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F I S C A L I M P A C T R E P O R T

SPONSOR HJC

DATE TYPED 3/16/2005 HB 520/HJCS/aSFL#1

SHORT TITLE Unemployment Experience History Transfers

SB

ANALYST Dunbar

APPROPRIATION

Appropriation Contained Estimated Additional Impact Recurring

or Non-Rec

Fund

Affected

FY05

FY06

FY05

FY06

$0.1

General Fund

(Parenthesis ( ) Indicate Expenditure Decreases)

Duplicates SB 476.

SOURCES OF INFORMATION

LFC Files

Responses Received From

Department of Labor (DOL)

Attorney General (AG)

NM Department of Corrections (NMDC)

SUMMARY

Synopsis of SFL Amendment #1

The Senate Floor Amendment # 1 of HJC substitute of House Bill 520 prohibits denial of Unem-

ployment Insurance Benefits for a person who voluntarily left work because a spouse who is in

the United States Military or New Mexico National Guard received permanent change of station

orders, activation orders, or unit deployment orders.

The bill modifies the current Unemployment Insurance (UI) structure and would increase the

availability of benefits to those individuals who are not currently eligible for benefits. The pro-

posed amendment would make eligible for UI benefits certain workers who voluntarily quit their

employment to follow a military spouse who has been transferred to a new location. This change

does not contradict federal law.

House Bill 520/HJCS/aSFL#1 -- Page 2

DVS notes that if a member of the military receives orders to transfer, the spouse has to quit, not

by choice of their own. This sometimes causes undue hardship with the loss of income until

such time as the spouse can find employment at a new location. This bill would allow for an in-

come stream until the spouse is re-employed.

The DOL projects the additional costs to the UI Trust fund will be approximately $400 thousand

per year. The fund currently has a balance of $572 million dollars. Senate Bill 920 proposes a

similar change in law as incorporated by this amendment.

Synopsis of Original Bill

The House Judiciary Committee substitute for House Bill 520 makes changes to rules governing

contributions to the unemployment compensation fund when employers buy, sell or otherwise

transfer business. There are civil and criminal penalties, imposed for violation of the rules. The

substitution bill incorporates the changes that were included in HB 9 that was passed by the cur-

rent legislature with and emergency clause and signed into law by the governor. Specifically, the

legislation eliminated the benefit denial for claimants attending school full-time, included a de-

pendents’ allowance of $15, added eligibility for victims of domestic violence, allowed for bene-

fits to workers seeking part-time work, reduced the new employer tax rate to 2 percent, allowed

for the transfer of favorable employment history from other states, and provided a zero tax rate

for employers with experience.

The substitute bill modifications track the changes made to Senate Bill 476 substitute.

Significant Issues

Unemployment compensation rates are based in part on benefits that have been charged against

employer accounts. This bill tightens procedures for the calculation of rates following the trans-

fer of an employing enterprise and provides civil and criminal penalties for transferring an em-

ploying enterprise for the primary purpose of obtaining a reduced contribution rate. The bill pre-

vents employers from transferring employees to a company with a lower rate for the sole purpose

of receiving a lower rate.

By amending the statutes, state law will conform with the requirements of federal legislation en-

acted by Public Law (P.L.) No 108-295, the SUTA Dumping Prevention Act of 2004. In not

conforming with the federal law, it may prevent the state from receiving administrative grants

from the UC program and may jeopardize state SUTA tax credits to employers.

The Labor Department calculates employer contribution rates based upon the employer’s actual

experience in making contributions, payroll, the condition of the unemployment compensation

fund, and actual unemployment compensation benefit payments to former employees charged to

their accounts. Employers must maintain a “reserve” within the fund which is considered when

determining annual rates. Employers may also make voluntary contributions to the fund in order

to reduce their rates. Presumably employers who have been in business for some time will be

charged lower rates, given their contribution history and reserve maintenance.

Current law provides for rate calculations in situations involving business transfers, mergers, and

consolidations. It appears that it is beneficial to the successor business to have the previous em-

ployer’s contribution and benefits history transferred, since the rates based upon that history in

House Bill 520/HJCS/aSFL#1 -- Page 3

most cases will be lower than the “new employer rate”. In the case of business acquisitions, cur-

rent law provides generally that the contribution, payroll, and benefits payments history is trans-

ferred to the successor employer.

This bill would address situations where the predecessor business and the successor business are

under “common ownership” at the time of the transfer. That term is defined in the bill to include

two or more businesses under substantially the same ownership, management, or control of the

same persons. The bill provides that upon such transfer, the employment experience of the two

businesses is combined for the purpose of setting rates. Current law does not appear to address

situations involving transfers of businesses under “common ownership.

The bill also addresses situations where businesses are transferred for the purpose of avoiding

higher contribution rates. This may occur when a business is transferred in name only, and the

new owner has no intention of continuing to operate the business acquired. In those situations,

the bill provides that the previous employer’s contribution and benefit history is not transferred

and the new employer is charged the higher “new employer rate”. The Labor Secretary can con-

sider factors such as the price paid for the business; whether the person acquiring the business

continued the business enterprise of the acquired business and if so for how long; and whether

new employees were hired to perform duties unrelated to the acquired business. Persons involved

in sham transfers for the purpose of avoiding higher unemployment contributions are subject to

misdemeanor criminal penalties, civil penalties, and the new employer is charged the highest

contribution rate.

PERFORMANCE IMPLICATIONS

DOL Department Tax Representatives will begin detecting this type of activity in addition to

current duties.

FISCAL IMPLICATIONS

The bill imposes civil penalties of $1,500 to $3,000 for violations of the act.

ADMINISTRATIVE IMPLICATIONS

The Department will implement SUTA dumping software to detect suspicious SUTA dumping

activity. This is the automated detection program provided by USDOL. Modification to the

NMDOL TACS system will be required to properly assess penalties.

DUPLICATION

Duplicates SB 476.

TECHNICAL ISSUES

The AG notes that the bill also amends Section 51-1-11 NMSA to add the statement that “An

employing enterprise includes the employer’s workforce” to the definition of “employing enter-

prise”. The term “employing enterprise” is used throughout the Act in lieu of “business”. The

meaning of this amendment is unclear. It could be construed to require that the entire workforce

be transferred in order to transfer the contribution or benefits experience. Or it could mean that

House Bill 520/HJCS/aSFL#1 -- Page 4

only a portion of the workforce must be transferred in order to transfer that experience.

The language regarding an employer’s workforce on lines 3-4 page 7 should be clarified as to its

intended meaning.

BD/njw:sb:lg