Unpaid Federal Loans Means More Taxes on Employers (TRN Commentary)

By Gordon Friedrich (The Reserves Network Vice President, Corporate Counsel)

In previous articles, we have discussed how most states have taken federal loans to pay for the increased volume of unemployment claims. In Ohio for example, the totals loans currently exceed $2.4 Billion.

Since there is no money to pay back the loans before the end of 2010, Ohio will become a “credit reduction” state in 2011. What does that mean for Ohio employers?

Generally all employers pay, in addition to a state specific unemployment contribution on its payroll, a federal unemployment tax (FUTA) equal to 0.8% on the first $7,000 of each of its employees’ annual pay. The rate is actually 6.2%, but states are credited 5.4% if the state has no outstanding federal FUTA loans (6.2%, minus the 5.4% credit, equals 0.8% net FUTA rate).

Since it is expected that Ohio will not repay these loans before 2011, Ohio becomes a credit reduction state. All Ohio employers will have their FUTA “credit reduced” from 5.4% to 5.1% thereby increasing the effective rate by 0.3%.

In whole dollar terms, an employer historically paid $56 in FUTA for every employee who earned $7,000 or more during the year. With the credit reduction, another $21 will be added to that tax in 2011 for a new total of $77.

Ohio is not the only state where this will undoubtedly occur. Michigan has been a credit reduction state since 2009. Currently 32 states have outstanding federal loans, so the expectation is many states will face the credit reduction.

In an economy where the burden on employers is growing and taxes are increasing, another $21 per employee further reduces working capital and the ability to hire more employees.

Gordon Friedrich is the Vice President, Corporate Counsel for The Reserves Network, a provider of “Total Staffing Solutions” in the office, industrial, professional and technical markets. To contact Gordon, email gfriedrich@trnstaffing.com.

Post-Recession Hiring Challenges (TRN Commentary)

By Brad Qua (The Reserves Network Vice President, National Sales)

The most recent recession has been more destructive to businesses and families than any recession in recent times, and we will all be feeling the repercussions of this economic downturn for years to come.

One of the dynamics that we are seeing in the employment industry during this recovery is that companies have been adding multiple pre-hire screening practices to ensure that their workforce has the most desirable characteristics. Certainly we have all seen that drug tests and criminal background checks are among these. However, in many states, where it is still permitted, companies have added an inspection of a prospective employee’s credit history.

A review of credit history makes great sense for positions that require a degree of trust with negotiables or valuables, as well as employees who have access to other sensitive equipment or information. An ounce of prevention is well worth a pound of cure.

Let’s examine the impact that this recession will have on this pre-hire practice. One could argue that many prospective employees, who may have been unemployed during this recession, are more likely to have blemishes on their credit history, and as a result will be screened out by prospective employers. It is very easy for a medical payment or a car payment to get relegated to “next month” when a family is trying to survive while unemployed. We have several customers that require a pre-placement credit check and we are forced to screen twice as many candidates today to find the same number of eligible candidates as we were in 2007.

Are these credit checks weeding out perfectly good candidates? It is entirely possible, but one must consider the opposite side of the argument to evaluate the dynamic. We all know that desperate times call for desperate measures and, when faced with the pressures of life, some people make some poor choices. It is up to every company to perform a risk assessment to determine what protecting valuables, be they negotiables, data, equipment or simply information is worth to them. If a pre-hire credit check is determined to be worth disqualifying some candidates based on their credit history, then just like any other pre-employment evaluation, companies need to be sure that EEO rules are not broken during implementation.

If a credit check is to be performed, it is strongly suggested that you have a written document in your hiring policies that clearly states your company’s position on what constitutes an acceptable credit history and what constitutes an unacceptable one. It is critical not to create the opportunity for an applicant to make an assertion that they were unfairly denied employment based on a credit threshold that was not fairly and equitably applied to all applicants.

It is critical that the policy be carefully written so that any possible credit issue that comes up falls within the policy. In real life these policies are not as comprehensive as they need to be, so when an unforeseen credit issue comes up, a ruling needs to be made and the policy adjusted. When this happens, it is important to document the adjustment in the policy, the date and reason for the adjustment, and then apply the policy consistently moving forward.

