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Office of the State Comptroller - Local Government & School Accountability

Cost-Saving Ideas: Minimizing Unemployment Insurance Costs

Minimizing Unemployment Insurance Costs Brochure [pdf]
Introduction | Review Claims for Propriety | Select the Funding Method | Comprehensive Written Policy | Additional Information on this Topic

Introduction

Unemployment insurance provides immediate, short term financial protection for people who, generally, are out of work through no fault of their own; are ready, willing and able to work; and have sufficient work and wages in covered employment, as stipulated by law. Qualification for benefits is determined by the NYS Department of Labor (DOL), but the individual employers are responsible for funding their program.

A study by the Office of the State Comptroller (OSC) found there were signicant differences in the cost of unemployment insurance among similar local governments. In many instances, local governments can take additional steps to minimize their unemployment insurance costs.

Local officials should take steps to ensure that they are keeping unemployment insurance costs as low as possible. The brochure suggests some steps municipal and school district officials can take to minimize unemployment insurance costs.

Review Claims for Propriety

When a former employee files for unemployment insurance and is determined by DOL to be eligible, a notice of entitlement and potential charges is sent to the former employer. This notice also provides the municipality or school district with an opportunity to comment and specify the circumstances that resulted in unemployment. Managers should review these notices promptly and completely.

Keep in mind that because claims are charged to your account, these charges could increase your tax rate in future years if your government uses the tax contribution method for funding your unemployment insurance.

Reviews should be documented thoroughly and handled by the appropriate officials, usually the person responsible for maintaining the payroll records and the former employee's immediate supervisor.

Select the Funding Method That is Most Economical for You

Except for a few excluded positions, local government employees in New York State are covered by the State Unemployment Insurance Program, administered by DOL, and funded by individual employers.

Unlike most businesses, government entities can elect to fulfill their funding obligations in one of two ways - the Tax Contribution Method or the Benefit Reimbursement Method:

  • Tax Contribution Method - Governments pay a quarterly tax based on a portion of annual earnings of each eligible employee. Rates are determined using a DOL index based on each government's individual experience rating.
  • Benefit Reimbursement Method - Governments contribute by reimbursing DOL for all unemployment benefits paid to their employees.

An OSC study comparing the two payment methods found potential aggregate savings if localities selected the reimbursement method instead of the tax contribution method. The potential savings ranged from over $3000 for a town with 19 employees to more than $59,000 for a town with 59 employees. In total, for the 10 towns reviewed, the average taxes paid during the three-year period exceeded average benefits paid out by $8,345.

Although our study found that the reimbursement method was less costly, you will want to make a comparison to verify that this method will result in savings for your locality before switching methods.

Use the following steps to compare the cost of the unemployment taxes paid with the actual benefits paid out.

Step 1: Determine the number of employees listed on the quarterly report, NYS-45 Quarterly Combined Withholding, Wage Reporting, and Unemployment Insurance Return.

Step 2: After recalculating the tax amount on the quarterly report and verifying that all wages were reported properly, check your DOL Employer Account Balance. Provided by the DOL at the end of each calendar year, this balance is calculated by taking the account's balance at the beginning of the year, adding to it all the timely normal tax contributions paid and subtracting out any unemployment benefits charged to the employer's account in that year. DOL notifies employers of their account condition in mid-February. Employers can also call DOL toll-free at (888) 899-8810 for the amount of the Employer Account Balance. A high positive account balance may represent unnecessary taxes paid to DOL and it may be advantageous to switch to the benefit reimbursement method.

Keep in mind, however, that changes in the size of your workforce may impact potential costs. For example, a school district facing a fiscal crisis and the possiblity of laying off staff in the near future may actually want to build up an account balance. Otherwise, it might be faced with reimbursing DOL for high unemployment costs at the very time it can least afford them.

Generally, local governments and school districts wishing to use the reimbursement method must submit a written request to DOL before the beginning of the calendar year. Further information can be found on the Department of Labor website.

Start with a Comprehensive Written Policy

The foundation for minimizing unemployment insurance costs is a written personnel unemployment policy that is periodically reviewed. This policy should include:

  • a long-range personnel plan to deal with the possible increases and decreases in workload requirements,
  • a clear job description for each position, outlining any factors that could ultimately impact eligibility for unemployment benefits,
  • guidance for creating new job titles or filling vacant positions, and
  • consideration of staffing factors that will affect unemployment costs (e.g., full vs part time; temporary vs permanent; reallocation of duties).

A comprehensive plan not only allows you to determine the potential costs in the event of layoffs, it also provides the information needed to determine which unemployment insurance funding option is preferred.

For More Information on this Topic:

Office of the State Comptroller:

  • Please contact us for a copy of the following audit report: A Study of Municipal Unemployment Insurance Costs (2002-MR-2)

NYS Department of Labor: