UI Forum (ADP Unemployment Group)

Fourth Quarter 2015

Best Practices: Impact of Hiring Practices on UI Taxes

Most studies that attempt to quantify the high costs of turnover use some variation of the formula: Turnover costs = costs of hiring new employees + costs of training new employees. However, what is often not factored into the equation is the extra unemployment insurance (UI) tax that may be incurred during periods of high turnover due to poor hiring decisions.

How Turnover Affects UI Taxes

If a newly hired employee is let go because he or she can’t perform the job you hired him or her to do, the state will likely deem the reason for separation as beyond the employee’s control and will allow the claimant to collect unemployment benefits that you pay for.

To partially fund unemployment benefits, employers pay state UI taxes on each employee’s wages up to a maximum determined by each state. The total taxable wages for all employees constitutes the taxable payroll. Let’s see how turnover due to poor hiring practices can affect the UI tax payroll burden.

Sample Turnover UI Tax Scenario:

In this example, the annual taxable wage base in this employer’s state for each employee is $7,000. New Employee X makes $20,000 annually, and the employer is responsible for paying UI tax on the first $7,000 of the $20,000 earned during that calendar year.

Let’s say that Employee X works for six months and is then replaced by Employee Y earning the same annual salary. The employer is responsible for the UI tax on the first $7,000 for both employees, which doubles the taxable payroll exposure for this single case from $7,000 to $14,000.

Hiring Best Practices

To help reduce employee turnover (and UI taxes), making good hiring decisions makes good business sense. You can start by urging your company to review its hiring practices in three key areas:

  • Do you use pre-employment assessments?
  • How effective are your hiring managers’ interview skills?
  • Do you use probationary periods?

Pre-employment assessments are valuable tools that can help identify candidates who are likely to succeed. Assessments should be validated, be based on objective indicators of job success and be administered consistently.

Effective interviewing can weed out candidates less likely to succeed. Interviewers should be thoroughly trained in best-practice interviewing techniques, and interview questions should focus on the actual job requirements. Candidates for the same job should be asked the same questions.

Probationary periods can be a useful new-hire best practice. Several states offer employers relief from unemployment charges for short-term employees, based on days or hours of tenure and/or maximum earnings as defined in their statute.

Employee Training and Development Benefits Everyone

It’s not uncommon for people to change jobs several times to advance their career and increase their wages. Why not ensure that you retain proven employees by assisting them to develop skills you need rather than hiring unknowns?

Employers can reduce turnover and employment costs in several ways:

  • Cross-training may eliminate the need to hire another employee.
  • Cross-training can help retain valued employees by giving them new challenges and possible promotions.
  • Urging good employees to explore transfers within the company instead of quitting helps build loyalty and benefits company managers who are happy to hire proven workers.

State Updates

Alabama: Alabama has amended its UI law regarding reasonable assurance. The changes state that employers whose employees “provide direct services to schools may not receive unemployment benefits during breaks in employment occasioned by holidays, fall and winter breaks, and summer vacation,” under the concept of “reasonable assurance” that they will return to work between two successive academic years or school terms. The State Agency is working out specifics regarding how the amendment will be implemented and for identifying affected employers. Additional details will follow as they become known.

To view the complete amendment, link to: http://alisondb.legislature.state.al.us/ALISON/SearchableInstruments/2015RS/PrintFiles/HB71-int.pdf

Idaho: The Idaho Department of Labor (DOL) recently announced a new tool—an online chat option—for claimants seeking answers to questions on the unemployment process from claims specialists. The online, real- time chat feature is available Monday-Friday from 8:00 AM to 5:00 PM Mountain time.

During the current pilot phase, online chat is only offered in English. However, the DOL hopes to expand the program to include additional languages by mid-2016. Spanish will be the first additional language.

Claimants who wish to communicate by phone can still call and speak to a staff member at 208/332-8942 during the same business weekday hours. For more on the pilot program, visit: https://labor.idaho.gov/news/NewsReleases/tabid/1953/ctl/PressRelease/mid/3872/itemid/2878/Default.aspx

Iowa: Effective July 5, 2015, Iowa Workforce Development increased the weekly benefit amount (WBA) for claimants. Prior to the increase, the WBA ranged from $416 for workers without dependents to $511 for those with four or more dependents. The change increases the amounts to $431 and $529 respectively and applies to all new claims filed on or after July 5, 2015. For more information, visit https://www.iowaworkforcedevelopment.gov/iowans-jobless-and-injury-benefits-increase-0

Maine: The Maine Department of Labor has also increased the WBA for claimants. Effective June 1, 2015 through May 31, 2016, the maximum is raised from $397 per week plus $10 per dependent (but the total cannot exceed one half of the weekly benefits amount) from the previous amount of $386 per week. For more information, visit: http://www.maine.gov/labor/unemployment/faqs.html#a5

Montana: Two Senate Bills, 85 and 105, were signed into law and became effective July 1, 2015:

  • SB 85 expands the authority of the Maine Department of Labor to use the federal Treasury Offset Program to direct the offset of federal income tax refunds if the person owes a “covered unemployment insurance tax debt.” A “covered unemployment insurance tax debt” includes employer contributions, penalties and interest that are owed to the UI fund, and remain uncollected.
  • SB 105, in part, renames the Board of Labor Appeals to the Unemployment Insurance Appeals Board. The law also clarifies and better aligns Montana’s exemptions of “employment” pertaining to government or non-profit entities with those of the federal government. It also limits credit or refunds on wages that were reported and subsequently used to establish benefit eligibility to 2 years. If a false claim or omission of material fact is discovered, the limit is extended to 3 years.

To view the complete statutes, link to: http://leg.mt.gov/bills/2015/billpdf/SB0085.pdf and http://leg.mt.gov/bills/2015/billhtml/SB0105.htm

Oregon: The Oregon Employment Department announced that effective June 28, 2015, the State’s maximum WBA will increase from $549 to $567. Oregon law requires this amount be recalculated annually based upon the average wage earned by workers in the state.

For more information, visit: http://lincolncountydispatch.com/index.php/business/item/5103-oregon-increases-weekly-unemployment-benefits/5103-oregon-increases-weekly-unemployment-benefits

This communication is intended solely for the use of the individual to whom it is addressed and may contain information that is privileged, confidential or otherwise exempt from disclosure. The information provided in this communication is for informational purposes only and not for the purpose of providing legal, accounting, or tax advice. The information and services ADP provides should not be deemed a substitute for the advice of any such professional. Such information is by nature subject to revision and may not be the most current information available.

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