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36–662 2007

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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ii 

COMMITTEE ON WAYS AND MEANS 

BILL THOMAS, California, Chairman 

E. CLAY SHAW, JR., Florida 

NANCY L. JOHNSON, Connecticut 

WALLY HERGER, California 

JIM MCCRERY, Louisiana 

DAVE CAMP, Michigan 

JIM RAMSTAD, Minnesota 

JIM NUSSLE, Iowa 

SAM JOHNSON, Texas 

PHIL ENGLISH, Pennsylvania 

J.D. HAYWORTH, Arizona 

JERRY WELLER, Illinois 

KENNY C. HULSHOF, Missouri 

RON LEWIS, Kentucky 

MARK FOLEY, Florida 

KEVIN BRADY, Texas 

THOMAS M. REYNOLDS, New York 

PAUL RYAN, Wisconsin 

ERIC CANTOR, Virginia 

JOHN LINDER, Georgia 

BOB BEAUPREZ, Colorado 

MELISSA A. HART, Pennsylvania 

CHRIS CHOCOLA, Indiana 

DEVIN NUNES, California 

CHARLES B. RANGEL, New York 

FORTNEY PETE STARK, California 

SANDER M. LEVIN, Michigan 

BENJAMIN L. CARDIN, Maryland 

JIM MCDERMOTT, Washington 

JOHN LEWIS, Georgia 

RICHARD E. NEAL, Massachusetts 

MICHAEL R. MCNULTY, New York 

WILLIAM J. JEFFERSON, Louisiana 

JOHN S. TANNER, Tennessee 

XAVIER BECERRA, California 

LLOYD DOGGETT, Texas 

EARL POMEROY, North Dakota 

STEPHANIE TUBBS JONES, Ohio 

MIKE THOMPSON, California 

JOHN B. LARSON, Connecticut 

RAHM EMANUEL, Illinois 

ALLISON H. GILES, Chief of Staff 

JANICE MAYS, Minority Chief Counsel 

SUBCOMMITTEE ON HUMAN RESOURCES 

WALLY HERGER, California, Chairman 

NANCY L. JOHNSON, Connecticut 

BOB BEAUPREZ, Colorado 

MELISSA A. HART, Pennsylvania 

JIM MCCRERY, Louisiana 

DAVE CAMP, Michigan 

PHIL ENGLISH, Pennsylvania 

DEVIN NUNES, California 

JIM MCDERMOTT, Washington 

BENJAMIN L. CARDIN, Maryland 

FORTNEY PETE STARK, California 

XAVIER BECERRA, California 

RAHM EMANUEL, Illinois 

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. 


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iii 

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 


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(1) 

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:] 


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ADVISORY 

FROM THE COMMITTEE ON WAYS AND MEANS 

SUBCOMMITTEE ON HUMAN RESOURCES 

FOR IMMEDIATE RELEASE CONTACT: (202) 225–1721 

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. 


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In announcing the hearing, Chairman Herger stated, ‘‘Last year an important law 

was enacted to protect the integrity of the Nation’s unemployment benefits system. 

This law is designed to stop the abusive practice of SUTA dumping by certain employers and to give States additional tools to identify individuals who continue receiving unemployment benefits even after taking a new job. At the hearing, we will 

get an update on the status of State implementation of these provisions in the 

SUTA dumping law, and consider any recommendations for further improvement.’’ 

FOCUS OF THE HEARING: 

The hearing will focus on implementation of the ‘‘SUTA Dumping Prevention Act 

of 2004’’ (P.L. 108–295). 

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS: 

Please Note: Any person(s) and/or organization(s) wishing to submit for the hearing record must follow the appropriate link on the hearing page of the Committee 

website and complete the informational forms. From the Committee homepage, 

http://waysandmeans.house.gov, select ‘‘109th Congress’’ from the menu entitled, 

‘‘Hearing Archives’’ (http://waysandmeans.house.gov/Hearings.asp?congress=17). Select the hearing for which you would like to submit, and click on the link entitled, 

‘‘Click here to provide a submission for the record.’’ Once you have followed the online instructions, completing all informational forms and clicking ‘‘submit’’ on the 

final page, an email will be sent to the address which you supply confirming your 

interest in providing a submission for the record. You MUST REPLY to the email 

and ATTACH your submission as a Word or WordPerfect document, in compliance 

with the formatting requirements listed below, by close of business Tuesday, June 

28, 2005. Finally, please note that due to the change in House mail policy, the U.S. 

