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United States Small Business Administration
Office of Advocacy
RS 171
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State Unemployment Compensation
and Workers' Compensation Programs:
A Review of Major Legislative Changes,
Program Costs and Suggested Reforms

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Purpose

State unemployment compensation and workers' compensation programs are intended to insure against the interruption of income due to the loss of a job, either because of temporary layoff or inability to work as a result of an injury or illness in connection with work. The objective of this study is to identify both "cost-driver" and "desirable" provisions of the two programs that can significantly affect employer costs. Wherever possible, the study highlights issues that specifically apply to small businesses.

The discussion of "cost-driver" provisions--provisions that drive costs up--is intended to help small employers in their efforts with state legislators to enact needed program reforms. The discussion of "desirable" provisions--provisions designed to reduce or contain escalating costs while continuing to provide reasonable benefits and coverage for worker--is intended to help small employers, in particular, evaluate specific provisions that could be included in a state's unemployment compensation and workers' compensation laws.
 

Scope and Methodology

The National Foundation for Unemployment Compensation

and Workers' Compensation, founded in 1984, was established to collect data, conduct research, and analyze current issues relating to unemployment compensation and workers' compensation.

The Foundation has researched the provisions of each state's unemployment compensation and workers' compensation laws and reviewed all major legislative changes affecting these programs since 1984. A state-by-state summary of such changes occurring for the four-year period 1990-1993 is provided in this report. The Foundation's suggested "desirable" provisions are the result of this analysis.

For each state, the "total cost" of benefit payments is reported for each program for the last 10 years for which data are available (1984-1993). Unfortunately, the data do not enable the Foundation to isolate the cost impact for small employers.

On the basis of total cost data, calculations were made of average cost per covered employee for each state in each year for each program. To provide another measure in evaluating the impact of state legislative changes, the Foundation computed the average cost rate (total benefit payments as a percent of total covered wages) by state for each year. To the extent possible, the Foundation has identified the correlation of the cost impact of major legislative enactments for each program in selected states.
 

Highlights

• Over the years, states have expanded mandatory coverage provisions to include virtually all employees and employers. The expansion of coverage has resulted in many complex and costly problems, particularly for small employers. In fact, providing this mandated coverage represents a substantial cost of doing business in many states.
• In addition to the cost of providing the insurance coverage, many small employers often have difficulty understanding the many confusing requirements in the different state laws, including record keeping and reporting.
• In most cases, legislative efforts have not focused on small business issues. Many issues addressed are intended to benefit all employers (large and small) and improve the overall performance of the programs.
• Major legislative changes deal with benefit levels, eligibility provisions, and the conditions under which benefits are to be paid. For workers' compensation programs, issues related to medical care have been the focus of many legislative changes because medical care has been a major contributor to the increased workers' compensation costs for employers.
• During the years 1990 to 1993, many changes were made to state unemployment compensation programs. In 1990, the Colorado legislature added a definition for "temporary help contracting firm." It also provided that employees of such a firm will be eligible for unemployment benefits if they contact the agency for reassignment immediately upon completion of a previous assignment and are not reassigned within five working days. Also in 1990, Kansas required that in employee leasing situations the leasing operation is required to make unemployment compensation contributions. In 1992 New Jersey reduced its unemployment insurance tax to 0.4 percent of taxable payroll, saving employers $200 million annually.
• Concerning workers' compensation laws, Connecticut in 1993 passed legislation requiring employers with 25 or more employees to have a labor-management safety committee. It also made it a D-class felony for an employer, knowingly and with intent to defraud, to misrepresent employees as independent contractors or provide false information to an insurance company in order to pay lower workers' compensation premiums. Other states also enacted workers' compensation changes.
• Other issues receiving attention by many state legislatures include disqualification provisions, improved program administration/oversight, and more efficient ways of allocating costs equitably among employers (experience rating and/or broader choices for purchasing workers' compensation insurance).
• One issue that has received considerable attention by state legislatures deals with the availability of workers' compensation insurance coverage for smaller employers. Several states have expanded availability of self-insurance, including group self-insurance. (The study includes findings from a recent report on the availability of, and requirements for, group self-insurance among the states.)
• In 1993, three of the four states ranked highest by average unemployment compensation benefit cost per employee were in the Northeast: New Jersey, Rhode Island, and Connecticut. The highest ranked was Alaska. For workers' compensation, the highest ranked states were Nevada, West Virginia, Montana and Maine--states with a high concentration of extractive industries.
• Based on the average cost rate, the four highest ranked states for unemployment compensation were Puerto Rico, Rhode Island, Alaska, and Washington. For workers' compensation, the four highest ranked states were Montana, Nevada, West Virginia, and Maine--the same states identified using benefit cost per employee as a measure.

Conclusion

The Foundation has attempted to identify the most important provisions in states' unemployment compensation and workers' compensation laws that can significantly affect costs to employers. This information will prove helpful to small employers in determining the kinds of cost-saving legislative changes they might want to present to their state legislators.
 

Ordering Information

The complete report is available from:
National Technical Information Service
U.S. Department of Commerce
5285 Port Royal Road
Springfield VA 22161
(703) 487-4650
(703) 487-4639 (TDD)
 

Order number: PB96-193396

Cost: A09; A02 Microf.

*Last Modified 6-11-01