According to a historical summary on the Social Security Administration’s website, the high unemployment rates during the Great Depression of the 1930s was a key impetus for the August 1935 enactment of the Social Security Act, which established the mechanism to create an unemployment insurance system in all States. Many supported a nationally administered program, but there were constitutional concerns since Wisconsin had already established an unemployment insurance program in 1932. Titles III and IX are the unemployment insurance provisions of the Social Security Act. Title III appropriated funds “for the purpose of assisting the States in the administration of their unemployment compensation laws” and stated the required provisions each State’s unemployment insurance program should include while Title IX imposed an excise tax of a percentage of the wages paid by employers.

Today, this basic structure remains intact, and almost all wage and salary workers are now covered by an unemployment insurance program. The unemployment compensation program is a federal-state partnership that is funded by federal and state taxes paid by employers. The federal government sets requirements, monitors compliance, and holds and invests the money in the unemployment trust fund account until it is drawn down by states for the payment of compensation. Within the framework of the federal requirements, each state designs it own program. Therefore, each state is responsible for administering claims, defining its benefit structure (eligibility and disqualification provisions and benefit amounts), and setting state tax rates. All states primarily finance their unemployment programs through employer contributions, but in Alaska, New Jersey, and Pennsylvania, employees are also required to contribute.

The Federal Unemployment Tax Act currently imposes a federal tax on covered employers of 6 percent of wages up to $7,000 a year paid to an employee. However, if the employer timely pays state unemployment taxes, it may be eligible for a federal tax credit of up to 5.4 percent. As of July 1, the federal tax rate actually dropped from 6.2 percent to 6.0 percent, but both state unemployment taxes and the effective tax rate for many employers has substantially increased as a result of high unemployment rates. Claims skyrocketed during the recession and forced 32 states to take out loans totaling approximately $43.6 billion from the Federal Unemployment Account (FUA). Under federal law, states may not repay the interest on these loans from their state unemployment trust fund accounts, but to avoid the need for future loans, many of these states have raised or are attempting to raise state unemployment tax rates. Also, 19 states are recouping these interest fees via special assessments on employers. Moreover, according to UWC, although the American Recovery and Reinvestment Act of 2009 (ARRA) waived interest payments and the accrual of interest on advances to the State Unemployment Trust Fund through Dec. 31, 2010, without an extension of the waiver through 2012, employers in up to 32 states and jurisdictions are likely to see up to $3.6 billion in increased state unemployment taxes. Furthermore, the federal tax credit is reduced for employers in states that have failed to repay these loans. Consequently, UWC projects that FUTA taxes on employer payroll in half of the states will increase by $2.5 billion for 2011 and by $3.0 billion for 35 states for 2012.

In summary, high employment rates are resulting in substantial increases in unemployment taxes, and unfortunately, unless federal and state legislators change the laws and regulations to offer employers relief, the portion of the tax formula described above will not change. However, there is a portion of this skyrocketing cost equation which human resources professionals can directly assist in controlling. Although the formulas used for rate determination vary significantly by state, all state laws determine individual employers’ contribution rates on the basis of their “experience” with unemployment. In other words, the more former employees that utilize the unemployment insurance program, the higher the employers’ unemployment taxes. Therefore, cost savings can be realized if human resources professionals protect their employers’ experience ratings. Fundamentally, human resources can positively affect the experience rating by helping managers both select and retain good employees. Additionally, effectively training managers in performance management, strategically managing terminations, and establishing an effective UI claims management program are also important ways to lower UI claims.

Although human resources professionals cannot directly affect all aspects of the unemployment insurance cost equation, it's important for us to become more knowledgeable about the unemployment insurance system so that we can help our employers manage skyrocketing unemployment insurance costs.