SUTA DUMPING PROHIBITION
Senate Bill 171 as passed by the Senate
Sponsor: Sen. Jason E. Allen
Senate Bill 172 as passed by the Senate
Sponsor: Sen. Laura M. Toy
Senate Bill 173 as passed by the Senate
Sponsor: Senator Michelle A. McManus
Senate Bill 174 as passed by the Senate
Sponsor: Sen. Dennis Olshove
House Committee: Employment Relations, Training, and Safety
Senate Committee: Commerce and Labor
Complete to 2-28-05
A SUMMARY OF SENATE BILLS 171-174 AS PASSED BY THE SENATE 2-23-05
Federal law requires that states amend their laws governing unemployment programs to prohibit the practice known as "SUTA dumping," which generally refers to the transfer of employees to a different employing company solely or primarily for the purpose of obtaining a lower experience rating and thus a lower state unemployment tax rate. (The term SUTA refers to "state unemployment tax act.")
Senate Bills 171 through 174 would amend the Michigan Employment Security Act to address this subject. The bills are tie-barred and would take effect on July 1, 2005. The lead bill, Senate Bill 171, contains the statement that "it is intended to be interpreted and applied in a manner so as to meet the minimum requirements of the [federal] SUTA Dumping Prevention Act of 2004 . . . and implementing regulations."
The bills would amend state law to do the following:
· Prohibit a person from transferring all or part of a trade or business solely or primarily for the purpose of reducing the contribution rate or reimbursement payments in lieu of contributions required under the act (i.e., "SUTA dumping").
· Prohibit a person from acquiring all or part of a trade or business solely or primarily to obtain a lower contribution rate than otherwise would apply under the act.
· Prescribe sanctions against a person who knowingly violated or attempted to violate these provisions.
· Require the unemployment insurance agency to recalculate the contribution rates of both employers if an employer transferred its trade or business to another employer and there were substantially common ownership, management, or control of the two employers.
· Require the agency to assign a new employer contribution rate to a person who was not an employer under the act at the time of a transfer and who acquired a trade or business solely or primarily to obtain a lower contribution rate.
· Require the money recovered under these provisions be credited to the unemployment compensation fund.
· Require the agency to report annually to the both Houses of the Legislature regarding SUTA dumping, beginning January 1, 2006.
· Specify that a transfer of an employer's assets would be a "transfer of business" under criteria described in the act if there were not substantially common ownership, management, or control of the transferor and transferee.
The following is a more detailed description of the bills.
Senate Bill 171
Prohibitions and Rate Recalculation. The bill would prohibit a person from doing either of the following:
· Transferring the person's trade or business, or a portion of it, to another employer for the sole or primary purpose of reducing the contribution rate or reimbursement payments in lieu of contributions required under the act (which the bill would define as SUTA dumping).
· Acquiring a trade or business, or a part of a trade or business, for the sole or primary purpose of obtaining a lower contribution rate than otherwise would apply under the act.
The following two provisions would apply to the assignment of rates and transfer of the unemployment experience of a trade or business to prevent or remedy those transfers that violate the provisions above.
If an employer transferred its trade or business, or a portion of it, to another employer and there were substantially common ownership, management, or control of the two employers at the time of the transfer, the unemployment experience attributable to the transferred trade or business would have to be transferred to the transferee employer. The agency would recalculate the contribution rates of both employers and apply the new rates in the same manner as for a transfer of business under the act. If, after a transfer of experience, however, the agency determined that a substantial purpose of the transfer of trade or business was to obtain reduced liability for contributions, then the employers' experience rating accounts would have to be combined into a single account and a single rate assigned to the account.
If the agency determined that a person who was not an employer under the act at the time of a transfer acquired a trade or business, or a portion of a trade or business, solely or primarily for the purpose of obtaining a lower contribution rate, the agency would have to assign that employer the applicable new employer rate under the act.
Transfer of Trade or Business. The bill would require the agency to establish procedures to identify the transfer or acquisition of a trade or business, or part of a trade or business, for the bill's purposes. The bill specifies that this would not grant the agency the authority to promulgate rules to define SUTA dumping.
The bill also would require the agency to determine whether a transfer was made for the sole or primary purpose of obtaining a lower contribution rate using objective factors, such as the cost of acquiring the business, continuity in operating the business enterprise of the acquired business, the length of time the business enterprise continued to operate, and the number of new employees hired to perform duties unrelated to the business activity or trade conducted before the acquisition.
The bill would specify that "trade or business" could include the employer's employees, but the transfer of some or all of an employer's employees to another employer would have to be considered a transfer of trade or business for the purposes of the bill if, as a result of the transfer, the transferring employer no longer performed trade or business with respect to the transferred employees and that trade or business were performed by the transferee employer.
