Improving California’s Unemployment Insurance Program

Improving California’s Unemployment Insurance Program GABRIEL PETEK | LEGISLATIVE ANALYST AUGUST 2022 AN LAO REPORT Executive Summary California’s Unemployment Insurance (UI) program provides temporary wage replacement to unemployed workers. The program helps alleviate workers’ economic challenges and bolster the state economy during downturns. Despite its importance, the program faltered during the two most recent downturns. At the Employment Development Department (EDD)—which oversees UI—payments were delayed for roughly 5 million workers during the pandemic and phone lines were overwhelmed by frustrated callers. These failures caused hardship for unemployed workers and their families, held back the economy, and spurred frustration among Californians with their state government. Recent Failures Trace Back to UI Program’s Basic Design. Recent failures can be traced back to the UI program’s basic design, which results in more emphasis being placed on minimizing fraud and business costs than making sure eligible workers can easily get benefits. Without safeguards to make sure eligible workers can get benefits easily, the state’s UI program has tilted out of balance. During normal economic times, this emphasis leads to unneeded complexity. During downturns, EDD’s policies and practices cause long delays and frustration for unemployed workers. Program’s Basic Design Encourages EDD to Focus on Fraud and Containing Costs. Three key features of the program’s basic design have encouraged the state to adopt policies that make getting benefits difficult. First, the state operates the UI program with an orientation toward businesses (as the entities financing the program), which have a clear incentive to contain costs. Policies formed under this orientation tend to emphasize holding down business costs. Second, pressure from the federal oversight agency to avoid errors encourages the state to conduct lengthy reviews. These steps probably catch some mistakes, but make getting benefits challenging and time-consuming for everyone else. Finally, to keep the program solvent, the state may look for ways to contain UI costs. The state UI trust fund does not build large enough reserves during normal times to weather downturns. Without legislative action to address this imbalance, the department may feel pressure to prevent the fund from becoming insolvent. Signs of Imbalance in the UI Program. In this report, we highlight five key signs of the state’s imbalanced UI program. First, the department improperly denies many UI applications. More than half of EDD denials are overturned on appeal, while less than one-quarter are overturned in the rest of the country. Second, UI claims are regularly delayed by weeks and often months, especially during downturns. Third, the administration’s assessment—conducted during the height of the pandemic— laid out how difficult the UI program is for workers. Fourth, we catalog state rules and application steps that make it unreasonably difficult for workers to prove eligibility and time-consuming to apply for benefits. Finally, we highlight several concerning steps taken by EDD in recent years that suggest that ensuring eligible workers get benefits is not among its top priorities. Improving the UI Program. Although these problems are not new, the pandemic has highlighted the need for the state to rebalance the UI program to make getting benefits to eligible workers a top priority. In our assessment, today’s problems do not call for fundamental reforms that could upend longstanding tenants of the state’s labor market. Instead, targeted changes to state practices could improve the experience unemployed workers have when they need UI. In this report, we suggest more than a dozen targeted changes to the state’s UI program to place greater priority on getting payments to eligible workers. www.lao.ca.gov 3 AN LAO REPORT LAO Recommendations to Improve Unemployment Insurance (UI) 9 Limit Improper Claim Denials More than half of the UI claims the Employment Development Department (EDD) denies are overturned on appeal. Overturned denials cause lengthy delays for workers who appeal and raise concern that the state denies many eligible workers. Likely between $500 million and $1 billion annually in UI payments go unpaid each year due to improper denials. • Audit claim denials to learn more about claim types that EDD regularly denies. • For claims denied because an eligible worker did not follow EDD rules, reevaluate rules to make sure benefits outweigh costs. • Give UI appeals board authority and staff to correct state practices that make it difficult to get UI benefits. 9 Minimize Delays More than half of UI claims were delayed during the peak of the pandemic, for many workers by several months. Between 15 percent and 20 percent of workers who apply for UI during normal economic times experience delays. • Review usefulness of state’s current identity proof requirements, which frequently delay eligible claims. • To reduce unneeded investigations, reword employer notices so employers know they should only respond to the notice if they dispute the worker’s claim. • To reduce unneeded investigations, limit current practice of state-led investigations (which may be inconsistent with existing state law). • To limit disputed claims, reassess practice of allowing all prior employers (not just the most recent employer) to dispute a UI claim. • Assess surcharge to discourage unsubstantiated employer disputes and appeals that cause long claim delays. 9 Simplify Application The state’s UI application and ongoing requirements are difficult to understand and unnecessarily lengthy. • Stop asking workers to list detailed work history and salary information that EDD already maintains. • Instead, make initial payment based on EDD’s internal information and allow for recalculations. • Require employers to report layoffs to speed-up UI application and increase take-up. (State law already requires employers to report new hires.) • To shorten application and limit misunderstanding, reevaluate need for extra questions on UI application that only affects eligibility for a small number of applicants. • Continue work to rebalance notification procedures so workers have sufficient time to respond to EDD requests, understand why EDD’s decision was made, and know what to do if they disagree. 