| Unemployment insurance tax liabilities have | | | | 2) Do you use multiple TATs that correspond to the |
| skyrocketed. As a result of the recession, | | | | tax rates assigned in each state or do you use a |
| employer-paid UI taxes in 2010 and for the next few | | | | single enterprise-wide TAT? |
| years will be significantly higher than in previous years - | | | | 3) If you use a maximum tax rate, how will benefit |
| for some employers tax liabilities have increased by | | | | costs in excess of the maximum be allocated? |
| more than 300%. No longer a "nuisance tax," higher UI | | | | 4) Should internalized tax liabilities be allocated on a |
| taxes are having a negative effect on labor costs, | | | | prospective or retrospective basis? |
| cash flow, and profitability. Higher UI taxes are altering | | | | 5) How long must new employing units wait before |
| hiring and retention decisions and affecting other talent | | | | becoming internally experience rated? |
| management decisions. Higher UI taxes are increasing | | | | 6) What internal tax rate should be assigned new |
| employers' interest in effective UI cost control | | | | employing units? |
| techniques. One technique to measure and allocate an | | | | 7) What happens to the experience of employing units |
| organization's UI taxes liabilities more effectively is | | | | that have been sold, closed, or merged into another |
| internalized experience rating (IER). | | | | unit? |
| SCENARIO: Microbiomics, Inc. develops and sells | | | | Step 2: Collecting Data and Developing UI Metrics |
| biomarkers and other specialized microbial based | | | | The decisions made in Step 1 provide the foundation |
| products to the federal government, universities, and | | | | for IER. In Step 2, IER objectives and decisions are |
| the pharmaceutical industry, including a specialized | | | | quantified. At this point you will need to collect IER data, |
| product developed for Placebo Pharmaceuticals, a | | | | including staffing, retention, and turnover data, UI benefit |
| manufacturer and distributor of proprietary and generic | | | | claim and charge data, taxable payrolls by quarter, and |
| pharmaceuticals and agricultural products. Microbiomics | | | | other UI statistics such as UI hearing attendance and |
| has four facilities in Maryland with the facility in | | | | decision data, by employing unit. |
| Baltimore dedicated to Microbiomics's contract with | | | | NOTE: Benefit charge data element by employing unit |
| Placebo. Employment at the Baltimore facility is cyclical | | | | is critical information. Most states will provide you with |
| in nature with a period of full production followed by a | | | | a breakout of benefits charges on an employing unit |
| period of reduced activity - staffing needs are typically | | | | basis. This procedure is referred to as "unit coding." |
| reduced by 50%. Currently Microbiomics calculates and | | | | You should contact the Experience Rating Section of |
| allocates annual UI tax liability as a percent of payroll. | | | | your state UI agency for information regarding the |
| Question: Is there a more effective technique to | | | | state's procedure for unit coding. |
| recognize and allocate the financial impact of the | | | | Specifically, the following data elements by employing |
| Placebo contract on Microbiomics's annual UI tax | | | | unit will be necessary for your IER system: |
| liability? | | | | Payroll Data: |
| UI Tax Liabilities: The Basics | | | | 1) Gross wages. |
| Most employers pay two forms of UI taxes: a | | | | 2) Federal taxable wages. |
| flat-rated federal UI tax and an experience-rated state | | | | 3) State taxable wage. |
| UI tax. The federal UI of $56 per employee tax is | | | | 4) Severance pay. |
| based on a taxable wage base of $7,000 and a net | | | | 5) Unemployment insurance taxes by state. |
| tax rate of 0.8%. | | | | 6) W-2 count. |
| The state, experienced-rated UI tax rises and falls | | | | Human Resource Data by Employing Unit: |
| each year based on the employer's experience with | | | | 1) Number of positions authorized for reporting period |
| turnover, UI claims activity, and the amount of benefits | | | | by. |
| collected by separated employees. | | | | 2) Number of employees filling those positions during |
| NOTE: Under the federal-state UI program, the various | | | | the reporting period. |
| states are permitted - within broad standards - to | | | | 3) Number, types, and reasons for separation during |
| promulgate their own UI financing system. As a result, | | | | the reporting period. |
| state UI tax liabilities - as well as benefit entitlement -- | | | | Unemployment Insurance Claims Data by Employing |
| varies significantly among the states. For 2010, taxable | | | | Unit: |
| wage bases range from $7,000 in six states to over | | | | 1) Number of claims during the period. |
| $30,000 in five states and state experience-rated tax | | | | 2) The reasons for separations for these claims. |
| rates range from 0.0% to more than 15%. | | | | 3) Current disposition of all claims filed. |
| Unemployment insurance cost control begins with a | | | | 4) The benefit year of each claim filed. |
| focus on coverage and classification issues. First, the | | | | 5) The maximum charges associated with each claim. |
| organization should determination whether or not the | | | | This amount is the product of the claimant's weekly |
| organization is a "covered employer" under the Federal | | | | benefit amount (WBA), the maximum duration of each |
| Unemployment Tax Act (FUTA) and the state UI law - | | | | claim, and the employing unit's percent or portion of |
