[Federal Register Volume 69, Number 219 (Monday, November 15, 2004)]
[Notices]
[Pages 65654-65656]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-3162]


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DEPARTMENT OF LABOR

Employment and Training Administration


Workforce Security Programs: Unemployment Insurance Program 
Letter Interpreting Federal Law

    The Employment and Training Administration interprets Federal law 
requirements pertaining to unemployment compensation. These 
interpretations are issued in Unemployment Insurance Program Letters 
(UIPLs) to the State Workforce Agencies. UIPL 30-04, Change 1 is 
published in the Federal Register in order to inform the public.
    This UIPL provides additional guidance to the states regarding 
enacting legislation which conforms to the ``SUTA Dumping Prevention 
Act of 2004,'' which was signed by the President on August 9, 2004.

    Dated: November 8, 2004.
Emily Stover DeRocco,
Assistant Secretary of Labor.

Employment and Training Administration, Advisory System, U.S. 
Department of Labor, Washington, DC 20210

Advisory: Unemployment Insurance Program Letter No. 30-04 Change 1
To: State Workforce Agencies.
From: Cheryl Atkinson, Administrator, Office of Workforce Security.
Subject: SUTA Dumping--Amendments to Federal Law Affecting the 
Federal-State Unemployment Compensation Program--Additional 
Guidance.

    1. Purpose. To provide additional guidance to states concerning 
the amendments to Federal law designed to prohibit ``SUTA Dumping.''
    2. References. Public Law (Pub. L.) 108-295, the ``SUTA Dumping 
Prevention Act of 2004,'' signed by the President on August 9, 2004; 
the Social Security Act (SSA); the Internal Revenue Code (IRC), 
including the Federal Unemployment Tax Act (FUTA); and Unemployment 
Insurance Program Letters (UIPLs) 30-04, 14-84, and 29-83, Change 3.
    3. Background. UIPL 30-04 informed states of the amendments to 
Federal unemployment compensation (UC) law made by Pub. L. 108-295, 
the ``SUTA Dumping Prevention Act of 2004.'' Pub. L. 108-295 amended 
the SSA by adding section 303(k) to establish a nationwide minimum 
standard for curbing SUTA dumping. States will need to amend their 
UC laws to conform with the new legislation.
    Since the issuance of UIPL 30-04, the Department of Labor has 
received requests for clarification and other questions on the 
Federal SUTA dumping requirements. This UIPL is issued to respond to 
these requests and questions. As was UIPL 30-04, it is a question 
and answer (Q&A) format. States are especially directed to Q&As 1, 
2, 14, and 15, which include additions and modifications to the 
draft legislative language provided with UIPL 30-04.

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    4. Action. State administrators should distribute this advisory 
to appropriate staff. States must adhere to the requirements of 
Federal law contained in this advisory.
    5. Inquiries. Questions should be addressed to your Regional 
Office.
    6. Attachment.

Questions and Answers (Q&As)

