45516 Federal Register / Vol. 62, No. 166 / Wednesday, August 27, 1997 / Notices

DEPARTMENT OF LABOR

Employment and Training

Administration

Federal-State Unemployment

Compensation Program; State’s

Experience Rating Formula

AGENCY: Employment and Training

Administration, Labor.

ACTION: Notice; request for comments.

SUMMARY: The Unemployment

Insurance Service within the

Employment and Training

Administration (ETA) interprets Federal

law requirements pertaining to

unemployment compensation (UC) as

part of its role in the administration of

the Federal-State UC program.

The purpose of this notice is to obtain

comments on the Department of Labor’s

(Department) proposal to issue more

definitive direction on the Federal law

requirements pertaining to the

minimum acceptable interval between

State UC tax rates. Although the

Department’s position on the need for

small intervals is well established, a

need for more definitive direction has

been identified as a result of recent State

legislative initiatives creating significant

intervals between rates. This ‘‘interval

requirement’’ will assure that States

operate experience rating systems

consistent with Federal law

requirements.

DATES: The Department invites written

comments on this proposal. Comments

are to be submitted by October 27, 1997.

ADDRESSES: Submit written comments

to Grace A. Kilbane, Director,

Unemployment Insurance Service (UIS),

Employment and Training

Administration (ETA); U.S. Department

of Labor; 200 Constitution Avenue,

NW., Room C–4512; Washington, DC

20210.

FOR FURTHER INFORMATION CONTACT:

Jerry Hildebrand, UIS, ETA; U.S.

Department of Labor; 200 Constitution

Avenue, NW., Room C–4512;

Washington, DC 20210. Phone (202)

219–5200, extension 392 (this is not a

toll-free number); fax (202) 219–8506.

SUPPLEMENTARY INFORMATION: The

Federal and State governments are

jointly responsible for administering the

UC program. The legislative

framework—the Federal Unemployment

Tax Act (FUTA) and Title III of the

Social Security Act—reserves most

decisions regarding tax structure,

qualifying requirements, benefit levels

and eligibility/disqualification

provisions to each State. However, these

laws also give the Secretary of Labor

responsibility for ensuring State

conformity with certain Federal

requirements as a condition for

participating in the UC program.

One of these requirements relates to

the use of experience in determining the

tax rates of employers. Section

3303(a)(1), FUTA, requires, as a

condition for employers in a State to

receive the additional credit against the

Federal tax, that State law provide that:

no reduced rate of contributions to a pooled

fund is permitted to a person (or group of

persons) having individuals in his (or their)

employ except on the basis of his (or their)

experience with respect to unemployment or

other factors bearing a direct relation to

unemployment risk * * *.

Thus, Federal law permits conforming

State UC laws to grant employers

reduced rates only if those rates are

related to the employer’s experience

with respect to unemployment or ‘‘other

factors bearing a direct relation to

unemployment risk.’’ Although the term

‘‘experience’’ is often used as

convenient shorthand, no State actually

measures ‘‘experience.’’ Instead what is

used are ‘‘other factors bearing a direct

relation to unemployment risk.’’

The words ‘‘his * * * experience,’’ as

used in the FUTA, compel a State’s

experience rating system to measure

each individual employer’s experience.

This means that an individual

employer’s rate must be assigned based

on experience comparative or relative to

the experience of other employers. S.

Rep. No. 628, 74th Cong., 1st Sess. 50

(1935). This accomplishes the purposes

of experience rating by equitably

allocating costs, encouraging

stabilization of employment and

encouraging employer participation.

On July 31, 1940, the Social Security

Board (Board), which at that time

administered the UC program,

published the first experience rating

standards in Employment Security

Memorandum (ESM) No. 9. ESM No. 9’s

explanation of the requirement that

rates be assigned based on comparative

or relative experience is repeated in

Unemployment Insurance Program

Letter (UIPL) No. 29–83, dated June 23,

1983. As stated in both issuances.

Rate differentials are essential to any

system under which an employer’s rate is

based on his experience, because only by the

use of differentials is there a genuine

reflection of the individual experience of an

employer. Within the limits of the maximum

and minimum rates, the smaller the intervals

between the variant rates, the greater the

effect of the individual experience upon the

rate at which any given employer must pay

contributions, i.e., the more nearly is his rate

based on his experience with unemployment

or other factors bearing a direct relation to

unemployment risk. Numerous differentials

make the transition from one contribution

rate to another more equitable because if the

interval between contribution rates is small,

inequities to borderline employers are less

than under a system in which the intervals

are larger. In other words, using a large

number of different contribution rates, with

smaller intervals between such rates, would

prevent slight variations in employer

experience from resulting in large variations

in rates assigned to different employers with

nearly the same relative experience.

