[Federal Register Volume 61, Number 145 (Friday, July 26, 1996)]
[Notices]
[Pages 39156-39159]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-19052]


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DEPARTMENT OF LABOR

Federal-State Unemployment Compensation Program: Unemployment 
Insurance Program Letters Interpreting Federal Unemployment Insurance 
Law

    The Employment and Training Administration interprets Federal law 
requirements pertaining to unemployment compensation as part of its 
role in the administration of the Federal-State unemployment 
compensation program. These interpretations are issued in Unemployment 
Insurance Program Letters (UIPLs) to the State Employment Security 
Agencies (SESAs). The UIPL described below is published in the Federal 
Register in order to inform the public.

UIPL 29-83, Change 3

    When one employer is acquired by another employer, a transfer of 
the first

[[Page 39157]]

employer's experience with unemployment may take place for purposes of 
determining UI tax rates. Although States are not required to make any 
provision for transfers of experience, 52 States do so.
    Departmental guidance concerning transfers of experience has not 
been updated recently. What guidance is available is incomplete, and 
due to changes in Federal law, out of date. This UIPL supersedes 
previous guidance concerning transfers of experience. Even though there 
are some minor changes in the Department's position, we are not aware 
of any State which will be required to change its law as a result of 
this interpretation of Federal requirements.

    Dated: July 22, 1996.
Timothy M. Barnicle,
Assistant Secretary of Labor.

DIRECTIVE: Unemployment Insurance Program Letter No. 29-83 Change 3
TO: All State Employment Security Agencies
FROM: Mary Ann Wyrsch, Director, Unemployment Insurance Service
SUBJECT: Transfers of Experience

    1. Purpose. To advise the States of the Department of Labor's 
interpretation of Federal law requirements relating to transfers of 
experience.
    2. References. Section 3303(a) of the Federal Unemployment Tax 
Act (FUTA); UIPL 29-83, dated June 23, 1983; UIPL 29-83, Change 1, 
dated September 24, 1991; UIPL 15-87, dated March 30, 1987; and 
Sections 3770 through 3776, Part V, of the Employment Security 
Manual (ESM).
    3. Background. When one employer (called the predecessor) is 
acquired by another employer (called the successor), a transfer of 
the predecessor's experience may occur. Following the transfer, 
rates are assigned based on the combined experience of the 
predecessor and successor. Although States are not required to make 
any provision for transferring experience, 52 States do so. Some 
States also provide for interstate transfers of experience.
    The ESM contains the only major Departmental discussion of 
transfers of experience. However, it is both incomplete and, due to 
amendments to Federal law relating to new employer rates and the 
standard rate, out of date. As a result, the Department regularly 
receives inquiries concerning its position on transfers of 
experience. Also, a disproportionately large number of conformity 
issues relate to transfers of experience. To address these matters 
and assist the States in assuring that Federal requirements are met, 
this UIPL is being issued.
    This UIPL supersedes the ESM material on transfers of 
experience. The Department has identified only two instances where a 
position taken in the ESM, other issuances, or correspondence is 
changed by the UIPL. The first relates to the use of managerial 
experience in certain transfers and is discussed in item 5.C. The 
second, which is more in the nature of a clarification, relates to 
the use of computation dates and is discussed in footnote 4 and the 
accompanying text. The Department knows of no State which will be 
required to amend its law due to these changes.
    4. Basis for Transfers of Experience. Section 3303(a)(1), FUTA, 
requires, as a condition of employers receiving the additional 
credit against the Federal unemployment tax, that--

no reduced rate of contributions to a pooled fund or to a partially 
pooled account is permitted to a person (or group of persons) having 
individuals in his (or their) employ except on the basis of his (or 
their) experience with respect to unemployment or other factors 
bearing a direct relation to unemployment risk during not less than 
the 3 consecutive years immediately preceding the computation date.