Mandatory Transfers--Section 303(k)(1)(A), SSA

    1-1. Question: In anticipation of a major layoff, Employer A 
transfers the portion of its business and workforce which it will be 
laying off to a small company, Employer B. Since there is 
substantially common ownership, experience is also transferred. 
Employer B then lays off all of the transferred workforce and is 
charged for the resulting UC payments. Employer B then either ceases 
operating or operates with a greatly reduced workforce, thereby 
minimizing its UC costs. May the transfer of experience from 
Employer A to Employer B be voided in this case? If not, what can be 
done to avoid this type of SUTA dumping?
    Answer: Since there is substantially common ownership, 
experience must be transferred from Employer A to Employer B under 
the mandatory transfer provisions.
    Although Federal law does not require states to prevent this 
type of SUTA dumping, states may take action. (States which charge 
benefits to the separating employer may be particularly vulnerable 
to this type of SUTA dumping.) If the state determines that a 
substantial purpose of the transfer of trade or business was to 
obtain a lower rate, then both Employer A and Employer B's accounts 
could be treated as a single account for experience rating purposes. 
This will prevent Employer A from escaping its poor experience. It 
is consistent with Federal law both because Section 303(k)(2)(B), 
SSA, permits states to define ``employer'' and because Section 
3303(a)(1), FUTA, has long permitted the establishment of joint 
accounts. To this end, the draft legislative language contained in 
Attachment II to UIPL 30-04 is revised as follows:
     By inserting ``(1)'' after ``(a)'' in the provision 
addressing mandatory transfers, and
     By inserting the following new language:
    (2) If, following a transfer of experience under paragraph (1), 
the Commissioner determines that a substantial purpose of the 
transfer of trade or business was to obtain a reduced liability for 
contributions, then the experience rating accounts of the employers 
involved shall be combined into a single account and a single rate 
assigned to such account.
    The Department recommends that states consider addressing this 
matter.
    Alternatively, nothing prohibits a state from revisiting its 
determination that Employer B was a separate legal entity for UC 
purposes. If, for example, the state determines that Employer B has 
no business existence separate and apart from Employer A, and, 
therefore, under its law should not have been established as a 
separate employer for UC purposes, then its establishment as a 
separate employer may be voided and its experience will revert to 
Employer A. (Note this approach would not cover transfers to a long-
established business that has a separate business identity.)
    1-2. Question: Although the answer to Q&A 5 of UIPL 30-04 
provides that an ``employer's workforce is necessarily a part of its 
business,'' the draft legislative language attached to that UIPL 
does not specifically address transferring workforce. Instead, it 
simply refers to transfers of trade or business. May the draft 
legislative language be modified to specifically cite transfers of 
workforce or employees?
    Answer: Yes. The draft legislative language is just that--draft 
language. It may, therefore, be modified to explicitly provide that 
transfers of trade or business include situations where employees 
are transferred. The following language is added at the end of 
subsection (a) of the draft legislative language as optional 
language that the state may consider using:
    The transfer of some or all of an employer's workforce to 
another employer shall be considered a transfer of trade or business 
when, as the result of such transfer, the transferring employer no 
longer performs trade or business with respect to the transferred 
workforce, and such trade or business is performed by the employer 
to whom the workforce is transferred.
    Care should be taken to assure the state law does not require 
transfers of experience where an employee is ``moved'' from one 
employer to another, without any transfer of trade or business. See 
Q&A 1-7.
    1-3. Question: The answer to Q&A 6 in UIPL 30-04 indicates that 
the Department is not defining a ``bright line'' test of what 
constitutes ``substantially common ownership, management, or 
control.'' Does this mean state law may contain a test of 
``substantially common'' that requires more than 90 percent 
commonality? Or more than 50 percent commonality?
    Answer: No, a 90 percent test would be a ``substantial 
majority'' test, while a 50 percent test would be a simple 
``majority'' test. Congress could have specified either of these 
tests, but it instead chose a test of ``substantial'' commonality. 
Therefore, ``substantially'' could include less than 50% common 
ownership, management, or control. ``Substantial'' common 
management, for example, might even occur where Company A and 
Company B share only one manager, but that one manager exercises 
pervasive control as the chief executive officer of both companies.
    1-4. Question: The answer to Q&A 8 in UIPL 30-04 ``strongly 
recommends that states reassign rates immediately upon completion of 
the transfer'' of experience to avoid a SUTA dump between the 
completion of a transfer and assignment of a new rate. If a state 
currently lacks the capability to assign two different rates to the 
same employer for the same year, may it retroactively change the 
employers' rates to the beginning of the rate year to reflect the 
transferred experience?
    Answer: No. Section 3303(a)(1), FUTA, requires that ``reduced 
rates'' be assigned to an employer based on ``his'' experience 
during ``not less than the 3 consecutive years immediately preceding 
the computation date.'' If a rate based on transferred experience is 
assigned to an employer for a period before it becomes ``his'' 
experience, the employer cannot be said to be receiving a rate based 
on ``his'' experience for that period.
    States have other options to address this concern. States may 
establish a different employer account number for the employer(s) 
and assign the recalculated rate to that new account number.
    States may also retroactively impose the state's standard rate 
of contributions or the state's highest rate of contributions since 
these rates are not ``reduced rates'' subject to FUTA. (See UIPL 14-
84 for guidance in determining the state's standard rate. Caution 
should be taken in using standard rates since in some states the 
standard rate may be lower than the employer's experience rate, 
either prior to or after any transfer.) Although this approach is 
consistent with FUTA, states should consider whether retroactively 
imposing higher rates on employers is equitable since employers will 
not have budgeted for retroactive costs and because the rates are 
not based on experience.
    1-5. Question: Recalculating an employer's reduced rate in the 
middle of the rate year may be administratively cumbersome. May a 
state simply assign the employer the higher of the two rates for the 
remainder of the rate year? For example, assume Employer A has a 
rate of 5.0 percent and is purchased by Employer B which has a rate 
of 4.0 percent. May the state assign a rate of 5.0 percent to 
Employer B for the remainder of the rate year? (This method is 
authorized by UIPL 29-83, Change 3, which discusses transfers of 
experience, but only when Employer B is not an existing employer.)
    Answer: Yes, the state may assign the higher of the two rates. 
FUTA's experience rating requirements apply to ``reduced rates.'' 
This approach always serves to increase the employer's rate. As 
noted in UIPL 29-83, Change 3, ``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.'' Although UIPL 29-
83, Change 3, addressed only cases where the successor was not an 
existing employer, this principle also applies to cases where the 
successor is an employer.
    States should note that this approach may raise fairness issues. 
For example, assuming substantial commonality of ownership, 
management, or control at the time of the transfer or trade or 
business, an employer with a workforce of 10 individuals and an 
experience rate of 5.4 percent could have its trade/business and 
experience transferred to an employer with a workforce of 1,000 
individuals and an experience rate of 2.0 percent. The result of 
assigning a higher rate would be a significantly higher rate on a 
significantly larger workforce.
    1-6. Question: The answer to Q&A 8 in UIPL 30-04 provides for 
the option of ``immediately'' recalculating an employer's rate 
``after the completion of the transfer of trade or business.'' This 
could be problematic since this rate change could occur in the 
middle of a quarter. May the recalculated rate take effect with the 
start of the quarter following the transfer?
    Answer: Yes. Since nothing in the SUTA dumping amendments 
requires rates be

