Hidden Costs of Layoffs

Unemployment insurance costs you plenty. Reduce your liabilities through planning and foresight.

February 1, 2012 | Robert J. Grossman

Millions of people, like Alan Brophy, 60, are struggling.

Brophy, who has a two-year community college degree, once earned $75,000 as a credit manager for a phone company. Divorced and without health insurance, he's desperately looking for a full-time job in Hamden, Conn. He's been on unemployment for more than six months, and "every month my chances become slimmer," he says. "This morning I got a flat tire that cost $15 to fix. When I only had $14, the garage guy took it all. Now I have no money left until I get paid from my part-time job tomorrow."

As Brophy contends with a tough New England winter, 120 employees at the New Buffalo Shirt Factory in Clarence, N.Y., are looking forward to spring with greater optimism. Like Brophy, they receive unemployment insurance (UI) and work part time. But their outlook is rosier as they anticipate when they'll be restored to full-time status. Credit HR Director Pam Thayer for implementing a work-sharing strategy that lets Buffalo Shirt reduce payroll, save on unemployment costs and still maintain a loyal workforce.

"If you lay people off fully, there's a chance you won't get them back," she says. "My workforce is right here, still engaged, working less, but still together."

The way you plan for and carry out staff reductions, layoffs and firings can affect morale and retention as well as your company's brand. Moreover, effective HR management of unemployment insurance can be a cost saver. Monitor performance reviews and attendance and other policies diligently, and you'll keep ineligible people off the rolls.

"Too many HR people don't think about the fiscal implications of unemployment insurance," says Scott Hollander, senior director of human resources and quality assurance at Axion Power International in New Castle, Pa. "Just one person slipping through the cracks can cost you several thousand dollars."

Pain Not Shared Equally

In the United States, 13.1 million people are unemployed; the official unemployment rate was 8.5 percent as of December 2011. Add in people who have exhausted their benefits, who have given up looking and who are working only part time but want to work full time, and the number reaches 23.7 million, or 15.2 percent of the adult working-age population.

Many do not qualify for unemployment insurance. Among them: people who leave their jobs voluntarily, those looking for their first jobs and re-entrants who previously left the labor force voluntarily. Others are eligible for unemployment benefits but don't file. As a result, 7.1 million people were receiving some type of unemployment insurance compensation in December 2011.

When it comes to feeling the bite, states and industries are not equal. Unemployment rates range from 3.4 percent in North Dakota to 13.0 percent in Nevada. The construction industry (with 16 percent unemployment) and leisure and hospitality businesses (at 10.8 percent) are among the hardest-hit sectors.

The average jobless spell now lasts 40.8 weeks, the longest duration on record, up from 16.8 weeks five years ago. Employers nationwide bear much of the increased costs of unemployment insurance through the taxes they pay, and the outlays are numbing. Each recipient collects on average nearly $295 a week for the additional 24 weeks. That comes to $2.07 billion more each week, which means employers are paying $47.6 billion more now than before the recession. The range of maximum weekly payments varies from $235 in Mississippi to $625 in Massachusetts.

If that isn't enough, most state governments are turning to employers to cough up more dollars to pay interest due on federal loans that the states tapped after they ran through their trust funds.

Paying the Bill

Unemployment insurance provides temporary assistance to workers who lose their jobs through no fault of their own. The basic program is state-run with oversight from the U.S. Department of Labor. Typically, it provides up to 26 weeks of benefits, replacing about half of the recipient's former wages, up to a ceiling. States pay the benefits; the federal government pays the states for administrative costs. Employers pay the Federal Unemployment Tax at a rate of 6.2 percent on the first $7,000 each employee earns. Employers that pay on time offset 5.4 percent, so they actually pay 0.8 percent tax, or $56 per year for each employee.

The permanent Extended Benefits Program provides an additional 13 or 20 weeks of compensation to workers who exhaust basic benefits in states where unemployment has worsened. Normally, the states and the federal government split the cost, but currently the federal government fully funds benefits through the 2009 American Recovery and Reinvestment Act.

The federal government ex-tended benefits and picked up the tab for as long as 99 weeks in 23 hard-hit states under a temporary Emergency Unemployment Compensation program. The Temporary Payroll Tax Cut Continuation Act of 2011 extended the expiration date of the emergency program to March 6.