Sanctions. If a person knowingly violated or attempted to violate the bill's prohibitions, or if a person knowingly advised another person in a manner that caused a violation, the sanctions would depend in part on whether the person was an employer. A person who was not an employer would be subject to a civil fine of up to $5,000. If the person were a transferring or acquiring employer, the employer would have to be assigned the higher of the following contribution rates:
· The highest contribution rate assignable under the act for the rate year during which the violation or attempted violation occurred and for the three rate years immediately following that rate year.
· If the employers' business already were at the highest rate assignable for a year in which the violation occurred, an additional penalty rate of two percent of taxable wages for that year.
Money recovered under the bill as contributions, reimbursements in lieu of contributions, civil fines, civil penalties, or interest would have to be credited to the unemployment compensation fund.
Annual Report. Beginning January 1, 2006, the agency would have to provide an annual written report to the chairpersons of the Senate and House Appropriations subcommittee having jurisdiction over legislation pertaining to unemployment compensation. The report would have to include all of the following in a format that did not identify individual employers:
· The procedures the agency had adopted to prevent SUTA dumping.
· The number of SUTA dumping investigations opened during the year.
· The average length of time to resolve a SUTA dumping investigation and the number of investigations pending for more than six months and for more than one year.
· The number of cases brought before an administrative law judge or the board of review and the agency's success rate in those cases.
· The amount of money recovered as a result of implementing the bill.
· The amount of the balance or deficit in the unemployment compensation fund.
· The estimated fiscal impact of SUTA dumping on the Fund balance and the factual basis for the estimate.
· The number of full-time employees assigned to, and the number of employee hours devoted to, SUTA dumping prevention, investigation, and remediation.
· The number of employee leasing companies operating in Michigan.
· The number of SUTA investigations that involved the transfer of employees to or from an employee leasing company.
· The number of investigations in which an employee leasing company was found to have participated in SUTA dumping.
Reimbursing and Contributing Employers. Notwithstanding any other provisions, the following would apply to changes in status between reimbursing and contributing employers:
· If a contributing employer elected to be to become a reimbursing employer, any negative balance the employer incurred while a contributing employer would have to be paid to the agency before the employer could become a reimbursing employer.
· Any benefits charges incurred as a result of services performed as a contributing employer that were charged to that employer's account after it became a reimbursing employer would be transferred to the employer's reimbursing account and paid by means of reimbursement to the agency.
If a reimbursing employer applies to become a contributing employer and the agency permits it, or if the agency converts a reimbursing employer to a contributing employer, then the employer would continue to pay the agency reimbursement payments as those benefit charges were incurred based on wages paid while the employer was a reimbursing employer. Benefit charges incurred based on wages paid after the reimbursing employer became a contributing employer would be used to calculate the employer's contribution rate.
Senate Bill 172
Under the Michigan Employment Security Act, the unemployment compensation fund is separate from all public money or state funds, and is administered exclusively for the purposes of the act. Senate Bill 172 would amend the act to include in the unemployment compensation fund all money collected under Senate Bill 171, including fines, civil penalties, and interest. (Currently, the fund does not contain interest, penalties, and damages collected under the act and would still not contain interest, penalties, and damages under other provisions of the act.)
Senate Bill 173
The bill would amend the act to specify that a transfer of an employer's assets would be a "transfer of business" under criteria described in the act only if there were not substantially common ownership, management, or control of the transferor and transferee.
The bill also would delete a provision under which a transfer is a "transfer of business" if an employer transfers any of the assets of the business, by any means other than in the ordinary course of trade, to any transferee substantially owned or controlled by the same interests that owned or controlled the transferor.
Senate Bill 174
The bill would amend the act's definition of "employer" to refer to any individual, legal entity, or employing unit that became a transferee of business assets by any means other than in the ordinary course of trade from an employer, if there were substantially common ownership, management, or control of the transferor and transferee at the time of the transfer. (This would replace a reference to a provision that Senate Bill 173 would delete.)
The Department of Labor and Economic Growth (DLEG) estimates that the Federally-mandated prohibition of SUTA dumping will increase revenue for the Unemployment Compensation Fund by a range of $62 million to $95 million, plus an additional but indeterminate amount for new penalty and interest provisions. In addition, the State will avoid the loss of Federal administrative funds totaling approximately $80 million for the unemployment compensation program. The bills impose additional investigative and reporting requirements on DLEG, which will add an indeterminate administrative cost.
Fiscal Analyst: Richard Child
■ This analysis was prepared by nonpartisan House staff for use by House members in their deliberations, and does not constitute an official statement of legislative intent.