As with many aspects of running a tribal organization, when it comes to the topic of unemployment insurance, there are differences in how things are managed and opportunities that you may not be aware of. Under Federal law, tribal organizations are required to participate in unemployment insurance programs, but there are some unique options available to them that may reduce both cost and risk.
An Overview of Unemployment Law for Sovereign Tribes
In the United States, the Federal Unemployment Tax Act defined and mandated the state Unemployment Insurance system; as such, there are 50 state unemployment insurance programs, and the District of Columbia, Puerto Rico and the United States Virgin Islands are also required to participate. Benefits are paid out to employees who have lost their jobs by no fault of their own. Funds used to pay these benefits come from state and federal taxes levied against employers.
Under U.S. federal laws, Indian tribal governments are treated the same as state government, local government or non-profit organizations for unemployment compensation purposes. A 2001 federal omnibus appropriations bill amended the previous Internal Revenue Service code with regard to the Federal Unemployment Tax Act (FUTA). The bill basically exempts tribes from FUTA and extends them the option to self-insure their unemployment obligations.
These changes provide tribes and their businesses with new opportunities, but these opportunities can come with risks. This is why it’s important to understand all of the options available to you as the owner or manager of a tribal organization.
Three Unemployment Insurance Options for Tribes
There are three basic options when it comes to unemployment insurance. You can participate in the state program, elect reimbursement, or elect to reimburse with a safety net.
The State Unemployment Tax Option
Every state has an insurance pool that is made up of taxes paid by employers. As with any other type of insurance, your premiums (taxes you pay, if you participate) go toward subsidizing other employers as well as the state’s administrative costs.
In this case, the state has full control of everything. Employees who want unemployment benefits file their claim, the state reviews the claim and determines eligibility, and then pays out benefits accordingly. While states may have different calculations, employer taxes are usually based on payroll, the amount the employer has paid into the system, and unemployment claims paid out against the employer’s account.
Reimbursing the State
This option is also known as self-insurance. Self-insurance can reduce your costs, but leaves the organization open to virtually unlimited risk. Under this model, employees still file their claims with the state, and the state determines eligibility. The state then pays out benefits accordingly, and your organization is required to reimburse the state dollar for dollar.
If you self-insure, you don’t pay the state’s administrative costs, which reduces costs in the short-term. However, as a reimbursing employer, you are fully liable for all charges against your account, including any catastrophic losses resulting from unforeseen layoffs or terminations where the state determines the employee was terminated due to “no fault of their own.”
Self-insure with Managed Risk
The optimal scenario for tribal organizations to elect to self-insure their unemployment with managed risk. This option requires two critical initiatives in order to achieve success.
Historical data shows that approximately 20-40% of unemployment charges assessed against an employer can be avoided. This does not imply that former employees who should be eligible for unemployment would be wrongfully denied; however, it does mean that a large percentage of claimants are receiving benefits who should not be deemed eligible under state law. These benefits paid in error are a result of employer risk introduced through such areas as hiring practices, policies, internal procedures and management training, to name just a few. Through proactive, industry-leading risk management initiatives, these unnecessary unemployment costs can be significantly mitigated, enabling the employer to retain the critical budgetary dollars within their budget – rather than being paid to former employees who should not be receiving benefits under state law.
The second critical initiative to managing unemployment risk is to employ a safety net. Within natural employment cycles, most employers will experience seasons of higher-than-normal unemployment. It is in these seasons where employers will want to ensure that they have stop-loss insurance in place which protects them against unforeseen losses. This is generally considered to be included as a part of the state’s Unemployment Insurance tax structure; however, it does not exist within the standard reimbursement election.
This is a golden opportunity — reduce costs and risk through intentional unemployment risk management. Recognizing this need, S3 Management Group created the Tribal UI Partner Program. With this option, you pay less and eliminate the risk for your organization. You’ll go from a tax paying structure to self-insured with clear policies and procedures in place designed to eliminate unnecessary unemployment charges. You will also receive stop-loss protection in the event of a catastrophic unemployment season.
Consider Your Options
The options mentioned above can reduce both cost and risk. However, if they’re not carefully managed, they can introduce significant cost and risk as well. Many companies say they can transition your Tribe to a reimbursing employer. They may even give you a place to bank, but they only function as a project manager. They often outsource the administration to a commoditized unemployment third-party administrator who provides compliance, at best. Unfortunately, they drop the ball when it comes to functioning as a partner and making a difference to your bottom line.
Alternatively, you can find a partner who knows what it takes to operate a business in Indian Country, who cares about the community, and who can come along side you with solutions specifically designed for your business. At S3, we don’t outsource to a commoditized partner. We’re not transactional. Our solutions are strategic and focused on making your organization stronger while removing your risk.
Leverage your sovereignty so you’re not paying the state’s administrate costs and subsidizing other employers. Step away from the state’s control with a partner who knows how to navigate the waters. We’re a trusted partner who’s been doing business in Indian Country for years. Click here to learn more.