It is also possible that if economic woes persist, it will become increasingly difficult to consistently source candidates who adhere to the acceptable credit standards prescribed. The same process holds true here. If, as a company, you determine that your screening thresholds are preventing you from being effectively staffed, then the risk analysis need to be re-evaluated. If it is determined that a relaxing of your standards is required then the policy needs to be amended and the change and purpose for that change needs to be dated and documented.

These suggestions are in addition to the Federal Fair Credit Reporting Act, which require pre-check authorization and notification of rights as well as post check responsibilities if adverse action is required.

None-the-less there will be some interesting dynamics that we all will be seeing as we re-tool and rebuild our human capital on the other side of the recession.

Brad Qua is the Vice President, National Sales for The Reserves Network, a provider of “Total Staffing Solutions” in the office, industrial, professional and technical markets. To contact Brad, email bqua@trnstaffing.com.

Ohio’s SUTA Deficit (TRN Commentary)

By Gordon Friedrich (The Reserves Network Vice President, Corporate Counsel)

Each state has a trust fund into which is deposited unemployment insurance payments levied on employers based on their payroll and benefits paid to its former (unemployed) workers, similar to commercial merit-based insurance programs. It should be to no one’s surprise that Ohio’s state fund is insolvent as payrolls dropped and claims skyrocketed. Ohio’s fund deficit of over $2.4 billion has been temporarily remedied with federal loans so that checks to unemployed can continue.

This problem is not unique to our state. Altogether 37 state trust funds are upside down over $38 billion. The US Department of Labor forecasts that by the end of 2012 the debt will exceed $90 billion.

And the loans are being called. For Michigan, interest payments on $3.4 billion started in 2009. California ($7.4 billion), New York ($3.2 billion) and Ohio payments are due next year 2011. Non-payment of the loan principal also kicks in federal penalties.

The only legislative answer on the books today to collect this debt is to crank up the insurance rates charged to Ohio employers, increasing expenses, reducing working capital and their ability to hire more employees. No one disputes the need for a comprehensive unemployment program but any plan to resuscitate it cannot be solely funded by employers.

Gordon Friedrich is the Vice President, Corporate Counsel for The Reserves Network, a provider of “Total Staffing Solutions” in the office, industrial, professional and technical markets. To contact Gordon, email gfriedrich@trnstaffing.com.

SUTA-The Iceberg that is Not On Anyone’s Radar

By Brad Qua (The Reserves Network Vice President, National Sales)

Every day it seems like the newspaper lands on our doorstep with a new obstacle on the business horizon that threatens to sink our ships. We’re still unsure what the impact of the Federal Healthcare Reform Act, Healthy Families Act (Ohio) and the Free Choice Labor Act will have on our business, but they are certainly on the radar.

In addition to these items, there is one issue that will have a large impact on every business’ labor costs and not even legislators are willing to discuss it because they currently have no solutions.

36 of the 50 states’ unemployment funds are flat-broke and six more are almost out of money. What each of these states has done is borrow from the federal government through the FUTA fund in order to pay the unemployment benefits that are due to its unemployed residents.

Each state has a repayment plan that is based on the amount and date that they first started borrowing. The problem is that the most recent recession has been so profound. While the funds are designed to be replenished by the time the FUTA loans are due, the states are still broke.

If one were to ask an HR or payroll professional what the FUTA rate is, they would tell you that it is .8% of the first $7,000 of payroll. The actual rate is 6.2% of the first $7000. However, the Fed offers a credit reduction from that rate to each state as long as the state either has a zero balance or is paying back as required. The problem that will soon come to a head is that states with outstanding loans can’t pay them, which, by law, will trigger the elimination of the credits.

What this means is that the federal portion of employers’ unemployment tax will go up independent of the states’ portion. In real terms, this means that each year that the state does not make its payments in full and on time, their FUTA rate will grow by .3%. And it is reasonable to estimate that it will take at least 5-7 years for the state funds to become solvent themselves, let alone able to repay federal loans.

But wait, there’s more – Unfortunately the states are going to be forced to replenish their funds as soon as possible. Therefore, you can be sure that states will raise not only their percentage rates, but also your state’s base wage rate, and this could easily double or triple your own SUTA costs.

Brad Qua is the Vice President, National Sales for The Reserves Network, a provider of “Total Staffing Solutions” in the office, industrial, professional and technical markets. To contact Brad, email bqua@trnstaffing.com.