4 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT INTRODUCTION California’s Unemployment Insurance (UI) more emphasis on eliminating fraud and minimizing program provides temporary wage replacement to business costs than making sure eligible workers unemployed workers. First enacted in response to can easily get benefits. the Great Depression, UI helps alleviate temporary Our Approach to Improving the State’s UI economic challenges for workers and their families. Program. Although these problems are not new, By backfilling lost wages, the program also bolsters the pandemic has highlighted the need for the the state economy during economic downturns. state to rebalance the UI program to make getting Despite its importance to workers and the benefits to eligible workers a top priority. In our economy, the wage replacement program faltered assessment, today’s problems do not call for during the two most recent downturns—the Great fundamental reforms that could upend longstanding Recession and the pandemic. At the Employment tenants of the state’s labor market. Instead, targeted Development Department (EDD)—which oversees changes to state practices could improve the UI—payments were delayed for roughly 5 million experience unemployed workers have when they workers and improperly denied for likely 1 million need UI. In prioritizing getting payments to eligible more. The department’s phone lines were routinely workers, these changes also would help bolster the overwhelmed by the number of frustrated callers. state economy during downturns, by distributing These failures caused hardship for unemployed economic support broadly and quickly to lessen the workers and their families, held back the economic economic impact of job losses. In this report, we recovery during both periods, and spurred outline how incentives to contain UI costs make it frustration among Californians with their state difficult to get benefits, trace these consequences government. Recent failures can be traced back to back to the UI program’s basic design, and lay the UI program’s basic design, which encourages out changes to place greater priority on getting EDD to adopt policies and practices that place payments to eligible workers. CALIFORNIA’S UI PROGRAM What Is Unemployment Insurance? by UI and therefore eligible for benefits when they become unemployed. Under state law, all traditional The state’s UI program provides weekly wage employees are covered by UI. Traditional employees replacement to workers who have lost their are workers who work for the same business day jobs through no fault of their own. The state’s to day. Most workers in California fall under this EDD oversees and operates UI. The program is category. As shown in Figure 1 on the next page, the intended to replace half of workers’ wages for up state’s UI program covered more than 80 percent (or to 26 weeks. State law sets the maximum benefit 17.4 million) of California workers in 2019. at $450 per week. The average benefit is about $330 per week. Unemployment insurance covers …But Some Workers Are Not Covered by traditional employees. Independent contractors, State’s UI Program. Nontraditional workers are self-employed individuals, informal workers, and not eligible for UI. As shown in Figure 1, between undocumented workers are not covered. 3 million and 4 million workers are not covered. Ineligible workers include: undocumented workers Who Is Eligible to Receive Benefits, and (about 8 percent of all workers), independent How Much? contractors and other nontraditional workers (about 7 percent), and self-employed workers (about Most Workers Are Eligible to Receive UI 3 percent). Benefits… Most California workers are covered www.lao.ca.gov 5 AN LAO REPORT domestic violence, or (5) respond to a large Figure 1 pay cut. Businesses may dispute a worker’s UI claim if they believe their former worker does Most, but Not All, Workers Are not meet these requirements. Covered by State's UI Program • Able and Available to Work if Another 2019 Opportunity Comes Up. To get benefits initially, and to continue getting benefits each Undocumented Workers 8% week, unemployed workers must be “able Independent Contractors and Nontraditional and available” to work. Workers are able to Workers 7% work if they are capable of performing work in Self-Employed their usual job field. Illnesses and injuries are Workers 3% common reasons a worker would not meet this requirement. Workers are available to work if they are willing to accept reasonable work. Common reasons a worker would not meet the available requirement include (1) caring for a Workers Covered by UI 82% child at home, (2) not having legal work status, (3) seeking part-time work when the prior job was full time, (4) not commuting longer distances for a new job, and (5) using the period of unemployment to change careers. UI = Unemployment Insurance. Once UI payments begin, unemployed workers must “certify” with EDD every two weeks that Despite Broad Coverage, Workers Must they are still able and available to work. Meet Certain Requirements. Despite broad UI Payments Intended to Replace Half of Prior coverage, workers covered by UI must meet certain Wages. The state sets weekly UI payments based requirements to get payments. Workers must meet on prior earnings. Workers receive half of their three requirements to get payments: average weekly earnings, based on their highest • Recent Work History. Workers must have earning quarter of their base year. State law set in made at least $1,300 in one quarter during 2005 also caps the maximum payment at $450 per the worker’s “base period.” Set by state law, week. Due to the cap, many workers—those who the base period is the first four of the last five make more than $46,000 per year—get payments completed calendar quarters prior to the job that are less than half their usual earnings. In 2019, loss. Some workers also may be eligible under about 40 percent of UI recipients earned enough to the state’s alternative base period, which is get the maximum state UI payment. the last four completed calendar quarters Who Pays UI Taxes, and How Much? prior to the job loss. Workers who started working recently—for example, recent school Businesses Pay Payroll Taxes to Cover UI graduates or workers returning to work after Payments and Overhead Costs. Businesses pay looking after children—often do not meet this state and federal UI payroll taxes. Revenue from the requirement. state tax, which averages 3.6 percent on the first • Stopped Working Through No Fault of $7,000 in wages (equal to $252 per worker each Their Own. Workers must have been laid off year), goes into the UI trust fund to pay out future (including for poor performance), had their benefits. Federal law requires states to tax the first hours reduced, or quit with good cause. Good $7,000 in wages at a minimum. Most states tax a cause covers quitting to (1) care for a family higher amount—only California, Tennessee, Florida, member, (2) relocate for a spouse’s work, and Arizona tax the minimum. Revenue from the (3) avoid unsafe working conditions, (4) flee 6 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT federal tax is collected by the federal government and workers become unemployed and get UI payments. redistributed to states to cover UI overhead costs. (Under this practice, known as “experience Federal UI Tax Is Applied Uniformly to All rating,” a business’ annual tax rate can range from Businesses. The federal UI tax applies uniformly 1.5 percent to 6.2 percent depending on how many to all businesses, regardless of the amount of UI prior workers get UI benefits.) Businesses have payments made to their former workers. The federal a clear incentive under this design to minimize UI tax rate is 0.6 percent on the first $7,000 in wages. payments that to go their former employees. This equals $42 per worker each year. Federal What Is the Role of the Federal law allows states to take on federal loans to keep Government? making UI payments if their state trust fund runs out of reserves. To repay state loans, the federal Federal Government Oversees Program, but tax rate paid by businesses in the state goes up Policies and Rules Set by the State. The federal incrementally. During the