State SUTA Dumping Proposals

Many bills falling short at protecting state trust funds, workers and employers
by National Employment Law Project

Click here to view the full .pdf version of this document and a state-by-state chart.

Most states have proposed anti-SUTA dumping legislation for consideration in the 2005 state legislative session.  SUTA dumping is a scheme by which employers dodge unemployment insurance taxes by “selling” their companies to new related entities in order to receive a much lower UI tax rate.  In August of 2004, President Bush signed federal legislation (P.L. 108-295) which requires states to have laws against SUTA dumping in place by 2006, and to impose penalties for violation of the state law provisions on both employers and on tax advisors.

SUTA dumping means states are losing hundreds of millions of dollars in taxes -- possibly as much as a billion dollars -- each year:

• The state of Michigan recently recovered $2.4 million in its first anti-SUTA dumping action against the giant Aramark Corporation.   Other states’ experience is similar:  the average SUTA-dumping case actually investigated and reported to GAO in 2002 cost states over $630,000. Connecticut has discovered a loss of $4 million since October 2003, and has dozens of cases pending.  North Carolina collected $9 million in just 12 cases, with 250 cases still pending.  

• States that have estimated losses from SUTA dumping are finding that their losses are in the tens of millions.  Colorado estimates losses from SUTA dumping in excess of $40 million. California estimates its losses at $100 million in 2003. Michigan estimates that SUTA dumping costs it $60-$90 million a year.

• Kelly Services, a major proponent of SUTA dumping legislation, estimates it could have saved $30 million in taxes in one year if it had engaged in SUTA dumping.

The federal Department of Labor drafted model legislation for the states to follow, on both the issues of substantive liability for SUTA dumping and on penalties.  NELP has reviewed 26 of the proposed state laws.  NELP has identified four critical trends that state policy-makers and advocates should address as they finalize their SUTA dumping policies.

• Federal and state bills fail to address PEO SUTA-dumping.  Neither the federal bill, nor most state bills offer solutions to SUTA dumping by employers who use “professional employee organizations,” which, for a fee, take workers onto their payroll and essentially sell them back to an employer.  Two million workers nationwide work through PEOs, which are operated by some of the nation’s biggest staffing firms like Manpower and Adecco, as well as numerous smaller operators.  Several states, including Michigan, Minnesota, North Dakota, Washington and Pennsylvania, have attempted to address this issue.

• States proposing weaker civil penalties on SUTA dumping firms than recommended by U.S. DOL.  U.S. DOL recommends that SUTA dumping firms be subject to the maximum tax rate (or a 2% increase, whichever is higher) for 4 years. Eight of the state laws we surveyed are proposing penalties that are weaker than this DOL model.

• Inadequate civil penalties for non-“employers.”  The DOL model SUTA dumping language submits entities that are not “employers” under the law, (generally including those who have no “employees” or those who are new employers) to a $5,000 maximum penalty.  In many cases, this may be the maximum penalty that can be imposed on the tax-advising entities, an amount insufficient to deter SUTA dumping.  Most states follow this inadequate approach, and five states have even lower penalties.  However, six states (Alabama, Arizona, California, Kentucky, Minnesota and North Dakota) have improved on the model by imposing specific penalties on tax advisors, or by increasing the penalties.

• Entrepreneurial SUTA dumpers buying firms to get a lower tax rate face no meaningful penalty.  In all but one proposed state law (Vermont), persons caught buying an existing unemployment account to start a new business with a lower tax rate would get the same tax rate as any other law-abiding new employer.  In these states, there is no real disincentive to SUTA dumping.