State benefit funds come from the states' unemployment tax authority, a per-employee payroll tax similar to the federal one. The taxable wage base differs and ranges from $7,000 in Arizona, California, Florida, Mississippi and South Carolina to $38,800 in Hawaii.

Employers' tax rates depend on "experience ratings" that take into account the amount of state tax money an employer has contributed to the state unemployment insurance trust funds and the amount of compensation to former employees who received unemployment insurance. All employers pay tax on the base; employers that lay off workers have higher experience ratings. They pay more, sometimes much more.

What Can HR Professionals Do To Control Costs?

Here are five ways HR professionals can control their employers' costs for unemployment insurance taxes:

Severance. When you pay severance affects how long workers are eligible for unemployment insurance and affects your experience rating. Some HR departments wait until the last day to pay the severance, says Douglas Holmes, president of UWC—Strategic Services on Unemployment & Workers' Compensation. When you pay severance on the last day, the former employee can take the money, apply for unemployment insurance and get paid beginning the day he was let go. Instead, if you pay the severance in weekly amounts while the worker is still on your payroll but no longer working, he or she has that time to look for a job while still technically employed and will be on unemployment insurance that much less time, if at all.

Rolling layoffs. Consider rolling layoffs to help keep good workers linked to your company. "When you're facing layoffs, the easiest way is to take the bottom 10 percent," says Scott Hollander, senior director of human resources and quality assurance at Axion Power International. "But you can't do it forever."

With rolling layoffs, workers rotate in and out of unemployment with the expectation that they will be reinstated after a given period and replaced on unemployment insurance by another worker. There's a risk that some workers may resent the cutbacks, but if you have the right culture, most people buy in. When Axion instituted rolling layoffs, "There were some longer-serving employees who felt they should be working full time rather than three-quarter," Hollander says. "But they didn't make a stink."

Shared work. Rather than laying off a percentage of the workforce, shared work permits you to reduce hours and wages for all employees or for a particular group. They receive partial unemployment insurance benefits to supplement their lost wages. Shared work is currently available in 20 states.

Tri-Star Industries in Berlin, Conn., chose to offer shared work. "We're a machine shop with equipment that requires operators with specialized expertise," says president Andrew Nowakowski. "I didn't want to take the chance of losing a good employee to a potential competitor or have someone decide to leave the industry. Between what they received from unemployment insurance and the company, their take-home pay was about the same. We had to maintain all the full-time benefits."

Networks for referrals and leads. Shorten the time someone is on unemployment insurance. You're helping them land on their feet and holding down your company's tax burden. "Keep up with other employers who might be hiring," advises Pam Thayer, HR director at the New Buffalo Shirt Factory. "I make calls, steer them in the direction of employers who want their skill sets."

Regional HR associations often keep resume books that are circulated to members.

Government services. All states have rapid response teams poised to visit and offer services to employees targeted for layoffs. The Worker Adjustment and Retraining Notification Act requires notice of 60 days for employers with 100 or more employees. State labor officials scour media for news of layoffs by smaller employers, then contact them and offer support. Still, the services seem to be underutilized. Holmes says employers often overlook the free help.

"So many employers fail to take advantage of state job banks and other resources," says Lois Campanelli, a regional job center director at the Connecticut Department of Labor. "It would be really wonderful if HR people would get in touch with us to see what we can do for them in terms of recruitment and training."

Employers are not the only ones passing up freebies. Some job seekers bypass job search tips and advice on resume writing from public servants, instead turning to professional companies. Usually, these services are first-rate, but Anne Banaszewski, a Connecticut career development specialist, offers a caution: "Sometimes, you don't get what you pay for," she says. "You'd be surprised how often I catch errors."

Finally, although it won't generate a direct savings on taxes, be mindful of the impact unemployment of family members may have on your workers. They can be affected financially, emotionally, physically and psychologically. Alert supervisors to watch for signs of stress. Emphasize the availability of employee assistance programs.

—Robert J. Grossman

In all, private-sector employers pay about $500 per employee per year for unemployment insurance—24 cents out of the $28.13 average hourly compensation; 3 cents goes to the federal tax authority and 21 cents to the state tax authority.

Not Paying the Bill

Unemployment insurance is supposed to be forward funding, with states using unemployment taxes to build trust funds as hedges against future unemployment. Funds are capped with the understanding that when the "lockbox" is full, state unemployment taxes will be reduced. When unemployment skyrocketed and the weeks on unemployment per recipient dragged out, trust funds were depleted, leaving states without cash to pay benefits. To meet the shortfall, they borrowed from the federal government, promising to pay back the principal with interest.

