[Federal Register Volume 62, Number 166 (Wednesday, August 27, 1997)]
[Notices]
[Pages 45516-45517]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-22793]



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Part III





Department of Labor





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Employment and Training Administration



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Federal-State Unemployment Compensation Program; State's Experience 
Rating Formula; Notice

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

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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.

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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 * * * 
.''

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    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