[[Page 65656]]

recalculated prior to the next time the state calculates rates for 
all employers, states have latitude in this matter.
    1-7. Question: The answer to Q&A 9 in UIPL 30-04, says that 
where ``[a]n employee of one legal entity is moved to another legal 
entity,'' no transfer of experience is required. (Emphasis added.) 
However, the answer to Q&A 13 in that UIPL says the SUTA Dumping 
amendment applies to ``all transfers, large and small.'' What is the 
distinction between the two?
    Answer: Q&A 13 applies to cases where there is a transfer of 
trade or business. (Q&As 5 and 14 in UIPL 30-04 and 1-2 in this UIPL 
also apply to situations where trade or business is transferred.)
    The answer to Q&A 9 applies to cases where an employee is 
``moved'' from one legal entity to another, but where there is no 
transfer of trade or business. For example, an owner of two separate 
legal entities ``moves'' an individual from head of widget making 
for Entity A to head of graphic design for Entity B, but does not 
transfer any of the widget-making trade/business to Entity B. In 
this case, no trade or business is transferred and the ``move'' of 
the individual is in the nature of a reassignment.
    In cases where no trade or business has been transferred, 
experience may not be transferred. Therefore, when an employee's 
``move'' is merely in the nature of a reassignment, the state may 
not transfer experience.
    1-8. Question: State law allows employers to voluntarily combine 
their experience rating histories into joint accounts under certain 
conditions. Does the SUTA dumping legislation affect this?
    Answer: No. Joint accounts may continue to be established in 
accordance with state law.
    The SSA's mandatory transfer provisions affect joint accounts in 
the same way they affect individual employer accounts. That is, if 
an employer participating in a joint account transfers trade or 
business to another employer and a transfer of experience is 
required under provisions of state law implementing the SSA's 
mandatory transfer provisions, then any subsequent calculation of 
the experience rate of the joint account must take into account this 
transfer.
    1-9. Question: Do the amendments mandating a transfer of 
experience affect what constitute taxable wages?
    Answer: The amendments address the transfer of experience and of 
rates based on that experience. They do not affect determinations of 
what constitute taxable wages under the state's law. As a result, 
after trade and business is transferred, the state may either give 
effect to taxable wages paid by the predecessor in determining 
whether the taxable wage base is met, or ``restart'' the taxable 
wage base for the individual at zero.
    1-10. Question: Do the mandatory transfer provisions for SUTA 
Dumping apply when an employer is ``reorganized?''
    Answer: The keys under section 303(k)(1)(A), SSA, are whether 
there is a transfer of trade or business and whether there is 
substantially common ownership, management, or control. Thus, the 
answer depends on whether the reorganization involves a transfer of 
trade or business between entities under substantially common 
ownership, management or control.
    As used in bankruptcy law, a reorganization is a ``financial 
restructuring of a corporation, esp. in the repayment of debts, 
under a plan created by a trustee and approved by a court.'' 
(Black's Law Dictionary (8th edition, 2004).) Thus, if a single 
employer simply ``financially restructures'' itself, without 
transferring trade or business, then the mandatory transfer 
provisions do not apply.
    In other cases, reorganizations are mergers of corporations 
which involve a transfer of trade or business. For example, a 
reorganization may be a ``restructuring of a corporation, as by a 
merger or recapitalization, in order to improve its tax treatment 
under the Internal Revenue Code.'' (Black's Law Dictionary (8th 
edition, 2004).) When there is a merger, the mandatory transfer 
provisions will apply if there is substantially common ownership, 
management, or control at the time of the transfer of trade or 
business.
    Note the mandatory transfer provision of Section 303(k)(1)(A), 
SSA, does not speak in terms of ``acquisitions.'' In many 
reorganizations, there may be mergers involving stock swaps or 
stock-for-asset exchanges, and it may be argued that no 
``acquisition'' has occurred, even though workforce has been moved 
to another legal entity within a corporate umbrella. For purposes of 
the mandatory SUTA dumping amendments, whether there has been an 
``acquisition'' is immaterial. What is significant is whether trade 
or business was transferred when, at the time of the transfer, there 
is substantially common ownership, management, or control. If this 
occurs, then the experience must also be transferred.