As of Jan. 4, 27 states and the Virgin Islands are borrowing a total $36.8 billion from the federal government. This figure is projected to equal $40.9 billion in fiscal 2012, and $38.2 billion in fiscal 2013. Principal on the loans can be repaid from trust funds.

Debtor states were obligated to pay interest on 2011 loans of about $1 billion by Sept. 30, 2011. Interest cannot be paid from state unemployment taxes, so most states levied an additional flat tax on employers. Some states, like Texas, float bonds.

For example, for Connecticut to pay interest on an $850 million federal loan, employers paid an additional flat tax of $25 per employee in the fall of 2011. Meanwhile, Connecticut's trust fund remains capped at $660 million, an amount that proved insufficient to handle the crisis. "Our ceiling should really be $1.1 or $1.2 billion," says Glenn Marshall, commissioner of the Connecticut Department of Labor in Wethersfield, Conn. At 8.4 percent unemployment in December 2011, Connecticut continues to be a bellwether state, mirroring the national average.

Fiscal pressures have forced states into austerity. Some, such as Michigan, Missouri and South Carolina, have cut benefit duration to 20 weeks. Some have made eligibility criteria tougher. For example, Michigan requires applicants to submit to drug testing. In Indiana, a candidate is assumed to have refused suitable work if an offer of work is withdrawn by a prospective employer after the candidate tests positive for drugs or refuses to take a drug test.

Grumbling Gets Louder

Generally, employers continue to support a system that offers temporarily unemployed people a bridge to the next job, but with reservations: "The unemployment insurance program has lost focus," says Douglas Holmes, president of UWC—Strategic Services on Unemployment & Workers' Compensation, a national organization based in Washington, D.C.

"When you have modifications that move unemployment insurance from being temporary to permanent, and if people leave work for personal reasons, employers begin to have problems," he says. "People should only be paid unemployment insurance if they're available and seeking work. Some states, like New Jersey and Washington, with high payouts have relaxed eligibility rules to allow unemployment insurance for reasons that have no direct connection to the loss of jobs, like illness or disability of a family member."

In most states, recipients must document that they have been actively seeking work. Often, they must submit online evidence. This requirement, Holmes says, can have unintended consequences. "Employers may be flooded with resumes from people who aren't serious about a job and are just going through the motions. It creates a workload issue for employers who must process them and respond."

In Florida, as of August, claimants must contact at least five potential employers weekly and provide information about their job searches online.

As employers continue to be squeezed, those with stable workforces grumble about inequities in formulas for computing experience ratings, claiming their burdens are disproportionate. Revise the criteria, they insist, so that the employers actually contributing to unemployment pay their fair share.

The Unemployed Play A Game of Musical Chairs

Envision a three-round game of musical chairs where employers post available jobs on vacant chairs. Participants are job seekers who receive unemployment benefits.

Round one. When the music stops, empty chairs representing available jobs are filled by applicants who match the qualifications. The problem is, there are more matches available than actually occur. Outmoded data systems and poor dissemination of information represents one reason many workers and employers don't connect, says Glenn Marshall, commissioner of the Connecticut Department of Labor. Two-thirds of the states are operating with 30- to 40-year-old legacy mainframe computer systems, according to George Wentworth, senior attorney at the National Employment Law Project in New York City.

Round two. There are still plenty of empty chairs, but when applicants hustle to fill them, the seats are too small and uncomfortable. If the jobs are similar to what they had before, the salaries and benefits may be lower. Taking the jobs may require moves that would disrupt their families. Or the jobs might be entirely different from their previous positions.

Faced with disheartening choices, some surrender to what they see as inevitable and squeeze into the smaller seats.

Others leave the chairs empty and continue to collect unemployment benefits. Critics note that the extra time spent receiving unemployment benefits—roughly two weeks—costs employers more than is necessary. They observe that since joblessness increases depression, divorce and substance abuse, and has a corrosive effect on the unemployed worker and his or her family members still at work, getting people back to work as soon as possible should be the priority. If there's a job, they argue, the person should take it.

