Unemployment Compensations Fraud

On a radio talk show in 1980, I said that simple dishonesty was the greatest threat to America’s economy even though I didn’t have solid data to support my claim. Since then I have observed many estimates of the cost of fraud in various segments of our economy and they clearly confirm my assertion.  I am now convinced that simple dishonesty is the greatest threat to the economic stability of any country and eliminating fraud and corruption should be the first step toward economic improvement.

The U.S. debt is enormous and increasing at a rate that is impossible to fully comprehend. However, this debt would have been a trivial amount if dishonesty had been eliminated years ago in government expenditures and receipts.  Consider the consequences of fraud in just one government program: unemployment compensation.

Unemployment insurance was created in 1935 as part of the Social Security Act to provide temporary assistance to workers who lose their jobs through no fault of their own. It provides recipients with about half of their former wages and is intended as a financial bridge until they find new jobs. Benefits were initially limited to a maximum of 26 weeks; however, the time limit has been extended in areas with high unemployment, in some places for as long as 99 weeks.

Many unemployed people take advantage of the unemployment compensation benefits and do not find new jobs until just before their benefits expire. To be eligible for unemployment benefits, recipients must be actively looking for a job,but they are not required to accept jobs that do not meet their career interests.  Some do not accept new jobs until just before their benefits expire because they could not find suitable jobs and they were forced to compromise of their careers.  Others prefer to live on unemployment and are not serious about accepting a job until they are financially forced to do so.  While this may not be considered fraud, it is not the way the system was intended to operate.

Employers can also take unfair advantage of the unemployment compensation program. By treating employees as independent contractors, some employers avoid paying unemployment taxes for workers who should really be treated as employees. The tax on employers is based on an “experience rating” that increases when an employer terminates many workers.  To escape paying large taxes, some employers with extremely high experience ratings let their company go out of business and start another company with a new experience rating.

Employees commit fraud when they continue receiving money after they have started a new job or when they work off the books. The Department of Labor estimates that eleven percent of unemployment compensation recipients are receiving fraudulent payments.  Others have estimated that between 15 and 20 percent of the money paid by state unemployment insurance programs are overpayments occasioned by fraud and administrative inattention [HR Magazine, November 2004: 55–58].

About 7.1 million people were receiving some type of unemployment insurance benefits in 2012 and the average recipient received about $295 per week.  Therefore, about $2.07 billion was paid each week in unemployment compensation benefits.  If between 11 and 20 percent of this was fraudulent, the annual cost of fraud in unemployment compensation was between $11.8 and $21.5 billion.  While this amount is dwarfed by the total U.S. debt, it is not a trivial amount.

Employers can use several strategies to eliminate fraud and reduce their unemployment compensation costs.  Good human resource planning that anticipates changes in employment can do much to prevent staff reductions and layoffs. Attrition, hiring freezes, and early retirement programs can often prevent layoffs and the unemployment insurance costs associated with them, especially if they are started early.

Employers need to monitor performance reviews and attendance.  Employees who quit or are fired for just cause are not eligible for workers compensation and if they apply for benefits the employer should challenge the action.

Some creative strategies have been used to avoid layoffs and reduce unemployment payments.  One strategy is shared work which involves reducing hours and wages for all employees or for a particular group.  They may receive partial unemployment insurance benefits to supplement their lost wages.  Another strategy is rolling layoffs, which involves having workers take turns being laid off.  While they are laid off, they receive unemployment compensation.  Finally, some companies allow workers to take unpaid sabbaticals to pursue whatever they want.  Some employees chose to travel, others perform community service, and others pursue a hobby.  While they are on sabbatical, the company continues paying their health benefits knowing that when they are needed again the company will have a trained worker ready to return.  $

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