pandemic, many states, government created the unemployment insurance including California, used federal loans to keep system in 1935 as part of the same law that created making UI payments. the Social Security retirement system. The federal State Tax Rates Depend on Trust Fund government provides funds to states to run their UI Condition… State UI tax rates also apply to the program. In exchange, states must operate their UI first $7,000 in wages but vary based on two factors. programs within broad federal guidelines. Within The first factor is the condition of the state’s UI trust the broad guidelines, however, states have ample fund. Higher tax rates apply when the condition of room to set the important policy and program rules the UI trust fund is poor, theoretically so that the that affect unemployed workers and their former fund’s reserve can be replenished. However, due employers. to the trust fund’s longstanding poor condition, Federal Government Suggests State the highest tax rate schedule—known as the Performance Targets. State programs must be F+ schedule, which carries a 6.2 percent maximum certified to receive federal administrative funding. rate—has been in effect every year since 2004. As part of its certification process, the federal …And How Often Their Workers Become government tracks state UI program performance Unemployed and Get UI Payments. The second and suggests targets to monitor how well states factor that affects businesses’ state UI tax rate operate their UI programs. Although the federal is the businesses’ “experience.” To allocate the government tracks key metrics and suggests program costs to businesses that use the program performance targets, there are no penalties for most, each employer’s tax rate goes up when their states that do not meet the standards. former workers get UI. Tax rates also go down if few WHY IS GETTING UI BENEFITS DIFFICULT? For recently unemployed workers, applying for eligibility interviews with the department that can and getting UI payments can be a difficult process lead to long wait times. Fourth, workers who appeal for various reasons. First, the application itself is the department’s decision to deny their claim must lengthy and requires workers to report detailed, attend a hearing and, if successful, wait for the unnecessary information. Second, as a follow department to eventually restore their payments. up to the application, workers often must submit Finally, unemployed workers must regularly certify back-up documents to prove their eligibility or that with the department to keep getting benefits. they are who they say they are. Waiting for the state In this section, we explore potential explanations to request and review these documents can take for why the process of getting UI payments has weeks or months. Third, businesses frequently become so difficult. contest their former workers’ claims, triggering www.lao.ca.gov 7 AN LAO REPORT EDD Faces Competing Objectives Program Design Encourages Striking a Balance Between Fraud Prevention Disproportionate Focus on Fraud and Paying Eligible Claims. In administration of Prevention the state’s UI program, EDD must balance the need State Policies and Practices Have Evolved to to prevent fraud and limit business costs with the Make Getting Benefits Difficult. The key factor priority to deliver payments in a timely and easy behind why getting benefits has become difficult is manner. Eliminating all fraud and overpayments the UI program’s basic structure, which encourages would require onerous eligibility standards and a EDD to disproportionately focus on stopping fraud frustrating application process. On the other hand, and minimizing business costs. Without safeguards a program without fraud controls would expose the to make sure eligible workers can get benefits state and businesses to financial risk. easily, the state’s policies and actions have tilted Fraud in State UI Program Historically the UI program out of balance. Individually, policies Uncommon. The most common type of and actions aimed at preventing fraud may appear overpayment is when a worker does not end their justified and reasonable. Viewed as a whole, UI payments when they take a new job. These however, the collection makes getting benefits overpayments are relatively easy to detect because unreasonably difficult for eligible workers. Below, employers must report new hires to the state. On we outline how the UI program’s basic design has the other hand, relatively few overpayments occur led to state policies and actions that make getting because workers lied about being unemployed— benefits difficult. for instance, if a worker quits their job but tells • EDD Operates UI Program With Orientation the department they were laid off. Until recently, Toward Businesses, Which Have Incentive fraudulent payments received using a stolen identity to Contain Their Costs. Under the UI were rare. While stolen identity UI fraud increased program’s basic design, businesses fund during the pandemic, this was tied to a now expired the program, meaning their payroll taxes federal program. In general, fraudulent claims in increase when former employees get UI. the state UI program are relatively uncommon— Businesses therefore have an understandable probably representing less than 1 percent of claims. incentive to limit UI claims to help contain The box on the next page includes more information their operating costs. Due to their role as about the recent spike in identity theft fraud cases program funder, businesses also are EDD’s related to a temporary federal UI benefit program. main customer. As such, the state has formed EDD Puts Significant Focus on Fraud an explicit partnership with employers to run Prevention. Due to a concern that workers may lie the UI program. The department’s 100-page to get UI payments, EDD’s practices have evolved guidebook for employers, titled Managing over time to meticulously scrutinize worker eligibility. Unemployment Insurance Costs, clarifies that This emphasis is often at odds with making sure businesses are an “important branch of the UI eligible workers get benefits quickly and easily. program partnership.” (This partnership does Indeed, this emphasis hindered the state’s response not include workers. Instead, workers “must to the pandemic. According to the administration’s also assume responsibility for their role in the own review of EDD practices, “In interviews and UI program by meeting all UI requirements.”) observations, stories and anecdotes about fraud The department also provides a training and/or suspected fraud were often used to explain video for business titled “How to Protect Your why EDD could not act quickly to avoid the growth Business from Higher UI Taxes” that provides of the [claims] backlog.” The added benefit of these tips on how to minimize their UI costs. The lengthy reviews—that is, how much additional fraud department also maintains an “Employer Bill of they prevent—may be very small. Viewed alongside Rights” that sets out steps employers can take the state’s competing priority to deliver payments to dispute worker claims or EDD decisions quickly and easily, the benefits of this level of to issue UI benefits. (Workers do not have a emphasis may not justify the costs these practices corresponding document.) State policies and carry for other eligible workers. 