Others say extra time spent on unemployment insurance helps people come to terms with their situations psychologically, improving the odds that they'll approach new jobs in better states of mind. "If I'm unemployed for 20 weeks as an engineer and think I could get a job as an engineer, should I keep looking or take a job I really don't want?" says Douglas Holmes, president of UWC—Strategic Services on Unemployment & Workers' Compensation. "Taking the extra two weeks may be worth it if I find a job that's a better fit."

Some contend that when benefits are extended to last as long as 99 weeks, people are encouraged to game the system, dragging out payments before seriously looking for a job. They say government officials should reform the system so that the safety net does not offer a disincentive to work at employers' expense. One Congressional Budget Office study reveals that when eligibility was extended by 13 weeks, it increased the duration of unemployment insurance by 2.1 weeks.

Round three. There are still empty chairs. When the music stops, applicants rush to be seated, only to find that they're trying to squeeze their round bottoms into square-shaped chairs. The mismatch can't be overcome. Available jobs require skills, education and training they lack. Age and time away from work has caused them to fall behind or seem less desirable to employers. Many people are in jeopardy of not finding work unless they achieve heroic advances in education and training.

The long-term unemployed keep the game going and going. While the average duration of unemployment is 40.8 weeks, the median is 21. This differential suggests that half of recipients are back to work in about five months while the rest linger on extended benefits—many until they exhaust their benefits. In December, 42.5 percent of unemployed workers had been unemployed for more than six months. These long-termers are the crux of the problem—costing billions but yielding poor to middling outcomes when re-entering the workforce. In 2010, some 3.9 million exhausted their benefits.

Louis Jacobson, president of New Horizons Economic Research in McLean, Va., estimates that 40 percent of the long-term unemployed are disadvantaged educationally and lack basic skills required to land a job at a store. They need training, counseling and education to be employable. Even then, many would only be capable of working at low-paying jobs that often do not yield a living wage.

In contrast, a smaller percentage of long-termers tend to be 50 and older, better-educated, experienced workers. Some may be near retirement age but lack the resources to stop working. They say they are being rejected because of their age and length of time out of work—and some may have a point.

It's hard to prove, but "they're being discriminated against because of their age," Marshall says. "Employers tell me their insurance carriers are encouraging them to hire younger, not older, people because of the differential in health care costs."

Marshall says the stigma of being out of work for an extended time also holds long-termers back. The Fair Employment Opportunity Act of 2011, proposed by Reps. Rosa DeLauro, D-Conn., and Henry Johnson Jr., D-Ga., is pending in Congress. It would make it illegal to discriminate against the unemployed. Marshall is supporting similar legislation in Connecticut.

—Robert J. Grossman

Experts agree that the ratings need to be more heavily weighted against employers that dump more workers onto unemployment rolls than others, but they support an incremental change. "We favor experience rating reform on a state-by-state basis, but you have to consider the impact," Holmes says. "If experience ratings were adjusted to make the payments truly equitable based on experience, the burden would be too great on many employers if it were done in one step."

Others suggest that more state and federal taxes could be generated by raising the wage base used to compute unemployment taxes. That would increase every employer's contribution, regardless of experience rating. For the federal tax, that would require lifting the $7,000 base. State wage base increases would vary.

The Return on Investment for Your Tax Dollars

Twenty years ago, if you became unemployed, you would travel to your unemployment office, be interviewed by a claims expert who would take a written application, and end up with a monetary weekly award. The process would take maybe 10 days. Today, states have telephone and web-based claims processing; the personal touch has been replaced by automation. You file remotely and, when benefits begin, communicate online to report and answer questions: Are you available to work? Did you make efforts to find work?

"The employment service has shrunk," says George Wentworth, senior attorney at the National Employment Law Project in New York City. "Most states have gone to one-stop centers—a combination of organizations directing people toward training and referring them to employment data banks." Specially funded programs for veterans, workers losing out to offshoring and workers with remedial needs are among the initiatives operating under the OneStop Career Center umbrella.

Federally funded OneStops have a big mission but are hindered by budget cuts, outmoded computer systems and a silo mentality that slows the exchange of information with service providers. Established under the Workforce Investment Act and coordinated by the U.S. Labor Department's Employment and Training Administration, the centers offer training referrals, career counseling, job listings and similar services.

"When the economy goes down, and demand for our services is highest, we've faced cutbacks," observes Glenn Marshall, commissioner of the Connecticut Department of Labor. "Before the downturn, we processed 30,000 claims a week; now it's 130,000."