    Although the term ``experience'' is often used (as it is here) 
as convenient shorthand, no State actually measures ``experience.'' 
Instead what is actually measured are ``factors bearing a direct 
relation to unemployment risk.'' Typically, the factor used is 
benefits paid.
    This section prescribes the conditions under which a reduced 
rate of contributions to a pooled fund may be permitted by State law 
``to a person (or group of persons).''\1\ UIPL 29-83 states that the 
authority for group accounts is the basis for allowing transfers of 
experience. There is, however, an additional, underlying reason for 
permitting transfers of experience: when a predecessor is acquired, 
the experience follows the work force, organization, trade and other 
assets to the successor.
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    \1\ Section 7701(a)(1) of the Internal Revenue Code of 1986 
defines ``person'' to ``mean and include an individual, a trust, 
estate, trust or estate, partnership, association or corporation.''
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    Transfers of experience are not required by FUTA. Provided the 
transfers are consistent with FUTA's experience rating requirements, 
determining when and if a transfer takes place is a matter that has 
been left to the States. As a result, a State could, for example, 
require transfers when the ownership of the predecessor is 
substantially the same as that of the successor, but otherwise 
require the successor to petition the State for a transfer. As 
another example, a State could mandate transfers in most cases, 
while not requiring transfers when predecessors in bankruptcy court 
are acquired.
    A single legal entity, which may or may not have been a subject 
\2\ employer prior to the transfer, may obtain the experience of a 
predecessor in two cases:
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    \2\ A ``subject'' employer is one that is required to pay taxes/
file reports under State law.
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     In a total transfer, the successor acquires the 
predecessor's organization, trade, or business and substantially all 
of the predecessor's assets to such an extent that the predecessor 
is unable to continue in business.
     In a partial transfer, the experience of the 
predecessor, in proportion to percentage of the payroll or employees 
assignable to the transferred portion, is transferred to the 
successor when it acquires part of the predecessor's business. For a 
partial transfer of experience to take place, there must be a 
clearly segregable and identifiable part of the predecessor's 
enterprise transferred, otherwise there will be no relation between 
the part of the business transferred and the experience attributable 
to the part transferred. What part of the experience of the 
predecessor is attributable to the part of the business transferred 
is a question of fact to be determined on a case by case basis.
    5. Application of Experience Rating Requirements to Transfers. 
If a State chooses to transfer experience, it must do so in 
accordance with all the requirements of Section 3303(a)(1), FUTA. 
Following is a discussion of the requirements which have been 
identified as affecting transfers:
    a. Use of Experience. Section 3303(a)(1), FUTA, requires that 
the assignment of reduced rates be ``on the basis of his (or their) 
[i.e., the employer's] experience with respect to unemployment or 
other factors bearing a direct relation to unemployment risk * * 
*.'' This means that--
     Only actual experience may be used. This is why partial 
transfers must be allocated proportionally and are limited to 
instances where there is a segregable and identifiable part of the 
predecessor acquired by the successor. Since States must use actual 
experience, they may not make assumptions about what an employer's 
experience might have been when, for example, there is a lack of 
data. (See UIPL 15-87 which transmitted the Secretary of Labor's 
decision in the 1986 State of Washington Conformity Proceedings on 
the use of actual experience.)
     Once experience has been transferred, it becomes the 
successor's experience, and must be used in determining the 
successor's rates for any rate year following the year in which the 
transfer occurs. (An exception exists when the successor, following 
the transfer, still does not have 3 years of experience. See item 
5.c below.) Since the transferred experience now belongs to the 
successor, it may no longer be used for computing rates for the 
predecessor for subsequent rate years.
     Any benefits paid which are based on wages paid by the 
predecessor prior to the transfer must be charged to the successor. 
Just as the successor acquires the organization, trade, business, 
assets and experience of a predecessor as of the date of transfer, 
so must it also acquire the benefit charges for current or future 
claims related to the predecessor (or segregable part of the 
predecessor) prior to the transfer.
    b. The Uniform Method Requirement. Under the ``uniform method'' 
requirement, the experience of all employers in a State must be 
measured by the same factor or combination of factors throughout the 
same period of time. (See UIPL 29-83 and 29-83, Change 1.) 
Therefore, no exceptions may be made to the State's method of 
measuring experience simply because the experience was transferred. 
Except as provided for partial transfers (item 4.), the State may 
not allow the transfer of only a portion of experience. For example, 
a reserve ration State must transfer the entire experience of the 
employer, not merely the three years