8 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT A Closer Look at Recent Identity Theft Fraud Recent Identity Fraud Concentrated in Temporary Federal Benefits That Have Ended. In California and across the country, an unprecedented level of identity fraud targeted Unemployment Insurance (UI) payments during the pandemic. The figure below shows the administration’s estimate of suspicious or confirmed UI benefit fraud that occurred during the pandemic. However, the vast majority of fraud occurred in the temporary, 100 percent federally funded programs that now have ended. The federal program did not require the basic fraud safeguards found in the state’s regular UI program. According to the administration, $18.7 billion (94 percent) of UI benefit fraud during the pandemic may have occurred in the federally funded programs, while the Employment Development Department (EDD) suspects $1.3 billion (6 percent) in state UI benefits fraud. Furthermore, the department’s estimate of state UI fraud ($1.3 billion) is likely overstated. EDD counted state UI claims as fraud if the worker did not confirm their identity when EDD asked. Yet there are several reasons why workers with legitimate claims may not have followed up with EDD. Many workers Temporary Federal Benefits, Not State Benefits, had already run out of Were the Primary Target of Fraud benefits, giving them little reason to respond to EDD’s requests. Other workers may have given up in frustration after trying unsuccessfully to send SSuussppeecctteedd in documents. An aass FFrraauudduulleenntt alternative estimate of state UI fraud, based on the administration’s strike team report, suggests that state UI Federal Benefits $146 billion fraud may have been much smaller, perhaps as little as $100 million. State Benefits $35 billion (The small red area of Likely Fraud the figure represents this smaller fraud estimate.) practices formed under this orientation would federal government’s goal of upholding tend to emphasize holding down business “program integrity” by eliminating errors, costs potentially at the expense of making sure overpayments, and fraud. This pressure eligible workers can get benefits easily. creates an incentive for the state to conduct • Federal Pressure to Avoid Errors Creates exhaustive reviews. For example, the state Incentive to Conduct Lengthy Reviews. often requests follow-up information to The federal government is the primary funder document worker identities or work history. of EDD’s costs to administer the UI program. The state also applies intricate rules to As such, EDD faces pressure to meet the determine whether workers are eligible for www.lao.ca.gov 9 AN LAO REPORT UI. These steps probably minimize errors year. With an absence of legislative action to and improper payments in a small number of address this imbalance, the department may cases. For the vast majority of unemployed feel pressure to use tools within its control workers, though, these steps make getting UI to prevent the fund from becoming insolvent payments challenging and time-consuming. during normal economic times. Policies and As discussed later, these steps also may result practices that tend to contain state UI costs in the department improperly denying some also would have the effect of helping to keep eligible workers. In so doing, federal pressures the UI trust fund solvent. on the department to eliminate errors and Antiquated Computer Systems Also fraud may interfere with the goal of getting Contribute to Difficulties. Like many state payments to eligible workers. departments, EDD’s reliance on outdated • To Keep the UI Trust Fund Solvent, State technology limits its ability to respond swiftly to May Look for Ways to Contain Costs. changing circumstances or even manage routine Under longstanding state tax and benefit tasks quickly and automatically. Although the rules, the UI trust fund does not build large key factors that make getting benefits difficult enough reserves in normal times to cover the are operational—that is, departmental policies, increase in claims during a recession. This practices, and actions—the use of outdated and imbalance has become more severe in recent inefficient technology adds further complication, years. During the strong economic years delay, and frustration for eligible workers trying to leading up to the pandemic, the state trust get benefits. fund accumulated only minimal reserves each SIGNS OF IMBALANCE IN THE UI PROGRAM In this section, we discuss several clear and federal UI law. At the hearing, the ALJ reviews indications—that is, practical effects of the the original application, interviews both parties, incentives laid out above—that state policies and and issues a ruling. The ruling either upholds or actions make it difficult for eligible workers to overturns EDD’s decision. Each year, roughly get benefits. These include: (1) the department’s 200,000 workers and businesses file UI appeals. tendency to improperly deny claims, (2) widespread Half of EDD Decisions Overturned on Appeal. payment delays, (3) the administration’s own As shown in Figure 2, ALJs at the appeals board assessment that the UI program is difficult for overturn EDD’s decision about 50 percent of the workers to navigate, (4) state rules that make it time. This means that, in most years, between unreasonably difficult for workers to prove eligibility, 5 percent and 10 percent of all workers who apply and (5) recent actions that suggest that ensuring for UI benefits are denied by EDD before being eligible workers get benefits is not a top priority. approved by an ALJ at the appeals board. Relative to Other States, EDD’s Denials Improper Claim Denials Decisions Twice as Likely to Be Overturned. Workers and Employers Can Appeal EDD’s Figure 3 shows the outcome of all worker appeals Eligibility and Process Determinations. State of UI benefit or eligibility decisions since 2019 in staff decide whether workers are eligible for UI California and the rest of the country. More than half based on the worker’s application and EDD’s of EDD’s decisions to deny eligibility or limit benefits internal records. If a worker or employer disagrees were overturned. In contrast, less than one-quarter with EDD’s eligibility decision, they may appeal to of other states’ decisions to deny eligibility or limit an administrative law judge (ALJ) at the California benefits were overturned. Over this same period, Unemployment Insurance Appeals Board (CUIAB). employer appeals resulted in overturned decisions The appeals board interprets and applies state less often (32 percent of the time) than worker 10 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT a claim based on the rationale Figure 2 that statewide employment in the unemployed worker’s Half of EDD Decisions Overturned occupation was forecast to decline When Workers File an Appeal by 0.9 percent. (State eligibility rules require that a job market 200,000 is available, not that an opening 180,000 is available.) In another case, 160,000 EDD denied the claim because 140,000 the worker was caring for her 120,000 children while unemployed. Thus, 100,000 according to the decision, the 80,000 60,000 worker was unavailable for work. 40,000 (State eligibility rules allow parents EDD Decision Overturned 20,000 to look