ABCO Payroll Services®

By Roger Reynolds

What is "SUTA" dumping?

SUTA dumping is the movement of employees in and out of related businesses to obtain a lower state unemployment tax rate. The result of this practice has been state unemployment funds losing 100's of millions of dollars in tax revenue.

Employee leasing companies have been using this scheme to keep their unemployment tax rate at or near the minimum for years. Did they pass along the savings to their clients? Only when they had to, therefore unemployment taxes became another source of profit. It made it hard to compete with an employee leasing company if the client had been with leasing long enough that it would revert to the new business rate of 2.7% when leaving the leasing company.

A survey Florida did on one employee leasing company for the years 2000 and 2001 showed they moved over 28,000 employees to a related company the beginning of 2001, resulting in tax avoidance of $1,424,688. Fourteen states lost more than $120 million during a three year period from employers guilty of SUTA dumping, according to a 2003 report from the General Accounting Office, the congressional watchdog office.

Because of such abuses congresses passed and the president signed into law August 9, 2004, Public Law No: 108-295 requiring states to enact anti SUTA Dumping legislation which Florida enacted in 2005 and became effective January 1, 2006.

What is the "SUTA" dumping law?

The new law specifically provides that when an employer transfers its trade or business, or a portion of the business, to another employer and at the time of the transfer there is any common ownership, management, or control between the businesses, the unemployment experience of the transferred business must be transferred to the employer to whom the business was transferred. In addition, when a determination is made that a substantial purpose of the transfer of a trade or business was to obtain a reduced rate of contributions, the experience of the employers involved must be combined into a single account, and a single rate will be assigned to the account.

Are employee leasing companies going to find a way around the law? That is a question many insurance agents have asked. If they do try to find a way around the law and get caught the consequences would most likely put them out of business.

The new law states that if a person knowingly violates or attempts to violate the provisions of law that apply to the assignment of rates and to transfers of unemployment experience, or if a person knowingly advises another person to violate the law, the person will be subject to the following penalties:

1. If the person is an employer, the employer will be assigned the highest rate assignable under Chapter 443, Florida Statutes (F.S.), for the rate year during which the violation or attempted violation occurred (currently 5.4%) and for the three rate years immediately following this rate year. However, if the person's business is already at the highest rate for any year, or if the amount of increase in the person's rate would be less than two percent for such year, then a penalty rate of contribution of two percent of taxable wages will be imposed for such year.

2. If the person is not an employer, the person will be subject to a civil penalty of not more than $5,000. In addition, any person who violates any of the provisions related to SUTA dumping commits a felony of the third degree, punishable by imprisonment for up to five years, and a fine of up to $5,000.

What does this mean to us?

We (agents and ABCO Payroll Services) should be able to compete more effectively with employee leasing companies. Employee leasing companies have a high turnover of clients each year (this means uncontrollable unemployment claims) and their unemployment tax rates are going to increase. The Florida Department of Revenue projects the savings to the State at fifty million dollars, ($50,000,000) per year. This will mean lower unemployment rates for Florida's businesses and higher cost for employee leasing companies. It will be necessary for them to increase their rates or absorb the cost, either way they will become less competitive.

New unemployment rates go in effect January 1st of each year.