In reply refer
to UPL
Bureau of Employment Security
Washington, D.C.
    Unemployment Insurance Program
Letter No. 419
May 2, 1956













Experience Rating - Conformity of Provisions Omitting Charges for Unemployment Due to Disaster



The Secretary of Labor decided on March 16, 1956, that the provision for the omission of charges contained in Pennsylvania Act No. 136 and in Connecticut Public Act No. 48 do not meet the requirements of section 3303(a)(1) of the Internal Revenue Code of 1954. The purpose of both laws was ti give tax relief to employers whose plants had been damaged in flood disasters. Since provisions designed to have the same effect have consistently been held to be out of conformity with the Federal requirements, both State legislatures had taken the precaution to provide that the noncharging provisions would be inoperative if the Secretary of Labor rendered an adverse decision. Thus the Pennsylvania and Connecticut laws continue to conform with the requirements of Federal law.

Because the floods, hurricanes, and other acts of God in the past few years have resulted in a number of proposals to omit experience-rating charges when unemployemnt is due to a disaster, review of the issues presented by the Pennsylvania and Connecticut acts may be of interest. Although the purpose of both laws was the same, the methods for omitting charges differed, and, thus, the issues involved in determining their conformity were different in certain respects.

Prior Construction of Federal Law

Under section 3303(a)(1) of the Internal Revenue Code, an employer may receive a reduced rate only on the basis of his "experience with respect to unemployment or other factors bearing a direct relation to unemployment risk during not less than the 3 consecutive years immediately preceding the computation date." As indicated in section 3780, Part V, Employment Security Manual, section 3303(a)(1) (formerly 1602(a)(1)) has been interpreted not to require that all benefits paid (or separations compensated) be charged as a part of the experience of employers, provided that those which are charged assure a reasonable measurement of the experience of employers with respect to unemployment risk. The test is one of reasonableness in the measurement of each employer's experience in relation to other employers and to the purpose of experience rating.

Noncharging Provisions and
Basis for Secretary's Determination

Pennsylvania Act No. 136.-- This act permits the omission of charges from an employer's account of benefits paid for unemployment resulting from "loss of work with such employer due directly to a disaster by reason of which the Governor has declared a state of emergency." Thus, since only base-period employers may be charged, charges of benefits paid to an individual unemployed by reason of a disaster would have been omitted only if the employer affected by the disaster was also a base-period employer of the individual. Other employers for whom the individual worked during his base period would not have been relieved of charges.

This provision is essentially the same as those in other States which have previously been ruled to be inconsistent with the Federal law. The argument advanced by the State for finding its provision in conformity was, in effect, that the Federal law should be construed as not requiring charges against an employer's account if the unemployment compensated is not within his control. The Secretary of Labor conculded that he would not be justified in accepting the approach that only benefits paid for unemployment that can be controlled by an employer should be charged. If this approach were adopted, few charges to employers' accounts could be required, since, in the last analysis, most unemployment is beyond the control of any individual employer. To make the reasonableness of an omission to charge benefits paid depend on whether the unemployment compensated was within the control of the employer would have grave consequences upon the administration of the experience-rating aspects of the unemployment insurance program.

The terms "unemployment" and "unemployment risk" in section 3303(a)(1) of the Internal Revenue Code refer to the unemployment risk of insured individual workers. The test of the reasonableness of an omission of charges depends on whether the unemployment compensated was part of the worker's risk and not on whether it was within the control of any individual employer. It is clear that unemployment that results from a flood or other disaster is not due to the worker's act or condition and, therefore, is part of the worker's risk.

Moreover, under the Pennsylvania law, benefits paid are charged to base-period employers proportionately. This method of charging is based on the principle that compensable unemployment of a worker is attributable to the employer or employers whose wage payments to him form the basis for, and the measure of, his benefit rights. Under the normal charging method in Pennsylvania, employers are chargeable with benefits paid despite the fact that the unemployment for which benefits are paid is completely outside their control. The approach of Act 136 is, therefore, inconsistent with this normal charging method.

Connecticut Public Act No. 48. -- This act provides that "A compensable separation shall not be charged against an employer's merit rating account . . . for any compensable period of any individual occurring during the period commencing August 21, 1955, and ending October 29, 1955." Thus, the omission of charges was not limited to those for unemployment resulting from the floods. It would have been applicable to all employers, whether or not they were affected by the floods, for all unemployment during the specified 10-week period, whether or not it was caused by flood.

Connecticut argued that the omission of charges in Public Act. No. 48 was reasonable because unemployment resulting from an act of God was not business-connected. The Secretary concluded that this approach was no more supportable under the Federal law than the approach suggested by Pennsylvania. Moreover, under Public Act No. 48, no compensable separations during the specified 10-week period would have been charged, not even those for unemployment conceded to be due to causes other than the disaster.

Section 3303(a)(1) of the Internal Revenue Code of 1954 is very specific that experience of employers must be measured "during not less than the three consecutive years [156 weeks] immediately preceding the computation date." The term "during" has been interpreted since 1940 to mean "throughout," and this interpreation is supported by the legislative history of the experience-rating provisions of the Federal law. Accordingly, the Secretary was unable to find that an experience period of 146 weeks would meet the statutory requirement.

    Sincerely yours,
    Robert C. Goodwin