after their children while unemployed, so long as they 2014 2015 2016 2017 2018 2019 2020 2021 arrange child care when they get EDD = Employment Development Department. hired.) While our review does not allow us to know how extensive these Figure 3 types of cases are, these examples Employment Development Departments Decisions raise questions about (1) the quality Twice as Likely to Be Overturned on Appeal of staff training; (2) the complexity of current eligibility rules; (3) the Share of All Worker Appeals Overturned by Appeals Board, extent to which EDD managers 2019 Through 2021 review staff eligibility decisions; and (4) whether the department’s concern about fraud leads eligibility staff to err on the side of denying claims, even claims that have very limited fraud risk. California Other States Delayed Payments During normal economic times, state practices lead to payment delays for 15 percent to 20 percent of workers who Decision Overturned apply for UI. However, during the Decision Upheld economic downturns of the Great Recession and the pandemic, appeals. California’s employer appeals result in state policies caused much worse overturned decisions about as often as other states payment delays. Figure 4 on the next page shows (35 percent). We illustrate the potential magnitude of the percentage of payments delayed by more than overturned denials in the box on the next page. 21 days during the last two downturns. During the Great Recession, about 25 percent of workers Some Denials Appear Inconsistent With State Law. Our office has reviewed several EDD seeking UI received delayed payments. During the claim denials in cases where the worker was pandemic, delays were more common—affecting clearly eligible for UI. In one case, EDD denied between 30 percent and 50 percent of workers www.lao.ca.gov 11 AN LAO REPORT What Amount of UI Payments Went Unpaid Due to Improper Denials? The total amount of payments eligible workers do not receive because of improper denials is unknown. However, the financial cost of improper denials on eligible unemployed workers and the state likely is large. The figure below shows our best guess of the range of unpaid Unemployment Insurance (UI) benefits each year. These are (In Billions) payments that eligible unemployed workers $8 would have received 7 had the state not 6 High Estimate of denied their application. Low UI Payments Due As shown in the 5 figure, likely between 4 $500 million and 3 $1 billion annually in UI payments went unpaid 2 in recent years. (This Total UI Payments Made 1 figure does not account for workers who were 2014 2015 2016 2017 2018 2019 eligible for UI but did not apply.) Figure 4 State Delays UI Payments for Large Portion of Workers During Downturns Share of First Payments Delayed More Than 21 Days, Six-Month Rolling Average 100% Pandemic Great Recession Delayed UI Payments 50 2009 2010 2011 2012 2019 2020 2021 2022 UI = Unemployment Insurance. 12 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT applying for UI. (These figures do not account also must independently provide this information for delays that occur when a claim is denied and to EDD. This information includes addresses, total later overturned. Including improperly denied pay, hours worked, and hourly wage for each job in claims would increase the share of workers whose the past 18 months. EDD uses this information to payments the state delayed.) Routine payment decide if the worker is eligible for UI payments and, delays indicate that state practices, as shaped by if so, for what amount. When information provided the program’s basic design, do not prioritize getting by the worker does not match EDD’s records, EDD benefits to workers quickly. may divert the claim to manual review. Like identity reviews above, claims that need work history review Steps That Make Proving Eligibility are almost always delayed by 21 days, and often Difficult longer. At several steps in the application process, Disputes of Worker’s Claim. When a worker the burden of proof is placed on workers to show applies for UI, EDD sends a notice to each business that they are eligible for UI. Some of these steps the claimant worked for in the past 18 months. require workers to submit extensive and potentially Businesses can respond to the notice if they dispute unnecessary information, while other steps seem to the worker’s eligibility. The most common scenario encourage businesses to dispute UI claims made is a dispute about whether the worker quit or was by their former employees. While each of these fired. If they do not dispute the claim, businesses do elements may appear reasonable individually, when not need to respond. However, the notice wording taken together they make it unduly difficult for may encourage businesses to respond. The notice eligible workers to get benefits. states “ACTION REQUIRED” and “Failure to respond Matching Identity Information. When an may result in an increased employment tax rate and unemployed worker submits a claim for UI employer penalties.” As a result, businesses may payments, EDD confirms the worker’s identifying respond to the notices when they do not dispute information with the federal Social Security the claim, causing unnecessary delays. When a Administration and the state Department of Motor business responds to the notice, the business and Vehicles. EDD is able to quickly process many worker must respond to questions during interviews claims using these automated steps. In many cases, scheduled by EDD. These interviews often lead however, a worker’s identity cannot be confirmed to payment delays, up to several months in some to EDD’s standards, often due to incomplete cases. information or minor discrepancies. One example of State Proactively Investigates Certain Claims. a minor discrepancy is if a worker applies using their When applying for UI payments, unemployed middle initial instead of their full middle name as workers must describe how they became found on their driver’s license. When worker unemployed. Often the work separation is due to documents do not match, EDD mails a notice to the a lay off. Sometimes, though, the worker quit for worker requesting more documents. The worker good cause or was terminated. When a worker then must submit the documents. Due in part to applies after quitting or being terminated, it is our this high standard for identity documentation, EDD understanding that it is the department’s practice redirects about 40 percent of all UI applications to to investigate the claim. This occurs even if the manual staff processing. In many cases, the worker business does not dispute the claim. This practice returns the requested information and gets their UI may be inconsistent with state law. State law says payment, albeit after a delay. However, if the worker that workers who quit for good cause or were is unable to return the documents promptly (or if terminated are eligible unless the business disputes EDD cannot locate or process their documents), the claim in writing. The investigation includes state staff disqualify the worker’s claim. phone interviews with the business and the worker Duplicative Requests for Work History. Even (similar to the investigation described above). These though employers are required to report employees’ interviews often lead to payment delays. wage