Unemployment insurance costs set to rise for Kansas businesses

Dave Dewhirst learned two weeks ago that his costs of doing business are going up.

That’s when he got a notice in the mail that he’d be paying more for unemployment insurance next year.

He said the increase is manageable for Sabris Corp., a flight management company that he founded 22 years ago and which has three employees.

But Dewhirst didn’t know why his costs were going up, and he’s unhappy that he has to pay more even though his company has never had an unemployment claim.

“I end up having to pay more money even though I’ve had no claims in 22 years?” Dewhirst said.

The reason Dewhirst and other companies are seeing increases is that state lawmakers approved increases in the wages subject to the tax, as well as making other adjustments to the unemployment insurance formulas.

Unemployment insurance is funded on the state level by businesses and administered by the state. The money collected is distributed to workers who lose their jobs and meet the state’s qualifications.

During the recession, Kansas and a lot of other states ran their funds into the red. They had to borrow heavily from the federal government to make payments to the unemployed.

The changes approved by state lawmakers earlier this year are intended “to restore the integrity of the unemployment system in Kansas,” according to officials with the state Department of Labor.

It’s a system that in 2011 was “in the red $96 million,” said Justin McFarland, director of the department’s labor market information services.

The Kansas Unemployment Insurance Trust Fund paid $766 million in unemployment benefits in 2009, $538 million in 2010 and $431 million in 2011, according to the labor department.

The fund has been built up since 2011, McFarland said, and stands at $237 million. That’s down from a high of between $600 million and $700 million throughout 2008, according to the Kansas Legislative Research Department. Between 2011 and 2012, the state borrowed $170.8 million and $141.7 million from the Federal Unemployment Account to pay unemployment claims, according to legislative research.

“Kansas was not alone in terms of more money going out than coming in,” said Brett Flachsbarth, director of unemployment insurance for the labor department. He said many states had to borrow funds from the U.S. Treasury “to buffer trust funds” because of the recession. Flachsbarth also said that Kansas made its final loan payment to the federal government in 2013.

“Kansas is debt free,” McFarland said of the unemployment insurance fund.

Employers pay into the unemployment fund through a percentage rate tied to the first $8,000 of an employee’s pay, called the taxable wage base. Next year, the taxable wage base will increase to $12,000.

And in 2016, the wage base will increase to $14,000. For example, that means an employer that paid $80 into the fund for one employee at a 1 percent rate this year would be paying $120 next year.

The way the system works, the rate on the taxable wage base varies for employers based on a number of factors, including the type of industry in which the business is engaged, the amount of time it’s been in business and how many claims have been paid out to ex-employees of the company – compared with how much money the employer has paid in.

Companies that take more from the fund than they pay in are categorized by the labor department as “negative balance” employers, McFarland said. Companies that historically have few or no claims are categorized as “positive balance” employers. And companies that are new and have no employment experience are categorized as “ineligible.”

McFarland and Flachsbarth said they think the increase in the taxable wage base will bring parity to who pays into the fund.

“It shifts the burden, the pain, to those employers who have a history of using the system more,” McFarland said, adding that “negative balance employers will end up paying a larger share.”

Employers that have a history of little or no use of the fund should have lower rates next year — in many cases, enough to minimize the effects of the higher taxable wage base, McFarland and Flachsbarth said.

But that’s not what businessmen such as Dewhirst are seeing.

Asked about that, Flachsbarth said, “I think it’s important to note, when you are talking about 70,000 some (positive balance) employers, there’s a lot of different scenarios” that go into determining an employer’s unemployment insurance rate.

He encouraged employers that have questions about their 2015 rates to contact the labor department.

Tim Witsman, president of the Wichita Independent Business Association, said his group is working with other business groups on the issue to mitigate what could be an expense that for some larger small businesses — those with 50 or more employees — “enough to really harm some businesses.”

“The kind of people it would really hit is these locally owned companies, maybe 50 to 500 (employees),” he said. “If you’re a two or three person operation, that isn’t a put-you-out-of-business number.”

Phillip Hayes, state director of the Kansas Society for Human Resource Management, a trade group for HR professionals, said he thinks the increase will affect a lot of employers, especially those in the positive balance category.

“Even this year, there’s employers getting sticker shock,” said Hayes, who also is vice president at the Arnold Group, an employment and HR consulting company in Wichita.

Hayes said his group is working with such groups as WIBA and local chambers of commerce to propose legislation in the next session of the Kansas Legislature that would ease the increases to positive-balance employers and get the unemployment fund to a higher level. The bill also would propose moving the funding of the unemployment insurance system in Kansas to a fixed-rate system that Hayes said would provide positive-balance employers with a predictable amount of dollars as they prepare their budgets for the next year.

As it is, he said, positive balance employers don’t know what they will be paying into the fund from year to year because their rates under the current system change annually. Hayes said there are some positive balance employers that are paying as much as 5.4 percent while others may be paying 1 or 2 percent.

“There’s no predictability on what rates are going to do from one year to the next,” Hayes said. “I think it really dissolves our competitive position to attract new employers.”

One of the criteria that fluctuates, for example, is the unemployment percentage. When the jobless rate hits a certain level, it triggers changes in the rates businesses pay.

Also, use of the system can cause a rate to change.

Negative balance employers are put into 20 rate groups ranging from 5.5 to 7.4 percent, the labor department said. The maximum rate for negative balance employers is 7.4 percent in 2015. Ineligible employers pay a 2.7 percent rate for the first two years with the exception of those that are in the construction industry; they pay a 6 percent rate for two years.

Hayes would like to see a fixed rate for all categories, especially positive balance employers, which he says are “carrying the water” for those employers that consistently take more from the fund in claims than they do pay in.

This story was originally published November 28, 2014 at 9:18 AM with the headline "Unemployment insurance costs set to rise for Kansas businesses."