Capitol Police will refuse sealed-package deliveries to all House Office Buildings. 

For questions, or if you encounter technical problems, please call (202) 225–1721. 

FORMATTING REQUIREMENTS: 

The Committee relies on electronic submissions for printing the official hearing record. As always, submissions will be included in the record according to the discretion of the Committee. 

The Committee will not alter the content of your submission, but we reserve the right to format 

it according to our guidelines. Any submission provided to the Committee by a witness, any supplementary materials submitted for the printed record, and any written comments in response 

to a request for written comments must conform to the guidelines listed below. Any submission 

or supplementary item not in compliance with these guidelines will not be printed, but will be 

maintained in the Committee files for review and use by the Committee. 

1. All submissions and supplementary materials must be provided in Word or WordPerfect 

format and MUST NOT exceed a total of 10 pages, including attachments. Witnesses and submitters are advised that the Committee relies on electronic submissions for printing the official 

hearing record. 

2. Copies of whole documents submitted as exhibit material will not be accepted for printing. 

Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material 

not meeting these specifications will be maintained in the Committee files for review and use 

by the Committee. 

3. All submissions must include a list of all clients, persons, and/or organizations on whose 

behalf the witness appears. A supplemental sheet must accompany each submission listing the 

name, company, address, telephone and fax numbers of each witness. 

Note: All Committee advisories and news releases are available on the World 

Wide Web at http://waysandmeans.house.gov. 

The Committee seeks to make its facilities accessible to persons with disabilities. 

If you are in need of special accommodations, please call 202–225–1721 or 202–226– 

3411 TTD/TTY in advance of the event (four business days notice is requested). 

Questions with regard to special accommodation needs in general (including availability of Committee materials in alternative formats) may be directed to the Committee as noted above. 

f 


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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 


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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. 

f 

Mr. MCDERMOTT. Thank you, Mr. Chairman. About a year ago, 

with your leadership and bipartisan spirit, we produced important 


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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 


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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, 


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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 


bajohnson on PROD1PC71 with HEARING
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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 


bajohnson on PROD1PC71 with HEARING
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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 


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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 


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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 supVerDate Aug 31 2005 02:10 Aug 23, 2007 Jkt 036662 PO 00000 Frm 00016 Fmt 6633 Sfmt 6621 E:\HR\OC\36662.XXX 36662

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port 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. 

f 

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. 


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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 intracompany 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 


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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 


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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 entiVerDate Aug 31 2005 02:10 Aug 23, 2007 Jkt 036662 PO 00000 Frm 00020 Fmt 6633 Sfmt 6621 E:\HR\OC\36662.XXX 36662

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ties. 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. 


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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. 

f 

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 


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19 

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 parttime 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’’ 


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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 


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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 parttime 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. 


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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. 

f 

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 


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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 integrityrelated 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 


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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. 


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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. 


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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. 

f 

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 


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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 


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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 

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sage 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 


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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 


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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 SUTAdumping 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 examVerDate Aug 31 2005 02:10 Aug 23, 2007 Jkt 036662 PO 00000 Frm 00035 Fmt 6633 Sfmt 6621 E:\HR\OC\36662.XXX 36662

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ple, 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) 

State Law 

and Status 

Penalties on Employers Penalties on Non-employers 

Labor 

Model 

Higher 

penalties 

Lower 

penalties 

Labor 

Model 

Higher 

penalties 

Lower 

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 174 (passed) X X 

Minnesota HB 898 

(passed) X X 


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State SUTA Dumping Penalties—Proposed and Enacted Legislation— 

Continued 

(Updated June 9, 2005) 

State Law 

and Status 

Penalties on Employers Penalties on Non-employers 

Labor 

Model 

Higher 

penalties 

Lower 

penalties 

Labor 

Model 

Higher 

penalties 

Lower 

penalties 

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. 


