Federal directive may lead to unemployment tax hit for employers

Federal directive may lead to unemployment tax hit for employers
By John Rondy, of SBT
If employers think the payroll taxes they now pay are high, it could get a lot worse in the future.
That’s the word from a handful of state officials and private employers who are seeking clarification from the U.S. Department of Labor on a directive affecting unemployment insurance that they say could have catastrophic consequences for employers.
The original intent of the federal directive was to prod the temporary staffing industry to offer benefits to temporary employees, says David Cornwell, who owns Cornwell Staffing Services in Milwaukee.
But the unemployment insurance mandate issued last August by the Department of Labor could drastically increase unemployment claims for all Wisconsin employers, thereby driving up unemployment compensation rates across the board, Cornwell says.
“It is so restrictive that it would open the floodgates for UC payouts,” Cornwell says.
The mandate, known as UIPL 41-98, redraws the rules surrounding what is considered “new work,” in effect placing employers in a state of double jeopardy when they attempt to transfer a worker to a different job. An employee can refuse the assignment if it is deemed less favorable than the previous job the employee held. That means the employee transferred to a “less favorable” job now has the right to receive unemployment benefits.
The new interpretation was upheld last December in a case involving a woman who refused a job transfer back to the second shift of a central Wisconsin manufacturer. Lori Winters was promoted to the first shift of Farnam Meillor Sealing Systems in Necedah after spending three and one-half years on the second shift. When business slowed, employees with less seniority were laid off. Winters was protected by her seniority through a collective bargaining agreement and assigned back to the second shift.
She refused the second-shift reassignment, citing child-care issues. Winters subsequently resigned and filed an unemployment claim, which was upheld by a state administrative law judge, and later by the Labor and Industry Review Commission (LIRC), which cited UIPL 41-98 as the deciding factor.
The commission determined that Winters’ reassignment to the second shift constituted “new work.” That job was determined by an adjudicator to be “substantially less favorable,” as only 19.27% of the labor force worked second shift in the labor-market area. Therefore, the adjudicator ruled that made her eligible to receive unemployment compensation.
The key part of the LIRC decision reads: “Although an argument could be made that UIPL 41-98 speaks only to temporary-help employment relations, the commission is unwilling to narrowly interpret this supplemental role in view of UIPL’s plain language. As such, the commission concludes that all employment relationships, even those governed by collective bargaining agreements, are subject to this interpretation of the recent UIPL 41-98.”
Bruce Hagen, an administrator with the state Division of Unemployment Insurance, says that literal interpretation of the federal directive is hurting employers, and puts government where it doesn’t belong: arbitrating disputes between employers and their workers, even in cases like the one in Necedah where a collective bargaining agreement was in place.
“It is infringing upon the right of labor and management to establish working conditions,” say Hagen, who has traveled to Washington, D.C. on several occasions to seek clarification on the directive. “The difference, as I see it, is that any change [in job status] is considered an offer of new work, which means any employee can quit with just cause.”
A gun to the head
Prior to last August, only twice before in the 65-year history of the Federal Unemployment Tax Act (FUTA) had the Department of Labor issued guidelines. The FUTA guidelines are administrative mandates that govern interpretation and application of law on a state level.
The states have one year to come into conformity with the FUTA directive, Cornwell says. If states such as Wisconsin are not in compliance with the mandate, the state must change its statutes to come into conformity. If the states do not fall in line, the Department of Labor can deny states their FUTA money, which would amount to $860 million in unemployment funds withheld here in Wisconsin, Cornwell says.
An advisory council of labor and management representatives who give their recommendations to the state legislature has put the issue on hold until the Department of Labor has time to reconsider the directive, says John Metcalf, director of human resources policy for Wisconsin Manufacturers & Commerce in Madison, who sits on the advisory council.
“The federal agency has the ability to call a state out of conformity,” Metcalf said recently. “It [UIPL 41-98] seems to be directed at Wisconsin. There isn’t a lot we can do about it. The state can challenge it, but we can lose the FUTA offset credit. They have all the cards,” he adds of the Department of Labor. “And LIRC seems to have adopted it.”
