Regular readers of mine have been warned that an increase in the State Unemployment Insurance (sometimes referred to as SUTA) tax was inevitable. In the Staffdigest issue dated February 2009 I wrote an article suggesting that this tax increase was coming due to the lingering high unemployment and the federal government’s desire to keep extending those benefits. It also went into detail about how you can combat some of the bogus claims. You can view that article on our website www.damianservices.com.
Our clients are receiving notices of hefty tax increases as this article is being written. Make no mistake, increases in the SUI tax rate is a potential jobs killer, since that tax is paid by employers only. Given that the staffing industry’s sole purpose is to give all employers an opportunity to economically add staff, the impact of the SUI tax increase is disproportionately borne by these companies.
Explaining Unemployment Benefits
Unemployment Insurance is a tax paid by every company in the United States that employs people. The more people that are employed, the larger the fund gets. In times of high employment, the unemployment insurance fund has more than enough money to pay its beneficiaries.
It is from this pool of money that employees receive monetary unemployment benefits. Each company pays this tax in the state where the employee works. The tax is calculated as a percentage of payrolls that is determined by each state. It is adjusted each year based on the number of claims that are paid to employees that are no longer employed by your company.
In our current era of high unemployment, it may be difficult to place employees that are ending their current job assignments into new ones. In other words, there may not be enough open orders to offer jobs to the temps. When this happens, the unemployment fund (your tax money) that the state uses to pay benefits dwindles.
Potential Jobs Killer
The impact of this tax on all employers in the United States should not be understated. Large employers, like staffing companies are in for a big surprise. For example, if employers had a $5mm dollar payroll that was subject to a 3% SUI tax in 2009, the SUI burden was $150,000.
$5,000,000 * 3% = $150,000.
In 2010, that same employer with the same $5mm dollar payroll is hit with 50% increase (4.5%) in the SUI tax (we have seen some that have doubled), then the employer will pay $225,000 in 2010.
$5,000,000 * 4.5% = $225,000 – a whopping $75,000 increase.
When employers are faced with this kind of tax increase – one based on payroll – how is that supposed to stimulate job growth?
Opportunity for Staffing Companies
The staffing business is a people business where contract employees typically work alongside your customers’ permanent employees. Your customer knows the SUI tax is going up – since their rate is also increasing. Since this tax increase is affecting them, your customer should now be in the right mindset to expect and accept a price increase. Sure, they may give you a little static but your customer knows firsthand that your cost of providing employees has gone up.
Good selling and negotiating skills are still needed in order to get a higher price and staffing companies need to use this as a selling tool! You may be able to convince your customers to use more temporaries and increase your margins in the process.
Benefit to your Customers
Some end users of contract labor already understand the benefits of using a staffing company. Staffing is one of the only industries to add jobs in the last six months. We are seeing increases in contract usage across the board and in particular manufacturing and IT placements.
Companies are looking for flexibility in hiring. According to a recent article in the New York Times as demand rose after the last two recessions in the early 1990s and in 2001, employers moved more quickly to temporary help. They added temps for only two or three months before stepping up the hiring of permanent workers. Now temp hiring has risen for six months, the economy is starting to grow, and still corporate managers have been reluctant to shift to hiring permanent workers, relying instead on temps and other casual labor easily shed if demand slows again.
“When a job comes open now, our members fill it with a temp, or they extend a part-timer’s hours, or they bring in a freelancer — and then they wait to see what will happen next,” said William J. Dennis Jr., director of research for the National Federation of Independent Business.
One Overlooked Fact
News Flash to Your Customers: Because end users of your services had the flexibility to use and “layoff” contract workers instead of their own employees last year, they are realizing “lower” SUI rates for 2010. When contract employees file for unemployment, those claims go against your company not your customer. Less claims equal lower unemployment rates – thus they pay less tax on their permanent staff and potentially save tens of thousands of dollars per year. This is a very tangible reason to use contract labor. The economy is only marginally better than last year, so it would behoove your customers to stay with this winning strategy.
Increase Your Price
Let’s assume Jane Doe earns $10.00 per hour. Your bill rate for Ms. Doe is $14.50 or a mark-up of 1.45%. The 2009 payroll tax burden is $1.15. In this example the SUI tax is 3%.
$14.50 Bill Rate
$10.00 Pay Rate
$1.15 2009 Payroll Tax Burden (3% SUI)
$3.35 Gross Profit
If SUI increases by 50% then adjust the bill rate by the dollar amount equivalent to keep your margin steady.
$14.65 BILL RATE (slight increase)
10.00 PAY RATE
-.1.30 2010 PAYROLL TAX BURDEN (reflects a 50% increase in SUI tax)
$ 3.35 GROSS PROFIT
Between You and I
Most states “cap” the SUI tax burden on the first $8,000 to $12,000 in wages per employee. In other words once your employee(s) earn the cap amount, then the employer stops paying the tax. However, your $.15 an hour increase in the bill rate stays in place.
Continuing with the above example let’s assume your average employee works 1500 hours and the SUI cap is $10,000. Once your employee works 1,000 hours ($10,000 in wages), your company stops paying the SUI tax. Thus, your company realizes $.15 MORE in profit on the last 500 worked for the year.
500 * .15 = $75.00 additional profit per employee
Multiply that by the number of employees that reach the limit and you could be enjoying a much needed vacation or a nice down payment on a new car next year. Now that can really help stimulate the economy.
Scott Locaccio, president of Encompass Personnel in Virginia Beach, VA contributed to this article.
