The UI Blues

By Robert J. Grossman Nov 1, 2004

HR Magazine, November 2004

The unemployment insurance system is plagued with fraudulent claims and red tape in inefficient state agencies, burdening employers with tedious disputes over benefits.

When the Alabama unemployment office’s request for documentation reached Dan Sinas, it was deja vu all over again for the harried HR vice president. This time it was for a worker he had fired for stealing a company cell phone. Although the employee acknowledged the theft on her unemployment insurance (UI) application, that wasn’t enough to scotch the claim. The agency still wanted Sinas to produce extensive documentation.

“They’ve asked me for the last day she worked, the date of discharge, who discharged her, the final incident that led to her termination, the date of the final incident, the policies she violated, whether she was aware of the policies, any prior warnings she received for the same or similar acts, and any concrete proof that substantiates her misconduct,” recalls Sinas.

“My astonishment was only exceeded by my disgust with this whole system,” he says. “You’ve got to have every ‘t’ crossed and ‘i’ dotted—it’s literally impossible. I challenged 10 claims and lost every case. We quit trying to contest them because it was a futile effort. Now I’m reluctant to get involved. You get to the point when you have to cut your losses and avoid battles you know you can’t win.”

Created at the height of the Great Depression in the 1930s, UI benefits are intended to temporarily help workers who lose jobs “through no fault of their own,” according to the U.S. Department of Labor (DOL). Employers usually don’t object to paying benefits to deserving ex-employees, but they do complain about a UI system that often grants benefits to undeserving claimants and puts an undue burden of proof on employers.

Many HR managers believe bureaucrats and hearing officers give employers short shrift when reviewing claims, even while making unwarranted demands for documentation. They say the process puts them on the defensive from the get-go. They’re disgusted by the fraud and abuse that pollute the system, and fed up with eating the costs when undeserving people receive benefits.

Sinas estimates that about half the claims granted each year against his employer, PRemployer of Dothan, Ala., a 4,000-employee PR temporary job agency, are “undeserving” and permit even chronically absent individuals and loafers to collect. “If I fire someone for a positive drug screen, I have to show the test result, that there was a policy, he was aware of it, he signed it and the medical review officer signed off,” says Sinas, who receives about 250 unemployment insurance claims a year. “Why does the claimant have so much protection, and I have none?”

“It’s very irritating,” agrees Robert Krajci, regional HR manager at Menasha Corp. in Yukon, Pa. “People are taking advantage of the law. If you applied a reasonable-person test to the claims we have, I’d say half are not entitled but still get [unemployment insurance benefits]. UI was not intended to take care of people who don’t want to work.”

Krajci recalls a worker who wouldn’t carry out a work assignment and walked off the job. When he applied for UI, he was granted benefits even though he admitted he had been insubordinate. The reason? “We let him come back the next day” and consulted with the union before firing him a few days later. “The hearing officer said we waited too long to act!”

Many employers, feeling their hands are tied and the hassles are not worth the fight, have surrendered. But doing so comes at a cost.

Despite the uphill battle, employers can successfully fight undeserving UI claims by preparing carefully and cooperating with UI agencies.

Funding UI

The frustration hits employers where it hurts most—the pocketbook. States fund UI benefits by levying State Unemployment Tax Act (SUTA) taxes against employers based on rates and procedures unique to each state. A common thread, however, is that all SUTA taxes use some type of experience-rating system to adjust employers’ tax rate, often over a three-year period.

Any benefits paid to former employees count in an employer’s experience rating—and drive up the employer’s SUTA costs in the future. So employers that pay for unqualified claimants today will also pay more tomorrow for unemployment insurance.

Generally, experts agree that when you lose even one contestable claim, or it goes unanswered, you wind up paying more. David Prosnitz, president of Personnel Planners of Chicago, a third-party administrator that handles UI claims for employers in 40 states, says the amount of money paid to unemployment claimants has a nearly one-to-one relationship to what employers will pay in increased taxes for the next three years. “When you do all the math—and it will vary somewhat by state—one claim will raise your taxes for the next three years, increasing the amount you pay overall to the amount the employee collected.”

Small businesses get clobbered, says Fred Radtke, owner of FAR Management, another third-party administrator in Clinton Township, Mich. “If you’ve got 50 employees or less, one person who draws unemployment could quadruple your tax rate” because the percentage of individuals drawing benefits is relatively high.

Bigger employers often don’t fare any better. “One claim will increase your tax rate from 25 percent to 33 percent per year,” says Eric Oxfeld, president of UWC-Strategic Services on Unemployment & Workers Compensation, an association that represents employers’ interests on UI and workers’ compensation issues, which is based in Washington, D.C.