[[Page 39158]]

preceding the computation date. As another example, a State using 
benefits as the measure of experience may not, in the case of a 
total successorship of the organization, trade, business and assets 
of the predecessor, transfer only a portion of benefit charges.
    c. The 3-year Requirement. Section 3303(a)(1), FUTA, requires 
that, if an employer has at least three years of experience, then 
experience must be measured ``during not less than the 3 consecutive 
years immediately preceding the computation date.'' \3\ (Emphasis 
added.) As a result, any successor with 3 or more years of 
experience must be assigned a rate based on experience for rate 
years following the year the transfer took place. The years of 
experience must be consecutive; summing concurrent experience 
periods does not increase the number of consecutive years of 
experience.
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    \3\ The computation date is the end of the experience period 
being measured. See UIPL 29-83 and Section 3303(c)(7), FUTA.
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    If, immediately preceding the acquisition of the predecessor, 
the successor already has more years of experience than any 
predecessor, then the State will need to use only the period of time 
the successor has had experience to determine if the 3-year 
requirement is met. If the successor has less experience than the 
predecessor, then the State will need to determine whether the 3-
year requirement is met by summing: (1) The years of experience 
transferred from the predecessor with the longest experience period 
and (2) the years of experience earned by the successor since the 
date of the transfer.
    For example, as of the date of transfer, Predecessor A has 2 
years of experience, Predecessor B has 1.5 years and the successor 
has 1 year. Since Predecessor A has the longest experience period, 
then Predecessor A's years of experience determine whether the 3-
year requirement is met. As of the computation date, which occurs 
six months later, the successor now has 2.5 years of experience: 2 
years of transferred experience plus one-half year of experience 
following the date of the transfer. The successor may continue to 
receive a new employer rate for the following rate year. However, as 
of the computation date one year later, the successor will have 3.5 
years of experience and any reduced rate must be assigned based on 
the combined experience.
    The 3-year requirement also applies to partial transfers of 
experience. In determining whether a successor will be assigned a 
reduced rate, only so much of the experience of the predecessor as 
is attributable to the transferred business and the experience of 
the successor (if any) may be used in determining if the 3-year 
requirement is met.
    The above discussion assumes that a State requires 3 years of 
experience before assigning a reduced rate based on experience. 
Under the last paragraph of Section 3303(a), FUTA, a State may use 
as little as one year of experience in assigning reduced rates to 
newly subject employers. Accordingly, States assigning rates using 
less than 3 years of experience should use their own minimum 
experience periods in determining whether a rate based on experience 
is to be assigned.
    The Department has reevaluated a provision found in Section 
3776, Part V ESM. That section in part provided that, for certain 
partial transfers, the State may provide that the successor will be 
immediately eligible for a reduced rate when part of the over-all 
managerial experience of the predecessor is attributed to the 
successor. The Department finds no relationship between the 
predecessor's transferred experience and over-all managerial 
experience. As discussed in item 5.a, the ``experience'' for the 3-
year period would not be based on actual experience.
    6. Rate Assignments During the Year in which the Transfer 
Occurs. Because FUTA mandates a rate computation based on experience 
only once a year, it is not necessary for a State to recalculate 
either the predecessor's or successor's rate for the remainder of 
the rate year during which the transfer occurs. If the State chooses 
to assign a different rate to the successor for the remainder of the 
rate year, then the reassignment must be done in accordance with 
Section 3303(a)(1), FUTA. The following methods have been determined 
as acceptable for determining the rate for the period beginning the 
first day of the quarter in which the transfer occurs and ending 
with the next effective date for computation of rates of 
contribution:
    a. If the successor was not a subject employer prior to the 
transfer, it may be assigned the predecessor's rate. If more than 
one predecessor is acquired, only the highest rate assigned to any 
of the predecessors may be assigned to the successor. Assigning a 
lower rate would reduce the employer's rate without recognizing the 
experience of the higher-rated predecessor(s). (However, averaging 
rates is permissible when the size of each predecessor is taken into 
account.) Since assigning the highest rate results in an increased 
rate (even though it may be less than the standard rate), there is 
no conflict with FUTA.
    b. If the successor was not a subject employer prior to the 
transfer, a new employer rate of not less than 1 percent may be 
assigned under the authority provided by the last paragraph of 
Section 3303(a), FUTA.
    c. A newly computed rate may be assigned to the successor based 
on the combined experience of the predecessor(s) and the successor 
using the computation date in effect for all other employers in the 