and work history to EDD, unemployed workers www.lao.ca.gov 13 AN LAO REPORT Unusual Application Questions Can Create • EDD’s cultural focus on fighting fraud Confusion. The UI application includes questions interferes with the delivery of benefits to that affect eligibility for a very small number of legitimate claimants. applicants yet add complexity for all applicants. The • EDD denied claims for not mailing in requested unusual questions relate to obscure program rules. documents while an average of 450 pounds of As an illustration, Figure 5 shows a few questions unopened mail sat in each EDD field office. that rarely affect eligibility from page 8 of the paper • Little or no assistance available to people who application. Other unusual questions relate to: do not speak English as a first language, and (1) disaster unemployment assistance, a special fluent English speakers struggle to understand federal program for workers in disaster areas; EDD notices. (2) pension income; (3) workers’ compensation • Unclear questions on UI application and other and disability benefits for injured workers; (4) the notices cause workers “extreme confusion and worker’s prospects of starting a self-employment stress” and drive avoidable workload at EDD. business; (5) whether the worker is the officer of a private corporation; (6) whether the worker is a Key Recommendations. substitute teacher for Los Angeles Unified School • Purchase identity verification software to District; or (7) whether the worker is an exempt reduce the need for manual processing. appointee of the Governor. Administration’s Own Figure 5 Strike Team Identifies Example of Questions Included on State's UI Application Imbalance at EDD On July 29, 2020, the Governor UNEMPLOYMENT INSURANCE APPLICATION announced the formation of a Social Security number: – – “strike team”—jointly chaired by 37. Are you currently receiving a pension? 37. Yes No Yolanda Richardson, Secretary If yes, answer question a: If yes, answer question a: of the California Government a) Are you currently receiving more than one pension? a) Yes No If yes, proceed to question 38. If yes, proceed to question 38. Operations Agency, and Jennifer If no, answer questions b-f: If no, answer questions b-f: Pahlka, founder of Code for b) What is the name of the pension provider? b) c) Is the pension based on another person’s work or c) Yes No America—to learn more about wages? struggles at EDD and to make d) Is the pension a union pension or a pension d) Yes No funded by more than one employer? immediate improvements. In e) What is the name of the employer(s) paying into e) September 2020, the strike team the pension? published an exhaustive, critical f) Did you work for that employer in the last f) Yes No 18 months? assessment of struggles at EDD 38. Will you receive any additional pension(s) in the next 38. Yes No and issued key recommendations 12 months? If yes, answer questions a-b: If yes, answer questions a-b: to improve the UI program. a) What is the name of the pension provider(s)? a) Key Findings. b) When will you receive the pension(s)? b) (mm/dd/yyyy) • EDD is routing more claims to (mm/dd/yyyy) manual processing than it has 39. Are you receiving, or do you expect to receive, 39. Yes No Workers’ Compensation? capacity to process. If yes, answer questions a-d: If yes, answer questions a-d: • EDD’s anti-fraud measures a) Who is the insurance carrier? a) delay payments to all b) What is the insurance carrier’s telephone number? b) Phone: – – c) What is the case number, if known? c) claimants and do not prevent d) What are the dates of your claim, if known? d) From: (mm/dd/yyyy) fraud. To: (mm/dd/yyyy) UI = Unemployment Insurance. 14 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT • Pause all new claims for two weeks to allow that a claim is not eligible unless submitted “in staff to work existing claim backlog. accordance with authorized regulations.” Almost • Assess ways that current practices to minimize all 1253(a) disqualifications were made because improper payments and fraud affect legitimate workers did not submit, or EDD was unable to claimants. process, additional identity documents within the allotted time frame. Many of these disqualified • Develop an “ideal” UI claim application and workers may have been eligible for UI: of workers recertification form to simplify process. who appealed (about 200,000), the appeals board LAO Perspective. The strike team’s findings overturned EDD’s action 78 percent of the time. were generally consistent with our office’s Had getting payments to eligible workers been a understanding of the major causes of the top priority, the state could have taken a different processing delays and backlog at EDD. Similar approach. For instance, the department could to our analysis, the strike team report identifies have extended the deadline for sending in identity longstanding practices and one-time actions at EDD documents or issued provisional payments while that are inconsistent with the priority of ensuring documents awaited processing. Further, with eligible workers get benefits. lessons learned from the Great Recession in hand, the state could have upgraded document Recent Actions Suggest Getting processing, mail sorting, and call center capabilities Payments to Workers Is Not a Top prior to the pandemic. Priority EDD Mischaracterized Figures in Legislative In addition to longstanding policies and Reports, Showing Far Fewer Denials. In response procedures that make it difficult for eligible workers to initial reports of claim delays, the Legislature to get benefits, recent actions during the pandemic passed Chapter 264 of 2020 (AB 107, Committee also suggest that getting payments to eligible on Budget) to improve oversight of EDD. The law workers is not a top priority for the state. Below, we directed the department to issue weekly reports to describe these actions in more detail and present the Legislature about the UI claim backlog and the simple steps the state and the department could number of workers found to be ineligible, including have taken instead had getting payments to eligible workers who were disqualified. From the start of workers been a top priority. the pandemic to June 30, 2021 (the final report EDD Denied 3.4 Million Workers for Not date), the department reported it had disqualified Sending Documents Via Mail at Time When or denied 705,000 UI claims. Yet during that same Department Could Not Process Its Mail. During period, the department disqualified 3.4 million the pandemic, the department struggled to process claims under Section 1253(a) alone. When asked incoming mail and phone calls from workers. about this discrepancy, the department told our According to the strike team report, each EDD field office that it interpreted “found ineligible” to mean office had an estimated 450 pounds of unopened workers who were ineligible under state and federal mail and had no system for processing unopened eligibility rules but not under state procedural mail. Further, at the state’s call centers, less than rules. As a result of this narrow interpretation, 1 percent of callers reached an EDD staff member. the Legislature was unaware of the widespread Of those, few were able to resolve their issues. reliance on procedural denials at a time when Despite its inability