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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_filename=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). 

f 

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 sesVerDate Aug 31 2005 02:10 Aug 23, 2007 Jkt 036662 PO 00000 Frm 00038 Fmt 6633 Sfmt 6602 E:\HR\OC\36662.XXX 36662

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sion 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. 


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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 penalVerDate Aug 31 2005 02:10 Aug 23, 2007 Jkt 036662 PO 00000 Frm 00040 Fmt 6633 Sfmt 6621 E:\HR\OC\36662.XXX 36662

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ized 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. 


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ATTACHMENTS: 

1. HB3250—Texas’ SUTA Dumping legislation 


bajohnson on PROD1PC71 with HEARINGInsert 36662A.001
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bajohnson on PROD1PC71 with HEARINGInsert 36662A.002
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bajohnson on PROD1PC71 with HEARINGInsert 36662A.003
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bajohnson on PROD1PC71 with HEARINGInsert 36662A.004
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bajohnson on PROD1PC71 with HEARINGInsert 36662A.005
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bajohnson on PROD1PC71 with HEARINGInsert 36662A.006
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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. 

f 

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 


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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 


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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 


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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 


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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. 


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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 


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1See 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 Greentwo points on what would be now given that the implementation 

of the legislation that we passed out a year or 2 ago, and tell us 

now what would be the one or two crucial things to do. I know 

some of you in your written testimony have mentioned some of 

these things, and some of you have outlined what some of the 

States have tried to do. Give us a sense of what you think we can 

quickly do, the one or two things that should not be that difficult 

to get through Congress or to see if DOL can do through regulation 

that we can move toward, because I know that all of you have said 

that this is an evolving phenomenon here you do one thing and all 

of a sudden clever folks find a different way to get past this. So 

the one or two things that you think we can try to move on most 

quickly, so Mr. Camden could continue coming back saying, 

‘‘Thanks very much for moving faster than we expected.’’ 

Finally, if you all can—because I know my time is expiring and 

we do have votes. If you can give us any suggestions on trying to 

deal with this independent contractor issue where we have the 

misclassification going on, because my understanding is it is fairly 

substantial, and to allow that to occur is another way of allowing 

States to be underfunded and allowing legitimate employers—and, 

Mr. Camden, yours would be one—to have to absorb the costs for 

unemployment compensation insurance. I do not think that is fair. 

So anything you have that would help us deal with the phenomenon where employers are misclassifying their employees as 

independent contractors we would appreciate it. Thank you very 

much for your testimony. 

Chairman HERGER. Thank you, Mr. Becerra. I want to thank 

each of you for appearing here today and giving us updates and insights. It will be helpful as we consider additional steps to 

strengthen and improve our unemployment system. If you do not 

mind, I do have a few questions that I might submit to you in writing. This has been very helpful. Again, I share the thoughts of the 

gentleman from California in that when we have our next hearing 

we want to be able to have the same comments that you led off 

with, Mr. Camden. Again, I want to thank each of you, and with 

that this hearing stands adjourned. 

[Whereupon, at 11:12 a.m., the hearing was adjourned.] 

[Submissions for the record follow:] 

Statement of Edward A. Lenz, American Staffing Association, Alexandria, 

Virginia 

On behalf of the American Staffing Association, I am writing to express our industry’s appreciation for your efforts to protect the financial integrity of the nation’s 

unemployment insurance system. ASA submits the following statement for inclusion 

in the record of the June 14, 2005 hearing on implementation of the SUTA Dumping 

Prevention Act. 

ASA represents over 1,100 companies that operate approximately 15,000 offices 

representing about 85 percent of the $63 billion U.S. staffing industry. Our members include the nation’s largest publicly owned staffing firms as well as privately 

owned regional and local staffing firms throughout the country. Such firms have 

contributed significantly to the well-being of the U.S. economy by providing critical 

labor market flexibility that benefits both employers and workers.1


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span, 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. 

f 

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 


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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 InsurVerDate Aug 31 2005 02:10 Aug 23, 2007 Jkt 036662 PO 00000 Frm 00056 Fmt 6633 Sfmt 6621 E:\HR\OC\36662.XXX 36662

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1Thirty-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. 

ance 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. 

f 

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. 

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 


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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. 

Æ 


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