Unscrupulous employers are continuing to evade millions of dollars in state unemployment taxes despite passage two years ago of a new federal law meant to tighten the rules, witnesses from state governments and private industry told a House panel yesterday.
Companies eager to cut unemployment insurance costs have found new loopholes following closure of the old ones, and many states have been reluctant to step in in the face of opposition from employers, said Carl T. Camden, president of Kelly Services Inc., the big staffing service firm.
"There's a lot of cleverness out there" in the marketplace, Camden told the Ways and Means human resources subcommittee.
The issue, often referred to as "SUTA dumping," gained attention two years ago when state and federal officials learned that business consultants were marketing strategies that allowed employers to cut taxes they are required to pay under state unemployment tax acts (SUTA).
These taxes, which finance state trust funds that pay benefits to workers who lose their jobs, are "experience rated" based on the number of unemployed workers a firm has generated in the past. Certain cyclical industries such as construction tend to pay high tax rates because they lay off many workers when business slows.
Consultants figured out ways for companies to get around this in the past, such as creating a subsidiary that would have a lower rating as a new employer or would perhaps sit dormant and establish a record of having few layoffs. The parent company could transfer workers to the subsidiary and get a much lower rating.
The SUTA Dumping Prevention Act of 2004 required that experience ratings be transferred when employees move from one business to another owned or controlled by the same employer, but companies are finding ways around the law, Camden and several state officials said.
Some "SUTA dumpers have been deterred" by the new law, but state collection "cases are getting bigger and harder," said David L. Clegg, deputy chairman of the North Carolina Employment Security Commission.
Some companies are turning to employee-leasing firms to avoid SUTA taxes, and some of those firms in turn are forming separate corporations for each of their deals, Camden and others said.
In addition, more employers are "misclassifying" workers as independent contractors instead of employees, they said.
The 2004 law "is having a positive effect," Deputy Assistant Labor Secretary Mason Bishop told the panel, pointing to states such as California, which has assessed $158.6 million in unpaid unemployment taxes from 40 employers.
Mason also noted that the law allows states access to a federal listing of newly hired workers, which makes it easier to detect employees receiving "overpayments" and ineligible workers.
The Bush administration has proposed several amendments, including measures allowing states to use a portion of their collections to fund enforcement activities and to pay private collection services, Bishop said.
However, Richard McHugh of the National Employment Law Project, an advocacy group, said it appears to him that "the administration's concerns are mostly about overpayments to workers," rather than employers evading taxes.
Camden said additional federal pressure on the states would be helpful -- only 40 have so far changed their laws as the 2004 act requires -- and that the states need to go beyond what is required by the federal law to resolve the problem. For instance, requiring experience ratings to follow a company's workforce even when it moves to an employee-leasing company would make state enforcement officials' job easier.