A few years ago, Connecticut's Department of Labor—administrator of OneStops in the state—had 1,200 employees. Today, with unemployment soaring, the department is down to 800. "We were a unit of five counselors; now we're down to two," says Anne Banaszewski, a Connecticut career development specialist.

OneStops were established on the premise that most unemployed people can and should conduct their own job searches. Too much support creates dependency instead of responsibility, lengthening rather than shortening the jobless period. "Everyone does not need hand-holding," Banaszewski says.

The tough love approach seems to work for many who never contact a OneStop other than to register. Others just use the computer banks and data sources online or on a walk-in basis. "You're totally on your own," says Mary Ellen Kirby of Zionsville, Ind. "The only programs they offered were for unskilled workers. It's fine for people like me to do everything virtually." She recently landed a sales executive position in Texas.

OneStop staff members have been directing their attention to the 10 percent to 15 percent of recipients who are in greater need of support. High-risk recipients are identified when they apply for long-term benefits. They must sign up for counseling and possible training and education referrals. They require attention and monitoring. Now, as the number of long-term unemployed individuals stands at 42.5 percent of recipients nationwide, it appears that more-rigorous screening might have netted more candidates for these high-maintenance services at the outset.

There may be a triage issue here. With limited resources, government officials may be spending too much time and resources on more-challenged individuals at the expense of others who are more likely to find work. The issues:

Should modernizing jobs databases and improving the technology that matches candidates to jobs be a higher priority?

Should the significant number of recipients who think incorrectly that they don't need help with job searches be a higher priority? "I'm amazed at the basic skills many people lack," says Peter Raymo, a business consultant in the Connecticut Department of Labor. "A lot need more than self-service."

Should recipients who blow off self-help be required to at least take an orientation to learn what's available? "There's a high probability that even minimal contact with a OneStop's self-help services can shorten the time on unemployment insurance by up to two weeks," says Louis Jacobson, president of New Horizons Economic Research in McLean, Va. Jacobson has studied OneStops.

As the recession drags on, it has become clear that there are not enough good jobs available. Still, some new jobs are always popping up. Others become available when people retire or leave. Doing a better job of matching candidates with jobs and targeting people who are most likely to benefit from training could take a bite out of the unemployment rate—and reduce expenditures.

—Robert J. Grossman

Fraud and Malingering

Many people know of someone they think cheats the system. U.S. Labor Department officials estimate that around 11 percent of unemployment recipients are ineligible, overpaid or working off the books. But to link all recipients to bad actors is a distraction and disservice to millions playing by the rules. For example, research by Princeton University economics professor Alan Krueger, chairman of the White House Council of Economic Advisers, and professor Andreas Mueller of Stockholm University, shows that unemployed U.S. workers spend more time than their counterparts in other industrial countries in pursuit of work.

There's no question that some ineligible claimants get benefits, says HR management consultant Ronald Adler, president and chief executive officer of Laurdan Associates in Potomac, Md. And, some employers don't pay taxes because they're misclassifying workers as contractors. State officials have to do a better job of identifying workers who report misinformation or who are rehired and don't report back, he says.

Fraud claims by individuals are less of a scam than people think, says Gary Burtless, senior fellow of economic studies at The Brookings Institution in Washington, D.C. In fact, employers may be as likely as individuals to game the system. "Employers routinely say, 'I fired the guy for cause' even though it was a layoff. Meanwhile, the laid-off worker doesn't get benefits unless he challenges the employer. Many just give up; others appeal, which drags out the time before they can receive a check." Burtless says some employers with skyrocketing experience rates fold their businesses and re-emerge as new companies with clean slates.

Controlling fraud requires dedicated staff and resources. However, with states scrambling for funds to address claims, staff members previously assigned to investigate have been reassigned. "We favor dedicated funds for integrity," Holmes says.

Unemployment benefits recipient Brophy and New Buffalo Shirt Factory's Thayer deal with the human costs of the current unemployment insurance system every day. Politicians and academics in organizations as diverse as Brookings and the Cato Institute offer myriad proposals for reform. Yet, in the end, the message to HR professionals is clear: Your approach to unemployment insurance has strategic as well as financial implications. Don't dismiss it as an inevitable expense.

"Liability for unemployment insurance starts when you hire someone," Adler observes. "You will be charged if you have to let them go."

The author, a contributing editor of HR Magazine, is a lawyer and a professor of management studies at Marist College in Poughkeepsie, N.Y.