Regardless of company size, employers collectively are getting hammered. Last year, states paid out $41 billion in unemployment benefits to recipients for an average of 16.7 weeks, according to the DOL. (The DOL projects total outlays of $45 billion for 2004.) The cost to employers per worker in SUTA premiums averaged $300, an increase of almost 50 percent in just three years. Over the same period, employers’ outlays as a percentage of payroll jumped from 0.5 percent to 0.8 percent.

Fraud and Errors

Of course, no one would want to deny benefits to qualified applicants. At issue is the number of unqualified recipients who continue to collect and the financial impact of these overpayments on the employer’s bottom line.

When the Government Accountability Office (GAO) audited state UI programs in 2002, it reported that, over the past decade, on average, state offices made overpayments to claimants totaling 8.5 percent ($3.79 billion) of total outlays.

The GAO attributes 24 percent ($909 million) of these overpayments to fraud and 76 percent ($2.8 billion) to unintentional errors and administrative inattention.

Fraud. Most identifiable fraud occurs when an individual accepts a new job but continues to receive UI benefits. Last year, states recovered 59 cents on every excess dollar paid out, a receivables rate that most businesses would find unacceptable. Officials in the DOL’s Office of Workforce Security are optimistic that state UI agencies’ newly gained access to the National Directory of New Hires, a centralized listing of all new hires maintained by the federal government, will make it easier to nab double-dippers. The directory was originally created to enforce child support orders and administer other federal social service programs.

Some experts think UI administrators are shelling out even more than the DOL or the GAO estimates. “We believe the true rate of improper payment is much higher overall, especially when you factor in people receiving benefits who are working off the books or not truly seeking work,” says Oxfeld. He believes the overpayment rate is closer to 17 percent, or $8 billion.

But others, like Andrew Stettner, policy analyst at the National Employment Law Project, a legal services and advocacy group in New York, believe overpayments are overstated. He says the counts are not fully balanced against underpayments for eligible workers who are not approved or are awarded too little. Stettner points out that fewer than half of those who are out of work actually file for unemployment. Of these, some are not eligible, like undocumented immigrants, and some who may qualify don’t try, thinking they’re not eligible or that the system is too complicated.

Other types of fraud, not included in the above estimates, are SUTA abuses by employers who transfer employees to newly formed corporations with no history, and thus lower insurance rates, and scams in which individual fraudsters create phony companies with fake workers who file claims.

Errors. State administrators are more concerned with speed than accuracy, according to the GAO audit, which suggested that “increased focus on program integrity could reduce billions in overpayments.”

Under increasing pressure from employers and Congress to reduce fraud, UI administrators are scurrying to process claims quickly and accurately while monitoring recipients—even though errors, as noted above, waste more than three times as many UI dollars as fraud.

To qualify for federal funding, UI officials must meet the DOL’s goal of getting 90 percent of qualified claimants paid within 21 days. So when employers don’t respond or fail to cooperate fully, UI officials can’t wait. They push cases out the door.

While administrators’ salaries are paid by the federal government, recipients’ overpayments are funded by employers’ SUTA taxes. Inevitably, the law of self-interest carries the day. “I go into state offices and offer them a software process that will increase what they’re collecting on fraud by tenfold,” says Michael Lorsbach, principal of On Point Technology, a software development firm in Westchester, Ill., that markets programs to state offices. “But buying it would come out of their administrative budgets, causing them to divert funds from other administrative needs. In the end, they decide to let the fraud slide, realizing the increased fraud outlays will continue to be absorbed by employers in increased SUTA taxes,” says Lorsbach, whose 30-year career includes stints as a UI administrator, fraud investigator and claims adjudicator. Other experts interviewed for this story echoed Lorsbach’s view.

Meanwhile, state UI offices are struggling to meet their mandates with too few people, too few skills and less than optimum resources. Cutbacks have been significant. Illinois, for example, went from 5,000 UI workers to 1,500 UI workers in the past decade. Key managers are retiring, leaving an experience gap that can only get worse. “Across the country, there’s no backfill; the 30-year veterans are leaving, and there’s no one behind them,” Lorsbach says.

Frustration Takes Its Toll

Believing that the odds are against them, many HR managers have thrown in the towel. “HR lets it slide. They may not agree [with the ruling], but they don’t pursue the matter,” says Wayne Vroman, an economist and authority on UI at the Urban Institute, an economic and social policy research organization in Washington, D.C.

Prosnitz agrees: “If you only receive three or four claims a year, when the letter comes in from UI, you don’t understand the financial implications [and] the forms are hard to read, so you set it aside.”

In the 2002 audit, the GAO visited six states and discovered that significant percentages of employers fail to comply with UI requests for information in a timely manner. One state UI director reported that 75 percent of employers were untimely in responding.

