[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]
[[Page 45515]]
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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
[[Page 45516]]
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 * * *
.''
[[Page 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
