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Blog October 18, 2017

Why States Should Be Thinking Differently About Their Unemployment Insurance System

Adam Hofheimer
Today, agencies responsible for the management of their workers' unemployment insurance systems continue to turn to the same legacy processes and outdated systems. Most technology modernizations are basically a new implementation of an amalgamation of the first systems built in the 60s or 70s. These systems all utilize the same sort of siloed approach where taxes, benefit determinations and payments, and administration functions are isolated. This lacks a tight integration to give stakeholders a clear, transparent view of all their individual responsibilities and a view into all specific actions. If there is integration it seems to be forced and doesn't solve the real root causes facing most states. Further, these implementations are usually large, overly complex projects. The time has come to break these modernizations into smaller, less complex engagements where states can realize value more quickly, significantly decrease the cost and drive innovation.

Think about any business today-if you're an employer and you're paying unemployment insurance you're not only paying taxes but you're also interacting with the state on the benefits side. Well, you can't do that really well if the state's infrastructure is in two separate systems and the data is not integrated. Further, issues facing states are overpayments, worker misclassification and ever-changing systems rules that drive complexity.

State governments need to think differently about these systems. They should have horizontal approaches to all of the interactions and touchpoints for stakeholders. By doing that, states can start solving a lot of problems that are inherent in these systems.

For example, suppose an employee quits or resigns from his current employer (which would mean he shouldn't be getting unemployment insurance) and immediately files a claim for unemployment insurance. At a later time, the prior employer may file a dispute indicating that the former employee shouldn't receive unemployment insurance. However, there's a chance the state may have already started paying that employee because of poor system integration and transparency with the employer. By the time the employer dispute is processed, the state may have to collect money from the unemployed worker who shouldn't have been paid. These conditions can occur because of bad processes and bad integration of systems.

A better solution is to solve the root cause with better system integration instead of turning to the same outdated approaches.

Another problem these integrated systems can solve is misclassified workers. W2 employees' salaries require unemployment insurance funding at about 6%, adjusted for factors. However, 1099 contractors do not require employers to pay that funding. Misclassification of employees/contractors leads to uncollected premiums and higher administration costs that could easily be avoided.

The last thing I want to mention is how these digital systems can help improve the audit process. Right now, audits for classification are inefficient and often random. Further, most audit tools are manual and paper-based. In the case of one of our clients, we were able to create a mobile audit platform that dramatically improved this process.

Completed Audit Checklist

This platform is a tablet-based application that manages how auditors in the field perform their audits. The application will lead the auditor through a predefined workflow (consistent with federal and state guidelines) and allow the auditor to record the results electronically instead of writing notes on paper that must be transcribed or scanned at a later date. The platform also has full integration with the back end system which allows the auditor to download and view employer data any time in the field.

The results have shown that this application saves auditor time and is more intuitive than the previous manual processes. The consistent manner in which data is collected has allowed the agency to more easily see trends by categories like geography and types of companies. These trends make it easier to identify employers who are most likely to be out of compliance. The agency could then target audits to those who would likely have the highest percentage of non-compliant activities and those who had the highest propensity for collection.

State agencies don't want to conduct a lot of audits that take time and cost the state money just to penalize a shadow company that will quickly disappear. For example, if construction company is hit with fines, it may easily shut down and be restarted under another name. State agencies should target those employers with a higher probability of collection.

The last thing to remember about these integrated systems is that when the economy is strong, state agencies should be putting these changes in place. When unemployment is low, when you have flexibility, and you're not paying as many benefits-when you're not overstressed-this is the time to put these things in action.