Training Needed to Reduce $8.4 Billion Wage Gap, Report Says

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By Jazlyn Williams

Federal agencies must improve their efforts to reduce unemployment tax avoidance and decrease the frequency of improper unemployment benefit payments, the Office of the Inspector General for the Department of Labor said in its Nov. 28 semiannual report to Congress.

The OIG report covers the office’s activities from April 1, 2017 to Sept. 30, 2017, and summarizes its audits of the Employment and Training Administration and the Department of Labor. The report also highlights significant indictments and convictions related to unemployment insurance fraud schemes.

States reported 778,000 misclassified workers and $8.4 billion in underreported wages paid to misclassified workers from Oct. 1, 2012, to March 31, 2015, the OIG said in its ETA audit report (04-17-001-03-315), issued Sept. 13. Employers that misclassify workers as contractors do not pay unemployment taxes on wages earned by those workers.

The OIG determined in its report that the ETA did not adequately monitor state operations that identified a State Unemployment Tax Act avoidance practice known as SUTA dumping in which employers try to avoid paying higher taxes by transferring all or some employees to a new or existing employer that is assigned a lower unemployment tax rate.

States reported 9,478 instances of SUTA dumping, and employers owed $31 million in additional taxes in 2014 because of SUTA dumping, the report said.

The ETA must provide additional support to state agencies in their unemployment tax fraud efforts, the report said, noting that state agencies want training opportunities and access to best-practice information.

The state agencies most effective in detecting unemployment tax avoidance schemes generally had formal training, a statewide task force, and they used detection systems more effectively than other state agencies, the report said.

The ETA should provide the requested training opportunities and best-practice information, and also should improve controls over state reporting, the OIG report recommended.

The ETA generally agreed with the OIG’s recommendations and, following the audit, had begun requiring states to submit progress reports, improving data collection and evaluation efforts, the OIG report said.

The OIG report noted that an ETA grant of $10.2 million to 19 states to implement and improve worker-misclassification detection and enforcement systems had been used by each state to improve technology, increase staff, and conduct community outreach.

The U.S. Labor Department met most federal requirements to report improper unemployment benefit payments, but did not meet goals to reduce improper payments, the OIG found in a separate audit report (03-17-002-13-001), issued June 13.

Improper payments may occur when employers do not timely respond to separation information requests, workers continue to claim benefits after reemployment, or claimants do not comply with work search requirements.

Because the amount of benefits charged to an employer’s unemployment tax account generally helps determine an employer’s unemployment tax rate, improper payments may cause inaccurate tax rates to be assigned to employers.

The Labor Department identified $3.85 billion in improper benefit payments in fiscal 2016, the audit report said. The improper payment rate of 11.65 percent fell short of the department’s goal of up to 10.63 percent, it said.

The Labor Department’s methodology for estimating improper payments under the Federal Employee’s Compensation Act program has problems, and the department’s estimation methodology and reporting transparency must be improved; however, the department’s estimate for the Unemployment Insurance Program was adequate, the OIG report said.

The OIG recommended that Congress review and enact legislative proposals to improve the integrity of the Unemployment Insurance program and reduce improper payments.

One OIG proposal would require states to use the State Information Data Exchange System, which lets employers and third-party payroll administrators electronically receive and respond to state requests for information about workers seeking unemployment benefits.

States require separation information requests to be returned within a specified number of days from the date they were sent, so receiving the requests electronically instead of by traditional mail may give employers more time to prepare effective responses and appeal benefits-eligibility determinations.

The OIG also proposed that Congress allow OIG to access the National Directory of New Hires, that it require states to cross-match benefit requests with data in the directory, and that it require states to use unemployment tax penalty and interest collections solely for unemployment insurance administration.

Under its audit plan for fiscal 2018, the OIG is to assess state agencies’ use of federal funding to improve unemployment insurance technology systems, as well as efforts to reduce instances of unemployment benefit recipients continuing to receive benefits after reemployment.

To contact the reporter on this story: Jazlyn Williams at jwilliams@bloombergtax.com. To contact the editor on this story: Michael Baer at mbaer@bloombergtax.com.

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