- IMPLEMENTATION OF THE SUTA DUMPING PREVENTION ACT OF 2004

[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

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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).

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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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.