| most organizations are. Second, the organization must | | | | liability for benefit collected. |
| ensure that it has properly classified employees and | | | | Benefit Charge Data by Employing Unit: |
| independent contractors, that is, the organizations must | | | | 1) Actual charges, by claimant, by benefit year for the |
| answer the question: "Were services performed in an | | | | period. |
| employer-employee relationship?" Third, the | | | | 2) Total actual charges for the period. |
| organization must determine whether or not the | | | | 3) Benefit charge adjustments (debits and credits) by |
| services performed by the employees are specifically | | | | claimant, by period. |
| excluded from the definition of employment under | | | | Step #3: Application of Internalized Experience Rating |
| FUTA and state UI law. Fourth, the organization must | | | | In this Step, we apply the data collected in Steps #1 |
| determine if the wages paid are taxable for FUTA | | | | and #2. Continuing the scenario: |
| and state purposes. | | | | Each facility - including the Baltimore facility -- has |
| UI cost control then focuses on experience rating, | | | | approximately 100 researchers and production staff. All |
| which is the most effective method of allocating costs, | | | | facilities are reported under a single employer |
| incentivizing employment stabilization, encouraging | | | | registration number. UI taxes are allocated on a |
| employer participation in ensuring benefit payment | | | | percent of payroll. In 2008 and 2009, Microbiomics had |
| integrity, and holding employers' accountable for their | | | | a UI tax rate of 4.5% and an annual tax liability of |
| use of the UI program. Organizations have an | | | | $180,000. For calendar year 2010, Microbiomics's tax |
| opportunity and incentive to use UI cost control | | | | rate increased to 6.4% and has a projected tax liability |
| activities to reduce their state UI tax liability. One | | | | of $256,000. |
| method of improving UI cost control is the use of | | | | Through the use of internalized UI experience rating, |
| Internalized Experience Rating. | | | | Microbiomics seeks to more effectively allocate UI |
| Internalized Experience Rating: Background | | | | costs, more accurately assign costs to the proper |
| From a management perspective, a cost that is not | | | | account, and reduce the amount of overhead. |
| accurately measured is not effectively managed. From | | | | Information: |
| a labor cost accounting perspective, costs that are not | | | | 1) An analysis of work force and turnover data |
| properly identified as direct labor costs become | | | | reveals variations in each facility's employment stability. |
| overhead. Thus when labor costs are not accurately | | | | 2) Because of research and product line diversity, |
| identified, measured, and properly allocated to the | | | | each facility is treated as an independent employing |
| responsible employing unit, department, division, or profit | | | | unit and reports to a different Vice President. Each |
| center, cost controls are weak, accountability is lacking, | | | | facility is treated as a profit center. |
| and profitability/loss is miscalculated. | | | | 3) Historically Microbiomics has treated UI taxes as |
| Internalized experience rating addresses these issues | | | | overhead and has allocated UI taxes as a percent of |
| by more accurately measuring the impact on profits | | | | payroll. A survey of facilities managers has indicated |
| and losses and by identifying UI management | | | | that UI tax liabilities, like workers' compensation and |
| responsibilities. IER is a tool to help management more | | | | social security, are considered a non-controllable |
| equitably allocate UI tax liabilities and a process that | | | | overhead cost. |
| aids in the preparation of budgets and the calculation | | | | 4) As a part of its enhanced UI cost management |
| of costs, pricing, and profitability. Further, by more | | | | activities, Microbiomics has decided to stress the cost |
| accurately assigning UI tax liabilities, IER exposes UI | | | | and responsibility accounting aspects of internalized |
| cost management weaknesses and highlights the | | | | experience rating. As a result, individual facilities may |
| advantages of employment stabilization. By more | | | | be assigned a higher or lower tax rate than is |
| accurately measuring each employing unit's impact on | | | | assessed under state law. |
| the organization's UI tax liability, IER motivates | | | | Data: |
| employing units to take action, i.e., to improve their UI | | | | 1) Number of facilities = 4 |
| cost control activities. | | | | 2) 3-year average total payroll = $24,000,000 |
| Internalized Experience Rating: Implementation | | | | 3) 3-year average taxable payroll = $4,000,000 |
| To help organizations implement internalized | | | | 4) 3-year average benefit charges = $160,000 |
| experience rating, we have developed a four-step | | | | 5) Claimants collect an average of $400/week for a |
| implementation process. This process is built on the | | | | average duration of 8 weeks |
| foundation of senior management's commitment and | | | | 6) Assigned tax rate for calendar years 2008 and |
| support for UI cost management. | | | | 2009 = 4.5% |
| Step 1: Analyzing the Applicability of IER | | | | 7) Annual tax liability in calendar years 2008 and 2009 |
| The following activities will help you identify critical | | | | = $180,000 |
| issues in implementing IER and help determine IER's | | | | 8) Assigned tax rate for calendar year 2010 = 6.4% |