to process incoming mail or the department could not process incoming mail answer phone calls, EDD disqualified 3.4 million UI and phone calls. Had getting payments to eligible claims during this time for failing to respond to EDD workers been a top priority, the department could requests for additional information. This amounts have reported the full scope of claims that were to about one in four UI claims during the pandemic. found ineligible—instead of the narrowest scope—to The department made these disqualifications under bring the issue to the Legislature’s attention and a broad state law, UI Code 1253(a), which states begin work toward a solution. www.lao.ca.gov 15 AN LAO REPORT Based on a Third-Party Assessment, would be closed. Ultimately, more than half of Department Froze Benefits for Eligible Workers. the claims—600,000 of the 1.1 million—flagged In December 2020, EDD hired a fraud consultant as fraudulent were confirmed as legitimate. For to review nearly 10 million claims issued during the these workers, the process to reestablish their UI pandemic for potentially fraudulent characteristics. payments took several weeks (during which they In its review, the consultant flagged 1.1 million received no UI payments). Had getting payments to claims as potentially fraudulent. Without notifying eligible workers been a top priority, the department workers ahead of time, EDD stopped payments could have notified these workers beforehand and for these claims. To reopen their accounts, provided a 30-day period to prove their identity prior workers had to verify their identity using a new to turning off UI payments. identity verification service or their accounts ADDRESSING STATE PRACTICES THAT MAKE IT DIFFICULT TO GET UI With recent lessons in hand, the state now has could audit eligibility denials from recent the opportunity to rebalance California’s UI program years. To do so, ALJs at the independent so that getting UI payments to eligible workers is a CUIAB would work with the State Auditor to top priority. In this section, we lay out targeted steps review a random sample of denied claims the state could take to reduce improper denials, to assess whether EDD denied the claim minimize delays, and simplify the UI application. properly—that is, consistent with state eligibility law and regulations. Based on this Steps to Limit Improper Claim Denials review, the state could learn more about how Improper denials are a direct consequence often, and under what circumstances, workers of state policies and practices that have evolved are found ineligible. Further, the assessment alongside business, state, and federal incentives would uncover any potential patterns behind to contain UI costs. Denials are twice as likely to be improper eligibility denials. These findings overturned in California than in other states. Below, could guide changes that improve EDD we lay out several specific steps the Legislature policies and practices. could take to minimize improper denials. • State Auditor Reviews Procedural Rules First, Policymakers Should Learn Why That Lead to Denials. To learn more about Claims Are Denied. Little is known about claims procedural denials, the state will need to learn that EDD denies. To learn more about what types more about the circumstances that lead to of claims the state denies, policymakers should procedural denials. If procedural rules lead direct the State Auditor to independently assess UI frequently to denials but provide few other applications that EDD denies. Claims are denied benefits, reassessing these procedural rules for two main reasons: the worker is ineligible or could make getting UI benefits faster and the worker did not follow EDD procedures. As easier at little cost. discussed below, the eligibility review would assess Then, With Oversight, Give Appeals Board whether EDD follows current laws when determining Authority to Set Policy and Practices. State eligibility, while the procedural review would identify law requires EDD to apply UI policy in accordance the most common procedural reasons claims are with precedent decisions made by the full appeals disqualified. board of the CUIAB. However, only a small fraction • State Auditor Reviews Sample of Eligibility of appeals goes to the appeals board. Further, Denials. To learn more about claims where the longstanding EDD practice is to not appeal worker was found ineligible, the State Auditor ALJ rulings that overturn their determination, 16 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT meaning these cases are never escalated to notices to be clearer could potentially limit the the full appeals board. As a result, the appeals number of unneeded eligibility investigations. board has limited practical authority to direct Limit Practice of State-Led Investigations. An EDD policy to correct broader appeals trends. For additional step to address claim delays is to limit example, although ALJs overturned EDD staff’s the practice of investigating all “quit” or “fired” UI procedural denials roughly 80 percent of the time claims. (The state often investigates these claims during the pandemic, state law does not require even when the business does not dispute the claim.) EDD to revisit the procedures that led to such a The departmental practice of investigating these high overturn rate. To correct state practices that applications may unduly delay claims. have the effect of limiting UI payments, the state Reassess Practice of Allowing All Prior should give the appeals board the authority and Employers to Dispute UI Claims. In addition to responsibility to set UI policy and practices. Such a notifying workers’ most recent employer, EDD also step would represent an expansion of the appeals sends notices to any other employers the worker board’s duties relative to current law. As such, the had in the past 18 months. These notices show Legislature may wish to consider providing the former employers the amount EDD will charge appeals board additional legal and policy staff and their reserve account (based on wages earned by closely overseeing the appeals board’s transition to the worker when they worked for the employer). setting UI policy. Prior employers may dispute these charges. As discussed in more detail later, state law requires Steps to Minimize Delays businesses to report payroll information to the Unneeded delays between application and first department. As such, the department maintains payment are one consequence of state policies and all prior employment records. Given that the state practices that have evolved alongside incentives to already maintains these records, it is unclear what contain UI costs. The section below lists steps the past employers would dispute. One additional way state could take to limit these delays. to limit payment delays would be to review whether Reassess Requirements for Initial Identity past employer disputes frequently delay claims and Matches. One step to reduce delays due to manual reassess this practice if it furthers no clear state processing is to reevaluate the usefulness of current interest. identity requirements. To do so, the department Assess Surcharge to Discourage could catalog why claims go to manual processing Unsubstantiated Disputes and Appeals. and what occurred after. For issues that workers Unsubstantiated