current rate year.\4\ (In the case of a partial transfer, it is not 
necessary to recompute the predecessor's rate for the remainder of 
the rate year).
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    \4\ The Department previously appeared to allow the use of a 
computation date ``occurring within 27 weeks prior to the effective 
date of the newly computed rate.'' (ESM, Part V, Sections 3770.B and 
3772.A.5.) This suggests that a successor employer could have its 
rate computed using a computation date which is different from that 
used by all other employers. However, as this is inconsistent with 
the ``uniform method'' requirement, discussed in item 5.5. above, 
this is not an acceptable option.
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    d. The standard rate under the State's law may be assigned.\5\
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    \5\ Section 3303(a)(1), FUTA, applies only to reduced rates. 
``Reduced rate'' is defined as a rate ``lower than the standard 
rate.'' (Section 3303(c)(8), FUTA.) Some State laws use ``standard 
rate'' to mean the rate for new employers. This is not the standard 
rate for purposes of Section 3303(a)(1), FUTA. For identifying the 
standard rate in State law for experience rating purposes, refer to 
UIPL 15-84. Currently, every State has a standard rate of 5.4% or 
higher.
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    When the predecessor and successor become a single legal entity, 
a State may not assign one rate for transferred experience and 
another for all other experience. This is because Section 
3303(a)(1), FUTA, provides that ``no reduced rates or contributions 
* * * is permitted to a person * * *'' (Emphasis added.) Since, 
after the transfer, there is only a single person, that person must 
be assigned a single rate based on all of its experience.
    7. Interstate Transfers. Since nothing in Federal law prohibits 
interstate transfers of experience, States began providing for these 
transfers in the late of 1940's. Interstate transfers differ from 
intrastate transfers in that a successor does not acquire a 
predecessor. Instead, the same employer transfers operations from 
one State (the prior State) to another (the new State).\6\ As in the 
case of intrastate transfers, all requirements of Section 3303(a) 
must be met for the transfer of experience to take place. Those of 
special importance to interstate transfers are:
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    \6\ This discussion of interstate transfers is limited to the 
transfer of operations since, when an out-of-State employer acquires 
an already subject employer in a State, then the same situation 
exists as when a non-subject successor acquires a predecessor.
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    a. Use of Experience. Only experience attributable to the 
transferred operation may be transferred. Like an intrastate 
transfer of experience, the experience follows the work force, 
organization, trade and assets of the predecessor. Further, when 
benefits are paid and charged (or noncharged as the case may be) in 
the prior State based on wages paid prior to the transfer, these 
charges (or noncharges) must also be transferred to the new State. 
Otherwise, the employer would escape experience. (In addition, the 
uniform method requirement would not be met since charged to some 
employers, but not to others. Also, the 3-year requirement would not 
be met since not all experience in the 3 years preceding the 
computation date would be used.)
    b. The Uniform Method Requirement. The transferred experience 
must be converted into the factor used to measure experience in the 
new State, otherwise different factors will be used over the same 
period of time. For example, to assure uniformity of charging 
benefits, an amount noncharged in the prior State may be noncharged 
in the new State only if the new State allows for noncharging in the 
identical circumstances. As another example, a reserve ratio State 
(which uses the entire history of an employer) must reconstruct the 
entire history of an employer transferring experience from a benefit 
ratio State (which typically uses only 3 years of experience.)
    The complexity and variety of experience rating provisions makes 
it exceedingly difficult for the new State to convert the employer's 
experience in the prior State. A simpler alternative is for the new 
State to

[[Page 39159]]

assign a special new employer rate (of not less than 1 percent) in 
accordance with the last paragraph of Section 3303(a), FUTA, to 
employers transferring operations.\7\
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    \7\ From a solvency perspective this is also more prudent. For 
example, an employer transferring a large reserve balance for 
experience rating purposes is not transferring the contributions 
which created the balance. If the transferring employer eventually 
laid off large numbers of workers, the new State's fund as a whole 
will subsidize the transferring employer. At the same time, the 
transferring employer may not see any significant change in its rate 
of contribution to make up for this subsidization. Since a new 
employer rate is temporary, the risk to the fund would not be as 
great.
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    8. Action. States are to review existing State law and rules 
involving transfers of experience to ensure that the Federal law 
requirements as set forth in this program letter are met.
    9. Inquiries. Please direct inquiries to the appropriate 
Regional Office.
[FR Doc. 96-19052 Filed 7-25-96; 8:45 am]
BILLING CODE 4510-30-M