| applicability for your organization. | | | | 9) Annual tax liability for calendar year 2010 = |
| Activity #1: Ask the right questions. Start by asking a | | | | $256,000 |
| series of questions about the organization's strategic | | | | IER Methodology: |
| and business objections, business risks, key business | | | | 1) Assign each employing unit an internal designation |
| metrics, organizational structure, talent management | | | | 2) Determine the taxable payroll by employing unit |
| goals, and employment stabilization activities. The | | | | 3) Determine the amount of benefit charges by |
| purposes of this activity are to align UI cost control | | | | employing unit |
| with organizational objectives and determine the | | | | 4) Calculate the tax due before IER. The taxable |
| potential ROI from IER. | | | | payroll for each employing unit is multiplied by the |
| Activity #2: Assess the organization structure. Identify | | | | assigned calendar year tax rate for the company. This |
| employing units within your employer registration | | | | method assigns individual employing unit tax liability on |
| number, either by division, location, profit center, or | | | | the basis of the size of payroll, not actual experience |
| function. Do these units have P&L responsibility? Do | | | | with turnover, claims activity, and the amount of |
| these units have the authority to make staffing | | | | benefits charged. |
| decisions? You should identify the lowest | | | | 5) Calculate each employing unit's Benefit Charge |
| organizational level with P&L and staffing decision | | | | Factor by dividing each employing unit's amount of |
| making authority. | | | | benefit charges for the rating period by the Total for |
| Activity #3: Assess turnover and UI data. Assess | | | | the company. |
| turnover, UI claims frequency and severity, changes in | | | | 6) Calculate each employing unit's IER UI Tax Liability |
| employee numbers, and changes in taxable payroll. | | | | by multiplying each employing unit's Benefit Charge |
| Are there significant difference in the data among | | | | factor by the company's total tax liability. |
| employing units? If yes, your organization will benefit | | | | 7) Determine the difference in the per employing unit |
| from IER. | | | | tax allocation by subtracting each employing unit's UI |
| Activity #4: Assess current perceptions of UI costs. | | | | Tax Liability by each employing unit's IER UI Tax |
| Do individual managers consider UI costs a uniform | | | | Liability. |
| payroll expense like social security that is allocated | | | | 8) Analyze resulting differences and conduct a root |
| proportionally based on size of payroll; or do they | | | | cause analysis. |
| consider UI costs an experience-rated tax that | | | | 9) Incorporate the IER calculations into your cost |
| reduces profitability? NOTE: the implementation of IER | | | | accounting and budgeting procedures. |
| will have a dramatic adverse P&L impact on employing | | | | 10) Incorporate the IER calculations into your UI cost |
| units with high turnover and high benefit charge history. | | | | control management program. |
| To overcome high-cost units' objections to IER, you | | | | Analysis. Prior to using internalized experience rating, |
| may want to hold all units harmless the first year of | | | | the Baltimore facility's 2010 UI tax liability is $70,400 |
| implementation and use that period to educate the | | | | ($1,100,00 times 6.4%); the after IER tax liability is |
| units on UI cost control and help them develop an | | | | $89,293 ($256,00 times 34.88%). Thus IER reveals that |
| effect UI cost management program. | | | | the Baltimore facility's UI tax liability is being understated |
| Activity #5: Determine IER methodology. There are a | | | | by $18,900, while the UI tax liability for the Rockville |
| number of methods to calculate employing units' | | | | facility is being were overstated by $28,282. By using |
| internal tax rate. The easiest to understand and | | | | IER, the true financial implications of UI taxes are |
| implement is the ratio of individual unit's benefit charges | | | | revealed, the implications of turnover become more |
| to the total amount of benefit charges. See the | | | | obvious, and the value of UI cost management |
| example below. A second method is the Benefit Ratio | | | | becomes more urgent. |
| (BR) method. Under this method, the amount of benefit | | | | Step 4: Evaluation and Action |
| charges for a one-to-three-year period is divided by | | | | With the information developed by internalized |
| the taxable payroll for the same period. The resulting | | | | experience rating, management now has a clearer |
| ratio is then applied to an internally developed Tax | | | | understanding and perspective of the strategic, |
| Allocation Table (TAT) to determine the tax liability for | | | | operational, and financial impact of talent management, |
| each employing unit. In determining internal UI tax liability, | | | | employment stabilization, turnover, and unemployment |
| a number of decisions will have to be made: | | | | insurance costs. This insight will improve management's |
| 1) Do you use multiple taxable wage bases that | | | | ability to align talent management, accounting, and UI |
| correspond to the taxable wage base used in each | | | | cost management activities with business objectives, |
| state you have employing units or do you use a single | | | | allocate UI cost more accurately, and improve |
| enterprise-wide taxable wage base? | | | | performance management. |