Required Penalties--Section 303(k)(1)(D), SSA

    1-11. Question: The draft legislative language attached to UIPL 
30-04 provides that, in addition to any civil penalty, ``any 
violation of this section may be prosecuted as a'' criminal offense. 
(Emphasis added.) Does this mean that inclusion of criminal 
penalties is optional on the part of the state?
    Answer: No, section 303(k)(1)(D), SSA, clearly requires that 
state law must provide that ``meaningful civil and criminal 
penalties'' are imposed under certain circumstances. (See Q&A 19 in 
UIPL 30-04.) The draft legislative language quoted in the question 
merely indicates that the state has discretion to apply criminal 
penalties as appropriate. As noted in Q&A 20 in UIPL 30-04, ``States 
will take into account the amounts at issue and the likelihood of 
successful prosecution in determining which cases will result in 
criminal prosecutions.''
    1-12. Question: State law must provide for the imposition of 
penalties for persons who ``knowingly'' violate or attempt to 
violate those provisions of state law that implement section 303(k), 
SSA, and for those who ``knowingly'' advise another person to 
violate such provisions. Since it is often difficult to prove that 
an action is done ``knowingly,'' may state law provide that 
penalties may be imposed using a lower level of proof?
    Answer: Yes. The ``knowingly'' test is the minimum standard that 
state law must contain to meet the requirements of Section 
303(k)(1)(D), SSA. States must assure that any such test is at least 
as encompassing as the ``knowingly'' standard.

Statute of Limitations

    1-13. Question: Assume a ``SUTA dump'' occurred five years 
before the state identified it. The state's statute of limitations 
prevents the state from assessing contributions more than three 
years prior to the date of detection. Does this statute of 
limitations conflict with the SUTA dumping amendments?
    Answer: No. Nothing in the SUTA dumping legislation overrides a 
state's statute of limitations. As a result, in the above example, 
the state may limit its assessment of contributions to the three-
year period provided in its statute of limitations.

Draft Legislative Language

    1-14. Question: Subsection (c)(1) of the draft legislative 
language attached to UIPL 30-4 provides for civil penalties for 
persons knowingly violating or attempting to violate ``subsections 
(a) and (b) or any other provision of this Chapter related to 
determining the assignment of a contribution rate? (Emphasis added.) 
Should the ``and'' be an ``or''?
    Answer: Yes. The word ``and'' could be read to mean that the 
person must have violated, or attempted to violate, both the 
mandatory transfer provision and the prohibited transfer provision. 
Therefore the draft legislative language should be corrected by 
changing ``and'' to ``or''.
    Also, note there is a typo in subsection (e)(2) of the draft 
legislative language. ``Trade of business'' should be corrected to 
``Trade or business.'' (Emphasis added.)
    1-15. Question: Subsection (c)(4) of the draft legislative 
language attached to UIPL 30-4 provides that ``In addition to the 
penalty imposed by paragraph (1), any violation of this section may 
be prosecuted.* * *'' May ``section'' be changed to ``Chapter''?
    Answer: Yes. Using the word ``chapter'' will have the effect of 
making the criminal penalties applicable to any other provision of 
the state's UC law related to determining the assignment of a 
contribution rate. Note that states are not required to apply the 
penalties they develop for SUTA dumping to other violations of state 
law. (See Q&A 24 in UIPL 30-04.)

 [FR Doc. E4-3162 Filed 11-12-04; 8:45 am]
BILLING CODE 4510-30-P