UIPL 29–83 further provides that—

to assure that the differentiation of

experience will be reflected in the rates

assigned to individual employers, the rate

schedule must contain rate intervals that will

reasonably reflect their relative experience. A

range of rates, for example, from 5.4 to 0.1,

but with a highest reduced rate of 2.5 would

not permit a reasonable reflection of relative

experience.

In this example, the Department

deems the interval between 2.5

percentage points and 5.4 percentage

points (that is, 2.9 percentage points) to

be inadequate to reasonably measure

relative experience. Thus, if a State were

to have only one reduced rate assigned

to positive balance employers, and that

one reduced rate was zero, the gap

between that rate and the highest rate of

5.4 percentage points would be even

higher (5.4 percentage points) and

would simply be too large to reasonably

measure relative experience.

In that situation, employers with

almost identical experience would

receive widely divergent rates while

employers with widely divergent

experience would receive the same rate.

For example, in a reserve ratio State, an

employer with only a $1 positive

reserve balance would receive a zero

percentage point rate while an employer

with only a $1 negative balance would

receive a 5.4 percentage points rate.

Conversely, an employer with a

$100,000 positive balance would receive

the same zero percentage point rate as

an employer of the same or larger size

with a $1 reserve balance. Assigning

widely divergent rates for similar

experience or similar rates for widely

divergent experience would both thwart

the purpose of the experience rating

system.

To assure experience rating continues

to accomplish its purpose by reasonably

reflecting relative experience, the

Department proposes to establish a

minimum acceptable interval between

rates. Although States can and do assign

rates with intervals as small as 0.1

percentage points, the Department

recognizes, as stated in both ESM No. 9

and UIPL No. 29–83, that

‘‘administrative consideration indicate

the desirability of some limitations on

the number of differentials * * * .’’
Federal Register / Vol. 62, No. 166 / Wednesday, August 27, 1997 / Notices 45517

Given these administrative

considerations, the Department

proposes to establish an ‘‘interval

requirement’’ of 0.9 percentage points as

the largest percentage point interval

acceptable in an experience rating

system. This 0.9 percent acknowledges

that some States may find it

administratively desirable to have

equally spaced intervals between the

minimum and maximum rates. (That is,

0.0 percent, 0.9 percent, 1.8 percent and

so forth up to 5.4 percent.)

Although the large interval of 0.9

percent between tax rates would less

accurately reflect actual relative

experience of an employer than a

smaller interval such as 0.1 percentage

points, the Department would not object

if a State chooses to use such an

interval. However, the Department

would continue to encourage a State to

use a system assigning a large number

of rates with smaller intervals as a

means of more accurately measuring

employer experience and distributing

the UC cost burden most fairly.

A State which does not have any

interval between rates of greater than 0.9

percentage points would not need to

change its law as a result of this more

definitive guidance. A State with any

interval between rates of larger than 0.9

percent would, however, be required to

change its law. Such amendments

would assure that States operate

experience rating systems which more

fairly allocate costs and encourage

stabilization of employment by more

accurately reflecting the relative

experience of employers. States would

be given, at a minimum, two years from

the date of issuance of the Department’s

final position to obtain any necessary

amendments to State law.

This ‘‘interval requirement’’ would

apply only to ‘‘reduced rates’’ assigned

by States. Section 3303(c)(8), FUTA,

defines ‘‘reduced rate’’ as a rate ‘‘lower

than the standard rate applicable under

state law.’’ The same section defines

‘‘standard rate’’ as ‘‘the rate on the basis

of which variations therefore are

computed.’’ UIPL 15–86, dated February

17, 1984, provides guidance on

determining the standard rate. In brief,

the standard rate is 5.4 percent if the

State’s tax rate schedule contains a 5.4

percent rate that is assignable based on

experience. If the State’s law does not

contain such a 5.4 percent rate, then the

standard rate is the highest rate

assignable based on experience under

State law. To determine the effects of

the proposed interval requirement on

States laws, States will first need to

identify the standard rate and then

examine the intervals between rates at

or below the standard rate.

Interested parties are invited to

comment on this proposal concerning

the minimum acceptable interval

between tax rates.

Signed at Washington, DC on August 12,

1997.

Grace A. Kilbane,

Director, Unemployment Insurance Service.

[FR Doc. 97–22793 Filed 8–26–97; 8:45 am]

BILLING CODE 4510–30–M