004 Act. We compliment the Subcommittee for its 
leadership in the development of this important federal legislation. We 
believe that states have successfully passed conforming legislation to 
prevent ``SUTA dumping'' while carefully preserving legitimate 
corporate restructurings and not penalizing businesses choosing to 
utilize the services of professional employer organizations (``PEOs'').
    NAPEO believes that the 2004 Act appropriately prevents employers 
from engaging in certain practices that are intended to manipulate the 
unemployment compensation experience rating system. We are concerned, 
however, that testimony presented to the Subcommittee inappropriately 
labeled the use of a PEO as a ``loophole'' in the 2004 Act and 
erroneously suggested that state unemployment funds are diminished when 
clients join a PEO. To the contrary, PEOs provide significant benefits 
for the state unemployment systems. In the short-run, states often 
receive a windfall when a client joins a PEO. Over the long-run, PEOs 
have a significant economic incentive to manage unemployment risk, 
which benefits the states overall.
    In most states,\1\ PEOs pay unemployment contributions based on 
their own experience rating. The state often experiences a windfall 
when a client company joins the PEO because the PEO pays unemployment 
tax on the first portion of payroll of each employee regardless of how 
much of the tax has already been paid by the client company. 
Essentially, when a company enters into an agreement with a PEO, the 
``clock starts over'' on the employees and all previous unemployment 
taxes paid by the client company go into the general balance of the 
unemployment compensation trust fund. In addition, upon entering an 
agreement with the PEO, the liability for the new client company 
becomes that of the PEO (operating against its rates and reserves) and 
the funds in the client's account are forfeited to the state.
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    \1\ Thirty-six states recognize a PEO as the employer for 
unemployment insurance purposes and assign the PEO its own experience 
rating based on the experience of the PEO.
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    The state also benefits because PEOs have a significant economic 
incentive to effectively manage unemployment claims. PEOs do not 
benefit from a situation in which contributions into the state's 
unemployment fund are not commensurate with the claims being made, 
which would only result in law-abiding taxpayers being required to 
contribute disproportionately to sustain the fund. States have 
successfully implemented provisions of the 2004 Act to effectively 
eradicate practices intended to artificially lower future rates. More 
specifically, PEOs have no incentive to hold out the prospect of a 
lower SUTA rate to potential clients that have negative unemployment 
experience. Engaging a client with negative unemployment experience 
potentially increases the PEO's SUTA rate and its future rate given 
that the PEO's rate is based upon the actual experience of its worksite 
employees at all of its clients' worksites.
    PEOs can and do help clients manage unemployment risk, but this 
occurs by implementing professional human resource programs that 
achieve higher employee retention and, therefore, fewer unemployment 
claims. These programs include effective employee screening and hiring 
processes, employee feedback and appraisal systems, and proper 
separation procedures. If there is an unemployment claim, a PEO 
provides value by reducing the length of unemployment by placing 
employees with other clients and offering career counseling and job 
placement assistance to help workers find new positions. PEOs also are 
better able to scrutinize claims and participate in the administrative 
process to avoid the granting of inappropriate benefits.
    PEOs offer operational efficiencies that state and federal 
governments may not find possible to achieve when jurisdictions must 
collect unemployment taxes from a myriad of small businesses. Because 
the PEO's compensation is tied to payroll, PEOs are meticulous about 
assuring that payroll for all worksite employees is accurate, complete 
and properly reported. Additionally, many states require employers with 
a minimum number of employees to file unemployment taxes 
electronically. The aggregation of many small and medium size business 
clients under a single PEO arrangement that files a single report 
brings efficiencies and administrative savings to the system as well.
    In sum, NAPEO continues to support the implementation of the 2004 
Act standards, but we strongly oppose any efforts to penalize clients 
that utilize a PEO. PEOs want a level playing field like all other 
employers, which means that the rate of tax should be commensurate with 
the unemployment risk. That policy protects the state fund and it 
appropriately incents PEOs and all other employers to work to manage 
unemployment risk.

                                  
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