business disputes (that trigger frequently resolved, the department could relax an EDD eligibility interview) and appeals (that that requirement. This process would build on trigger an ALJ review) delay claims and cause extra improvements the department accomplished during workload for EDD staff. Current state law does the pandemic. For example, EDD discovered that not discourage these types of delays. In fact, by many workers were misreporting their birthdates. requiring businesses to submit a claim dispute in (Workers were listing date, month, year as is order to maintain their right to appeal, state law customary in many parts of the world.) EDD sent may actually encourage these actions. As such, these applications to manual review. In response, some businesses may view disputes and appeals the department improved its online application to as a no-cost step to limit their UI costs. To ensure reduce confusion. Birthdate misreporting and the that businesses reserve disputes and appeals corresponding delays dropped. for substantiated disagreements, the state could Reword Employer Notice to Clarify That assess a surcharge on unsubstantiated disputes No Action Is Required. One step to limit EDD and appeals. A surcharge could be in the form of investigations that cause delays is to clarify a fee or an increased charge to their UI reserve employer UI notices. As discussed earlier, the account, such as 125 percent of the claim cost department’s employer notices strongly encourage instead of the standard 100 percent. businesses to dispute UI claims. Rewording these www.lao.ca.gov 17 AN LAO REPORT Steps to Simplify Application and Clarify workers do not continue getting UI payments after EDD Decisions they have been hired. To rebalance the UI program, the state could also require businesses to report One clear byproduct of a UI program that does layoffs with ten days. The department could use not prioritize getting benefits to eligible workers is this information to automatically connect newly that the UI application and ongoing requirements unemployed workers with the UI payments for which are not user-friendly. EDD notices, decisions, and they are eligible. Layoff reporting could have the case file materials (that it shares before appeals) effect of speeding up applications and ensuring that are technical and unclear. Further, workers who all eligible workers get benefits. do not understand the state’s complex eligibility Reevaluate the Need for Extra Questions on rules may not grasp why the state asks seemingly the UI Application. The state’s application for UI unrelated questions. As a result, some workers may includes questions that rarely affect UI eligibility. answer mistakenly, leading to unnecessary delays In many cases, the state could forego these or denials. Below, we offer steps to simplify these questions and instead cross-match applications materials to ensure that they are not a hurdle to against related state databases. For instance, EDD receiving UI. oversees the state’s temporary disability insurance Drop Work History From Application… program. As such, as part of the UI application The state’s application for UI asks workers to list review, the department could check to ensure exhaustive information about prior employers. For that UI applicants are not also receiving disability each employer in the last 18 months, workers must payments. Eliminating unusual or duplicative report: employer name, address, and telephone questions would shorten the application and limit number; start date and end date; whether paid misunderstandings that cause delays. weekly, bi-weekly, or monthly; total wages paid; and Build on Recent Work to Rebalance hours worked per week. The department requires Notification Procedures. Chapter 516 of 2021 workers to fill out these questions despite having (AB 397, Mayes) requires EDD to tell unemployed this same information in their own database. workers how to correct errors before the state …And Make First Payment Based on EDD disqualifies their claim based on those errors. Records Instead. Asking workers to list out prior (Before the law, workers often mistakenly answered wages that the state already maintains serves little questions about their ongoing eligibility. Without purpose and has the effect of lengthening the UI prior notice, the state charged the worker for an application. Because the state already maintains “overpayment” and disqualified the worker from employer-provided wage and hour information for future benefits.) Building on this improvement, the all workers, the department could instead make state may want to set clear standards for all EDD first payments based on EDD records. After the notifications. Rebalanced standards might set: department has started paying benefits based on its (1) minimum number of days to respond to notices; records, it could give workers the option to update (2) minimum requirements for EDD attempts to call, EDD if they earned wages that were not reported by text, or e-mail workers before denying or reducing their employer. UI claims; (3) what information EDD must share In Addition to Existing Hiring Report, Set about why it denied a claim; and (4) readability Up Layoff Report to Speed-Up UI Application. standards for “Record of Claim Status Interview” Under state law, businesses must report all new reports (EDD shares its internal case file report hires to EDD within ten days. The department uses with parties before appeal, but the internal this information to make sure formerly unemployed documentation is incomprehensible). 18 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT CONCLUSION Despite its importance to workers and the Some of the changes we suggest in this report economy, the UI program faltered during the Great could be made quickly to immediately improve Recession and the pandemic. This caused hardship the process of getting benefits. Narrowing the for unemployed workers and their families, held instances when former employers can contest back the economic recovery during both periods, a worker’s claim is one example. Other changes and spurred frustration among Californians with we put forth here will take time to develop and their state government. These failures trace back implement and require broad participation from to the UI program’s basic design, which has businesses, workers, and the department. encouraged EDD to adopt policies and practices Simplifying the application for UI benefits is an that make it unreasonably difficult for eligible example of a more involved, substantial change. workers to get benefits. Although these problems Given these differences, improving the UI program are not new, the pandemic has highlighted the need will require the state to pursue several approaches for the state to rebalance the UI program in ways at the same time and carefully assess progress. that make getting benefits to eligible workers a top In the end, though, undertaking this work would priority. put the UI program in a better position to support workers and the economy during the next economic downturn. www.lao.ca.gov 19 AN LAO REPORT LAO PUBLICATIONS This report was prepared by Chas Alamo, and reviewed by Brian Uhler and Carolyn Chu. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, California 95814. 20 LEGISLATIVE ANALYST’S OFFICE