SENATE BILL REPORT

ESB 5294

BYSenators Barr, Hansen and Lee

Limiting application of predecessor-successor employer unemployment contribution rates to changes of ownership.

Senate Committee on Commerce & Labor

Senate Hearing Date(s):February 11, 1987; February 13, 1987

Majority Report:  Do pass as amended.

      Signed by Senators Warnke, Chairman; Smitherman, Vice Chairman; Anderson, Cantu, Lee, Tanner, Vognild, West, Williams, Wojahn.

Senate Staff:Dave Cheal (786-7576)

                  March 12, 1987

AS PASSED SENATE, MARCH 11, 1987

BACKGROUND:

Under the experience rating system of unemployment insurance premium rating adopted by the Legislature in 1984, a significant issue is whether an employer who buys a business or otherwise succeeds as owner of a business acquires the experience rating of the previous employer or whether such successor is to be considered a new employer.  The answer to that question can make a substantial difference in the unemployment insurance premium faced by the successor employer.  The Legislature has changed the answer twice within recent years.  Currently, a successor employer does inherit the experience of a predecessor and is not considered a new employer.

A related question which this bill deals with, is when does a predecessor-successor event occur?  The Department has taken the position that even when a sole proprietor reorganizes as a corporation in which he or she owns 100 percent of the stock, that corporation is a successor employer for the purposes of unemployment insurance premium rating.

During the period from January 1, 1984 to January 1, 1985, successor employers were rated as new employers and were given the premium rate for the average of employers in their class.  Some employers who had a good record entitling them to low premiums, were faced with paying higher premiums as a result of a simple change in the form of their business organization.  Typically these changes were made to take advantage of favorable corporate rates under the Internal Revenue Code.

SUMMARY:

Regardless of whether a successor employer inherits the experience rating of its predecessor, no predecessor-successor event or relationship exists when the only change is the form of business organization of an employer without any change in ownership.

The bill is made effective as of January 1, 1984

Fiscal Note:      requested

Senate Committee - Testified: John B. Armstrong