Alabama Department of Labor

Improving Stewardship of Employer Unemployment Insurance Taxes

By Phyllis K. Kennedy, former director, Alabama Department of Labor

I'm a big sucker for success stories. I never fail to read all the newspaper testimonials from people who've lost all that weight and are now beautiful and happy. I like it when car buyers tell me they looked everywhere but found the place where they could do the talking up at Larry Puckett Chevrolet (a local dealership for those of you in other parts of the state). Sometimes when I can't sleep I'm even impressed by all those new millionaires who just got rich in the real estate market.

But today I've got a real success story for you.

Have you ever heard the term “SUTA Dumping?” It was certainly a new addition to my vocabulary when I came to the Alabama Department of Labor, but I now find myself saying it with some frequency. It's also a term that you'll be hearing over the next few months.

Let me give you a short description of SUTA Dumping and then we'll get back to the story.

A company with a history of significant layoffs creates a new company or buys a small company that has good experience with no layoffs. The employees of the old company are transferred into the new company where they qualify for a lower tax rate. Over a period of time, the original company is eliminated, and the high turnover rate that boosted unemployment taxes goes away. Ta Da! The bad State Unemployment Tax liability (SUTA) is dumped.

That's the game that's being played and the results are (1) Unfair business advantage for companies that do the dumping (2) Increased UC tax rates for the ethical businesses that don't play the SUTA dumping game and (3) Loss of revenue for the state unemployment trust fund.

It might or might not surprise you to know that nationally known accounting and consulting firms, like the now defunct Arthur Anderson, have been recommending such practices to their clients and calling it “management.” Here in Alabama we're just beginning to see evidence of SUTA dumping. In the correspondence I've seen from businesses it is evident that the businesses applying for status with a new name and a clean slate have paid for costly legal advice. Currently, in Alabama, the practice isn't illegal, it's just unethical. But that's where the success story comes in.

Recently, President Bush signed legislation to stop SUTA dumping after unanimous Senate consent. In this day and time, when political partisanship is so strong, that's practically unheard of. It is now a crime for businesses to engage in this practice. We'll need to pass an Alabama bill as well, establishing penalties for SUTA dumping, as well as setting other parameters and guidelines.

How did it happen that this bill passed both Houses so quickly, without even a dissenting vote? It happened because of the determination of one business, Kelly Services.

Kelly Services is an international leader that provides temporary staffing and HR solutions to multinational companies. They provide staffing solutions to businesses around the world including 95 percent of Fortune 500 companies. When Arthur Anderson chastised Kelly for not engaging in SUTA dumping, saying that Kelly had violated “fiduciary responsibility to your shareholders” by saving money on UC taxes, the company took offense. They decided that rather than being badgered into participation in something they didn't believe in, they would work to make the loophole illegal. That campaign started in 2001 and amazingly ended with success in 2004.

We'll be working on our own conforming legislation for the 2005 Regular Session of the legislature, but even without it, a powerful statement has been made.

This story makes a point that I always try to make in speaking engagements. Many people are jaded and cynical about government. Others feel disenfranchised and isolated. Practically nobody believes anymore that it is possible to change government.

This story proves that just isn't true.