Washington State House of Representatives Office of Program Research |
BILL ANALYSIS |
Commerce & Labor Committee | |
HB 2388
Brief Description: Ensuring employers do not evade their contribution rate.
Sponsors: Representatives Conway and Chase; by request of Employment Security Department.
Brief Summary of Bill |
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Hearing Date: 1/12/06
Staff: Chris Cordes (786-7103).
Background:
Federal Requirements for States' Unemployment Insurance Laws
General Requirements. The unemployment insurance system is a federal/state program under
which employers pay contributions to fund unemployment compensation for unemployed
workers. These payments are made under state unemployment tax acts (SUTA) and the Federal
Unemployment Tax Act (FUTA). The FUTA allows the states' employers to receive a tax credit
against their federal unemployment tax, and the state receives a share of the FUTA revenues for
administration of its unemployment insurance system, only if the state maintains an
unemployment insurance system in conformity with federal law. Washington's program is
administered by the Employment Security Department (ESD).
SUTA Dumping Act. In August 2004, the federal "SUTA Dumping Prevention Act of 2004"
(SUTA Dumping Act) was enacted. According to the United States Department of Labor, this
law is intended to: (1) address a concern that some employers and financial advisors were finding
ways to manipulate state experience rating systems so that these employers could pay lower
SUTA taxes than their unemployment experience would otherwise allow; and (2) prohibit the
following two methods of SUTA dumping:
Under the SUTA Dumping Act, the states' unemployment insurance laws must be certified as in conformity with the SUTA dumping requirements by a certain date. For Washington, this requirement will apply beginning with the 2006 tax rate year. Among other things, the federal SUTA Dumping Act requires the states' unemployment insurance laws to adopt certain successor employer provisions, including:
Washington Unemployment Insurance Contribution Rates
General Requirements. Most employment in the state is covered for unemployment insurance.
Each covered employer is required to pay contributions on a percentage of his or her taxable
payroll, except for certain employers who reimburse the ESD for benefits the agency pays to
these employers' former workers. For most covered taxable employers, unemployment insurance
contribution rates are determined by the combined rate assigned to the employer based on layoff
experience, social costs, and solvency surcharge, if any. The highest contribution rate varies but
may not exceed 6.5 percent plus a solvency surcharge, if any.
Requirements for Unqualified Employers. Some covered taxable employers are not qualified to
be assigned a combined rate. These unqualified employers include employers who are new
employers and certain successor employers who were not employers at the time of acquiring a
business. Until a new employer becomes a qualified employer, the rate is the average industry
rate, plus 15 percent of that amount, with a 1 percent minimum rate. For a successor employer
who was not an employer at the time of the business transfer, the rate is the rate assigned to the
predecessor employer for that rate year, with combined experience determining the rate
thereafter, or the new employer rate in that industry until the employer qualifies for its own rate.
Legislation adopted in 2003 changed the rate determination for certain successor employers
engaging in a business transfer on or after January 1, 2005. If a new successor employer has
substantial continuity of ownership or management of the predecessor's business, the successor is
not permitted to use the new employer rate. Instead, these employers must pay at the rate
assigned to the predecessor employer, and will have the experience of the predecessor employer
transferred to the successor as part of its rate beginning in January following the transfer.
Penalties
Unemployment insurance tax penalties were revised in 2003 to add a penalty for an employer
that is delinquent in paying unemployment taxes because of an intent to evade the successorship
requirements and for any business that promotes such evasion. This penalty was modified in
2004 to require assigning these employers, or other persons violating this requirement, the
highest contribution rate, plus 2 percent, for that calendar year in which the Commissioner makes
the penalty determination.
It is a gross misdemeanor, with a fine of up to $5,000 and/or up to one year in prison, if a person
who is required to collect and pay unemployment contributions willfully fails to pay the
contributions or willfully attempts to evade payment.
Summary of Bill:
Successor Employers
An employer that acquires all or part of the predecessor employer's operating assets, which may
include the employees, is considered a successor employer for purposes of determining wages
subject to contributions.
Generally, a successor employer's contribution rate beginning on January 1 following the transfer
of a business is based on a combination of the successor's and the predecessor's relevant layoff
experience. However, for transfers on or after January 1, 2005, if the successor employer is not
an employer at the time of the business transfer and only a part of the business was transferred,
the experience will be assigned to the successor only if this makes the successor employer a
qualified employer. If the successor is not qualified, then the new employer rate will apply until
the successor qualifies for a different rate, including the transferred experience.
The prohibition that a new successor employer may not use the new employer rate when there is
substantial continuity of ownership or management of the predecessor's business is extended to
cover situations in which there is substantial continuity of control.
If a purpose of a business transfer or acquisition was to obtain a reduced rate, then:
References to determining the applicable new employer rate are changed from the Standard
Industrial Classification Code to the North American Industry Classification System.
Penalties
A civil penalty assessment rate is assigned to an employer whose delinquent assessment is due at
least in part to an intent to knowingly evade the successorship provisions or to a business found
to be knowingly promoting evasion of the successorship provisions. The Commissioner must
assign a civil penalty assessment rate in addition to the assigned rate that increases the rate to the
maximum array calculation factor rate plus two percent. The civil penalty assessment rate is
assigned for that rate year and the three following rate years. In addition, the employer must pay
the ESD's reasonable audit and collection expenses and may be prosecuted for a gross
misdemeanor.
A person who is not an employer and who is knowingly evading or knowingly attempting to
evade the successorship provisions, or knowingly promoting the evasion, is subject to a civil
penalty of $5,000 and to the gross misdemeanor penalty as if the person were an employer. The
person is also required to pay the ESD's reasonable audit and collection expenses.
"Knowingly" is defined to mean having actual knowledge of or acting with deliberate ignorance
or reckless disregard for the prohibition involved, including intent to evade, misrepresentation, or
willful nondisclosure.
Penalties and interest collected for evasion of the successorship provisions are to be expended
solely for prevention, detection, and collection activities related to evasion of the successorship
provisions.
The Commissioner of the ESD must establish procedures to enforce, and may adopt such other
rules as are necessary to implement the successorship provisions.
Application
These provisions are stated to be remedial and apply retroactively to January 1, 2006.
Rules Authority: The bill permits the Commissioner of the ESD to adopt such rules as are
necessary to implement the bill.
Appropriation: None.
Fiscal Note: Available.
Effective Date: The bill contains an emergency clause and takes effect immediately.