HR Management & Compliance

Unemployment Insurance: President Signs New Law to Prevent Employers from Ducking Unemployment Insurance Tax

President Bush has signed the State Unemployment Tax Act (SUTA) Dumping Prevention Act, a law designed to target employers who abuse the unemployment tax system. Here’s an overview.

Shell Corporations Created

Federal law requires states to collect unemployment insurance (UI) taxes from employers. Employers with low turnover rates generally pay lower UI tax rates than those with higher turnover.


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To artificially lower their rates, some high-turnover businesses— such as temporary help agencies and construction firms—purchase or create shell corporations and transfer all of their employees over. This allows the employer to “dump” the original company’s higher UI tax rate and switch to a lower rate. Unfortunately, law-abiding employers then get hit with higher UI taxes to make up for the lost revenues.

The new SUTA Dumping Prevention Act requires states to pass laws that include civil and criminal penalties for employers that practice SUTA dumping or for business advisers who promote this practice.

Act Expected to Save Taxpayers Millions

The Congressional Budget Office estimates that the new law will save taxpayers $498 million nationally over five years and $509 million over 10 years. California alone has reportedly identified 29 companies with payrolls between $10 million and $1.6 billion that appear to have engaged in SUTA dumping, costing the state’s unemployment fund an estimated $100 million annually.