Another study by the DOL’s Office of Inspector General identified 22 states where 25 percent of the time employers never responded at all to wage documentation requests. Overall, 25 percent of employers nationally “aren’t playing the game,” estimates Sigurd Nilsen, director of education, workforce and income security issues at the GAO.

Stay in the Game

But opting out is a losing proposition. When employers give up, they’re leaving easy money on the table, money that adds up quickly. “If you’re an average mid-size employer, you could be losing as much as $1 million a year,” says Lorsbach.

“Don’t overlook low-hanging fruit,” agrees Steve LeBlanc, SPHR, HR manager at ECM Plastics Inc. in Worcester, Mass. “It may not seem like much, but it adds up fast and is easier to control than workers’ comp.”

And it’s not just about the money, says Patti Heckman, SPHR, vice president of HR at Sports Endeavors Inc., a direct mail company in Hillsborough, N.C. For example, Heckman says if you fail to contest claims by employees you fired and those individuals are awarded benefits, they can use UI documentation against you in wrongful termination lawsuits. “Be vigilant. If you’re not, it could come back and bite you big time,” she says.

“Employers think they can’t fight these things, but it’s not true,” says Prosnitz, whose company contested 2,000 of the 10,000 claims for client companies, mostly involving firings for misconduct and unjustified “quits.” It won 70 percent of the cases.

Nationwide, when employers challenge “quit determinations,” they’re prevailing 70 percent of the time, according to the Urban Institute’s Vroman. For “misconducts,” the win rate is about 40 percent.

So despite the hassles, there are sound reasons—financial, legal and ethical—to take UI claims seriously. Even if you don’t like the rules or umpires, master the intricacies of the UI system in your states, and find ways to meet their requests and to satisfy their standards of proof.

And remember that not all states are the same. Some states, like Indiana and Florida, are more employer-friendly, say third-party providers that represent employers. Others, like California, New Jersey and Massachusetts, lean toward claimants.

Preparation Pays

When UI requirements seem unreasonable, in the short run it’s better to adjust your policies to remain in compliance. For example, most states require employers to demonstrate a compelling reason for firing someone. Saying, “This was the straw that broke the camel’s back” won’t cut it. You must have a clear policy that’s been communicated to the worker and documentation of prior violations.

Even then, a last straw is not enough. “I’ve been able to train my supervisors, so they know they have to come to me first, show me that they’ve given the employee a chance to know his job is in jeopardy. Otherwise I won’t terminate him,” Heckman says.

Requirements for hearings—which often are conducted by phone—vary among states but generally conform to basic principles. In reaching a decision, the hearing officer applies “the reasonable-person” standard. In a “quit case,” claimants are presumed ineligible, giving them the burden to prove that a reasonable person would conclude that they quit for reasons that should justify receiving benefits. In a firing, the presumption runs against the employer. LeBlanc, who has lost only one of 50 hearings, cautions that meeting the standards is critical. “If there’s any doubt, the decision will go against you.”

Heckman warns HR not to be surprised if claimants stretch the facts to enhance their claims. “UI laws are claimant-biased, and claimants who are desperate for money can be expected to lie. If you get into a ‘she said, we said’ exchange, you’re going to lose unless you’ve got ironclad documentation.” (For more information on responding to claims, see “Tips from the Trenches.”)

While the system goes out of its way to skew things to the employee, LeBlanc says that’s not bad. “The company should have to justify why it terminated a worker. People who complain they don’t do well don’t win because they don’t know the UI rules or aren’t willing to follow their own policies. They’re not doing what they need to do, or have that attitude that they should be able to do whatever they want.”

Communication Can Yield Cooperation

When UI administrators and HR professionals sit down together—for instance, at conferences—invariably they find ways to improve their strained relationships. If they did it more often, Lorsbach says, they would be able to streamline and simplify paperwork, making it less costly and more likely that employers would be more cooperative. “Administrators need to understand that they can get the information they need without putting the employer through the wringer. It’s really a pain in the butt to provide information where there’s really no need for it.”

Forms are too complicated and not geared to the typical business cycle. For example, states are asking employers to provide payroll information by the week, when most payrolls are paid biweekly or monthly, Lorsbach says. “It’s expensive to respond because the data have to be compiled manually. If you’re a big company and get hundreds of requests for information, you don’t bother to send it in, and the state doesn’t follow up.”

Until reforms are seriously discussed, HR must work with the system. “When I first started, I took it personally each time we lost a case,” Heckman says. “Now I understand what’s required to win. If I know I have a well-documented case, I don’t give up. And persistence really pays off. If we lose in the first round, we appeal; I fight on.”

Robert J. Grossman, a contributing editor of HR Magazine, is a lawyer and a professor of management studies at Marist College in Poughkeepsie, N.Y.

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