Unemployment Insurance Experience Rating (memorandum)

Unemployment Insurance Experience Rating in the Context of Mergers and Acquisitions

by Roger Royse

Unemployment Insurance

Employers who conduct business in California with at least one employee and who pay wages in excess of $100 in a calendar quarter must register with the Employment Development Department (“EDD”) to fund the Unemployment Insurance (“UI”) Program.[1]  Employers pay a percentage on the first $7,000 in wages paid to each employee in a calendar year with the UI rate schedule and amount of taxable wages determined annually.[2]

Determination of the UI Contribution Rate 

In California, new employers receive a 3.4 percent Unemployment Insurance (“UI”) contribution rate for two to three years.[3]  An employer’s contribution rate is thereafter determined by an “experience rating” method that measures the stability of the employer’s employment, incentivizing employers to maintain a stable workforce and reduce lay-offs.[4]  An employer who experiences an unstable workforce will have a higher contribution rate than one who experiences a stable workforce.[5]  Thus, the more employees that quit, the more unemployment filings there will, the higher the employer’s experience rating and the higher the contribution rate the employer will have to pay.[6]  Other factors that adversely affect an employer’s contribution rate include “fluctuations in payroll,” late tax payments, and late responses to any claim notices from the Employment Development Department (“EDD”).[7]
Effect on Employer’s UI Experience Rating in the Context of a Merger and Acquisition Involving a Transfer of Workforce to the Acquiring Company

In the event an employer acquires (hereinafter the “successor employer”) the business or “substantially all” the assets of a business of another employer (hereinafter the “predecessor employer”) and continues it “without substantial reduction of personnel,” the successor employer may apply to have the predecessor employer’s reserve account transferred along with the predecessor employer’s experience rating.[8]   The contribution rate is then determined as though the successor employer had always carried on the acquired business.[9] The successor employer must apply for the transfer of the reserve account within 90 days after the acquisition.[10]  Transfer of the reserve account is denied if the direct determines that the acquisition was only made to obtain a better contribution rate.[11]

To limit fraudulent transfers in which successor employers are only interested in obtaining a low contribution rate (also known as SUTA, or State Unemployment Tax Act, dumping), California requires successor employers to employ substantially the same workers from the predecessor employer in order to apply for a transfer of the predecessor employer’s reserve account.[12]  

Predecessor Employer’s Experience Rating After Transfer of Employees[13]

It is possible that a predecessor employer’s experience rating will not change after its workforce has been partially transferred to the successor employer and its reserve account is not transferred to the successor employer.  However, in that case, if a transferred employee is subsequently laid off by the successor employer, the predecessor employer’s experience rating will most likely be affected since it has retained the funds contributed into the reserve account for that employee.

On the other hand, if the successor employer applies and is approved for the partial transfer of the predecessor employer’s reserve account, the predecessor employer’s experience rating will most likely be affected.  The increase or decrease of the predecessor employer’s experience rating will depend on many factors including the amount of funds in the reserve account, number of benefits that have been paid out to employees, the amount of wages that are paid in, and most importantly, the overall economic condition of the state.  The successor employer who receives the predecessor employer’s reserve account will receive the predecessor employer’s experience rating as well as all liabilities related to the rating, which may be higher or lower than the 3.4% UI tax rate for new employers.

The predecessor employer may object or refuse to have its reserve account partially transferred to the successor employer.  The Contribution Rate Group often recommends that parties go through an accurate assessment of whether a reserve account transfer will be beneficial to both parties before actually completing the transfer because once the account is transferred, it cannot be reversed.

Notice to EDD in the Event of Changes

Employers are required to report to the EDD in writing any changes in the status of a business, such as the purchase or sale of a business, change in business ownership, or change in business name.[14]  The consequences of failing to do so are not delineated.  However, it is likely that discovery of an employer’s failure to make such a report will result in an adverse effect on the employer’s contribution rate considering that similar violations (i.e., responding late to EDD notices, failing to file taxes on time) are listed as factors that increase an employer’s contribution rate.

For additional information on legal issues, contact Roger Royse.
Please see www.RroyseLaw.com or contact Royse Law Firm, PC at rroyse@rroyselaw.com for additional information.
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[1] State of California Employment Development Division, “California Employer’s Guide 2011,” available at http://www.edd.ca.gov/pdf_pub_ctr/de44.pdf (last visited Jul. 12, 2011).

[2] Id.

[3] State of California Employment Development Department, “California System of Experience Rating: Information Sheet,” available at http://www.edd.ca.gov/pdf_pub_ctr/de231z.pdf (last viewed on Jun. 27, 2011).

[4] Id.

[5] Id.

[6] See id.

[7] Id.

[8] Cal. Unemp. Ins. Code § 1051 (Westlaw 2011).

[9] Id.

[10] Cal. Unemp. Ins. Code § 1053 (Westlaw 2011).

[11] Cal. Unemp. Ins. Code § 1052 (Westlaw 2011).

[12] Cal. Unemp. Ins. Code § 1051 (Westlaw 2011).

[13] This section is derived from a phone interview conducted with the Rate Management Group and Contribution Rate Group of the Employment Development Department, available at (916) 653-7795 (Jul. 11, 2011).

[14] Employer’s Guide, supra n. 1.