with co-author Sheldon Jackson
If you are a large employer, chances are good that you have experienced an unemployment benefit wage audit in recent years. In fact, over the past several years, there has been a substantial increase in the number of wage audit requests made by state unemployment agencies. In 2015, Equifax tracked that wage audit requests reflected approximately 12 to 15 percent of the total unemployment claims managed by the Equifax Unemployment Cost Management group. At the same time, the level of compliance enforcement by states has increased as well, although the specific level of enforcement varies from state to state.
States use wage audits to validate an employee’s eligibility for unemployment benefits and to detect situations when an individual may have been improperly collecting unemployment insurance benefits while earning wages from an employer during the same week(s). These audit requests require an employer to verify and provide accurate weekly earnings for an employee or former employee. Responding in a compliant manner can cause tremendous challenges for employers, both in terms of locating the specific wage information for the period specified and also when those wages need to be calculated because they fall outside of a standard pay period or are requested in a specific format by the state.
Complexity abounds in the wage audit process for both employers and states. Employers in particular are challenged by their ability to provide the right wage information in the right format. In all but New York, state wage audit responses require employers to submit wages in a format that aligns with benefit weeks, usually from Sunday to Saturday. This format typically does not match standard employer pay periods, which run Monday to Sunday. To recalculate wages for an hourly employee with overtime payments or a shift pay schedule, for instance, can be particularly tricky and unnecessarily time-consuming. Indeed, employers with whom Equifax works report spending an average of 20 minutes per employee to gather employee records and manually recalculate wages in order to submit them in the required format.
In addition, many employers find themselves stymied by wage audits because of the variance in state requirements. Currently, there are 54 jurisdictions in the United States, and each has a different set of unemployment rules and regulations. Each jurisdiction has different response requirements, submission formats, timelines and penalties. Case in point: At last count, there were more than 100 different types of wage audit response forms in use nationwide.
The level of enforcement related to compliance with unemployment benefit information requests varies from state to state as well. States define noncompliance in many different ways, from missing information, unreadable information, improper format, late response and more. Penalties for noncompliant employers can range from a subpoena of records to steep monetary fines, which can include costly Unemployment Insurance Integrity (UII) violations. No matter the state or states in which your company operates, there are risks for employers in all states for failing to respond in a timely manner with accurate information.
Employers bear the burden of potentially increased unemployment payroll tax rates due to improper payments, as well as for the compliance around unemployment claims management. Understanding the scope and impact of an unemployment program also requires careful consideration of the compliance elements, including UII regulations, as well as correct wage audit responses. Both require timely and accurate responses, which can put a strain on personnel juggling guidance from 54 different jurisdictions. Adding to the complexity is the wage audits themselves, which are random, and Murphy’s Law tells us that they can show up when the resources available to respond are least likely to be available. Advance planning and training on wage audit response can significantly minimize the administrative burden associated with the additional time required to respond to wage audits.
By anticipating and proactively improving the processes for responding to wage audits, employers can improve both the accuracy and timeliness of the response back to the state and the distraction and burden on their teams. In addition, those protocols can help protect and often reduce administrative and tax burden.
Improper unemployment benefit payments are costly – the U.S. Department of Labor estimates that the improper payment rate in 2016 was 11.6 percent. This means that $3.9 billion in unemployment benefits were overpaid, an increase over the improper payment rate of 10.29 percent in 2015, or $3.4 billion. The U.S. DOL has mandated that states work to achieve an improper payment rate of 10 percent or less, and many states have committed to reducing that rate even more.
Overpayments impact every employer in every state. Those overpayments drive the “replacement costs” for the state unemployment funds. Currently, the DOL estimates that the national replacement costs are $1.32. That means employers, collectively, are funding overpayments at a rate of $0.32 for every dollar spent. In an oversimplified example, it would be as if a national employer funded $200,000 in unemployment benefits last year for separated employees. That employer would have tax rates adjusted in order to collect $264,000 to put back into the unemployment accounts to help offset the overpayments made. By assisting the states in identification of improper payments and carefully managing unemployment claims, the burden on those state unemployment accounts is reduced, and the overpayment rate drops accordingly.
For organizations operating in multiple locations around the country, the increasing state oversight and added regulatory complexities can create unexpected and time-consuming challenges, as well as compound the risk of costly noncompliance. Many employers are looking for a solution that can minimize their administrative burden due to varying state requirements while improving accuracy and avoiding the errors that can occur when manual fulfillment processes are used.
To help manage the challenges associated with state wage audits, organizations should look for solutions that meet some basic standards, such as:
The growing frequency of state wage audits coupled with the increased complexity of state requirements have led many employers to search for a solution that can relieve them of the burden of tedious and time-consuming wage audit processes. Recognizing that both employers and state agencies benefit from reductions in improper payments, savvy employers can use automated solutions to help them reduce their risk while maintaining compliance with necessary state regulations.
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Angela Lockman is responsible for product management for Employer Services at Equifax Workforce Solutions. Lockman is primarily focused on Unemployment Cost Management and the Compliance Center platform, consisting of technology products to increase efficiency, manage risk and drive tax savings for Onboarding, I-9 and E-Verify, WOTC and tax incentives. Lockman often speaks as a subject matter expert on employer compliance topics, such as implementing software solutions, managing immigration requirements, as well as tax credits and incentives at regional and national conferences.
Prior to joining Equifax, Lockman was the Southeast Tax Credits Practice Leader for KPMG LLP. Lockman received her Certified Economic Developer (CEcD) designation in 1994. She serves on the executive board of the National Employment Opportunities Network (NEON) and previously served on the editorial board of Strafford Publishing’s Tax Incentives Alert.