Cornwell says a Department of Labor official wrote the directive with no public hearings or input. Because the government has the ability to withhold the FUTA money, states will fall in line with the directive without challenge.
“When you get into these bureaucracies, they have agendas, and they have a bias, and it certainly is not pro-business,” Cornwell says.
Adds Metcalf: “Maybe it makes sense in other states, but I don’t think this is very good public policy. It is not well thought out. From the top of a little office in Washington, someone appears to have dreamed up this solution.”
The FUTA directive has more impact on Wisconsin, as the state’s labor laws are highly advanced compared to the majority of the US, Cornwell says, and therefore, interpretations here are more stringent.
Ironically, the directive was co-authored by Gerald Hildebrand, a Sheboygan native who works as a Department of Labor administrator in Washington.
Pamela Anderson, the lone LIRC commissioner who issued a dissenting opinion on the Necedah case, says she was told recently by a Department of Labor official that part of the intent of the FUTA directive was to create a lever so that employers offer health insurance or other fringe benefits to marginal or less-than-full-time employees.
“We are seeing some cases that were decided one way in the past that are now being decided another way,” says Joe Brisk, owner of Staffworks Staffing Services, a Milwaukee staffing firm. “Unless we get some help on the federal level, there’s not a whole lot we can do.”
That help doesn’t appear to be forthcoming any time soon. Hagen and Metcalf have been advised that the Department of Labor has its hands full with other issues, such as pursuing a directive from President Clinton to revisit the Family Medical Leave Act. However, both Hagen and Metcalf have been told by the federal agency that the intention of UIPL 41-98 was not meant to affect all employers, and they will review the directive.
The Department of Labor told the National Association of Temporary and Staffing Services in March that the intention of the directive was not to require states to consider minor job changes “new work.”
Temp firms targeted
Temporary-staffing firms are most affected by UIPL 41-98, as the directive says that when a temporary employee finishes a job and goes on to a new assignment, that is considered “new work,” Cornwell says. And if the prevailing wages of the new job are inferior to the previous assignment, the temporary worker can apply for unemployment. The job conditions and location are also factored into the equation.
“The mandate has created another welfare subsidy program to pay people not to work,” Cornwell says.
The net effect will be to drive up unemployment tax rates to unacceptable levels, and staffing firms such as Cornwell’s won’t be able to pass it on to the marketplace.
“My customer will never accept it,” he says. “It is something that can’t be absorbed. We won’t be able to afford the cost of the tax, and we will be out of business in one or two years.”
Both Brisk and Carol Schneider, owner of staffing firm SEEK, Inc., agree with Cornwell’s assessment.
“The unions have made it their mission in life to get rid of the temporary-help services,” Schneider says. “I find that difficult to understand, as we account for just over two percent of the US labor force.”
When it comes to UIPL 41-98, what makes sense for some states with less sophisticated labor laws does not appear to make sense for Wisconsin.
Metcalf says the advisory council is reluctant to recommend a change in statutory langauge until the Department of Labor has a chance to revisit the issue.
“We don’t deal with change tlike this very well,” Metcalf says. We are really not used to having policy jammed down our throats.”
What’s
at stake:
The U.S. Department of Labor administers the Federal Unemployment Tax Act (FUTA). Employers pay a federal unemployment tax based on the size of their payroll.
The government gives it back to the states to pay for the administrative cost of providing unemployment insurance programs.
Employers build up a reserve balance based on their overall unemployment claims history. If unemployment claims rise, the percentage tax rate the employer pays goes up.
A new directive from the U.S. Dept. of Labor injects uncertainty into the unemployment claims system. At the worst, it threatens to raise the unemployment tax employers pay, as unemployment claims are sure to rise under the directive, known as UIPL 41-98.
9-9-1999 Small Business Times, Milwaukee