State unemployment systems saw a huge increase in claims in 2020, as the pandemic shuttered non-essential businesses. At the same time, state unemployment systems also experienced increased fraud and overpayment issues, costing $63 billion.
The Department of Labor estimates that up to 10% of unemployment insurance benefits were fraudulent. The Office of the Inspector General (OIG) reported a 40-fold increase in fraudulent UI investigations since the beginning of the pandemic and the implementation of the Pandemic Unemployment Assistance program. The OIG has also assisted in the recovery of $565 million in payments throughout the pandemic. Policymakers at the state and federal levels are finding ways to respond to the overpayments and fraud.
In addition to increasing fraud and overpayment rates, many states’ unemployment insurance (UI) programs have struggled to accommodate increasing jobless claims. Many states may lack sufficient administrative capacity to process UI applications while devoting resources to fraud and improper payment detection.
Unemployment Insurance Improper Payments
The term “improper payment” refers to overpayment or underpayment of UI benefits. According to a U.S. Department of Labor (DOL) report, the average overpayment rate among the states was 13.294%, amounting to $165, 649, 819 for the financial year ending Sept. 30, 2020. Among the states, the overpayment rate ranges from 0% to 40.944%. Eleven states have an improper payment rate greater than 13%.
The DOL reports that the largest causes of improper payments fall into three categories, benefit year earnings, work search and separation issues. These are described below.
Benefit Year Earnings (BYE) causes improper payments when workers continue to claim benefits/ fail to report earnings after going back to work. One solution to this problem is increased use of the National Directory of New Hires (NDNH.) The directory can help states identify when a claimant has returned to work. To maximize the efficacy of the NDNH, the DOL calls on increased employer compliance in updating the directory.
Often, UI claimants don’t comply to work search requirements, causing improper payments. All states require most UI claimants to actively search for work while receiving UI benefits. The DOL finds that states with more stringent work search requirements have higher improper payment levels. Claimants fail to adhere to work search requirements for a variety of reasons, including lack of understanding of work search requirements or inadequate documentation of work search activities. To improve adherence to work search requirements, the DOL recommends increasing messaging about requirements and updating the technology to make reporting work search activity easier. In addition, the DOL recommends integrating work search requirements into weekly claim certification.
Separation issues occur when UI claimants are paid and it is later discovered they are ineligible for UI benefits because of the circumstances of their “separation from previous employment.” Separation issues arise when employers or their third-party administrators (TPA) do not provide timely information about a claimant and the claimant’s reason for separation from the employer. By law, states are required to make a decision about a claimant’s UI eligibility if the employer does not provide timely information and the claimant is otherwise eligible for benefits. To combat this issue, the DOL recommends using the State Information Data Exchange System (SIDES), which allows for the quick exchange of information between UI agencies, employers, and third-party administrators. In addition, states could improve messaging about separation terminology to reduce claimant confusion about the nature of their separation.
In response to improper payment issues, the DOL created the UI Integrity Center. The Center works with State Workforce Agencies (SWAs) to “prevent, detect, and recover improper and fraudulent payments.” This includes recovering improper payments as a result of CARES Act provisions. The Integrity Center is housed in the National Association of State Workforce Agencies (NASWA) The current priorities of the Center include collecting and dispersion of integrity best practices information and creating an Integrity Data Hub (IDH).
Specifically, the DOL UI Integrity Strategic Plan calls for expanding or implementing programs that improve data exchange and target areas for maximum improvement. For example, the plan focuses on High-Rate-High-Impact (H-R/ H-I) states. Under the plan, the DOL will focus on 11 states with high improper payment rates and a high potential for affecting the national UI improper payment rate. The plan also promotes UI Integrity Act provisions, including requiring states to use SIDES, NDNH, and other technology aids to decrease the improper payment rate with the help of updated and readily available information. The DOL also authorizes the Secretary of Labor to take corrective action in states with high improper payment rates.
State Responses to Overpayments
Multiple ways exist for states to deal with the overpayment of UI benefits. States approach benefit overpayment based on how and why the overpayment occurred.
Many states provide waivers for overpayments that are not fraudulent or if the overpayment is not the fault of the individual. States offer waivers for agency error, employer error, equity or good conscience, financial hardship, and other reasons. State law also provides for the recovery of benefits. States have a variety of methods to recover overpayments, including offsetting the value of future benefits and tax refunds. In addition, some states permit civil action to recover overpayments. Some states also charge interest on overpayments. Interest ranges from 0 to 18%.
State Responses to Unemployment Fraud
Another concern about unemployment insurance and fraud is the role of administrative capacity in ensuring adequate resources to identify and address fraud. This issue is especially prevalent during the pandemic as unemployment claims surged. In March 2020, during the opening weeks of the pandemic, state unemployment insurance systems experienced a rapid increase in benefit applications. About 3.28 million Americans applied for unemployment benefits in the third week of March 2020, compared to 211,000 in the third week of March 2019. According to the US Department of Labor, the number of initial unemployment claims filed in the third week of March 2020 is the highest since the DOL began recording the measure. In May 2020, the national unemployment rate was 13%, more than 3.8 times the unemployment rate in May 2019. In addition, 16 areas had employment rates 20% or higher. This rapid influx of applicants, combined with the additional administrative burden of sorting traditional unemployment applicants, gig workers seeking benefit from the CARES Act Pandemic Unemployment Assistance Program (PUA) and additional payments to all workers through PUA overwhelmed many states’ unemployment systems. Many states did not have the administrative capacity to accommodate large numbers of applicants. Furthermore, states felt pressure to streamline the application and review process to ensure claimants received benefits in a timely manner. This caused some instances of fraud to go undetected.
Generally, when fraud is found to be the cause of overpayment on the individual’s part, or willful underpayment by the employer, states may approach this with benefit reduction, interest, fines, and prison time. Federal law requires a mandatory penalty assessment for fraud claims. The assessment can be no less than 15% of the overpayment. More specific state actions include:
- Benefit reduction, such as reducing the percent of benefits paid or the number of years of eligibility. This includes reducing state tax refunds.
- Monetary assessments, including interest and fines on claimant or employer.
- Prison time for the claimant, which ranges from 60 days to 20 years, and the employer, which ranges from 30 days to 20 years.
Finally, state law accounts for the write-off of overpayments. After a certain number of years, or if the recovery of the overpayment is deemed difficult/impossible, most states will allow the overpayment to be “canceled as uncollectible.” Provisions vary based on if the overpayment is fraudulent or part of a nonfraudulent case. For nonfraudulent cases states permit write-off if the age of the claim is between one and eight years, or for other criteria such as death, bankruptcy or if the claimant cannot be located. For fraudulent claims states permit write-off if the age of claim is between two and 10 years, or for other such as criteria death, bankruptcy or if it is impracticable to collect.
Increasing unemployment fraud has forced states to evaluate UI systems and identify areas for improvement. Responding to UI fraud during the pandemic requires states to analyze unemployment systems differently than when analyzing for internal fraud activity. Unlike traditional fraud, which occurs when UI claimants make false claims, fraud during the pandemic has been largely due to outside scammers.
For example, New York has prevented $6.4 billion in fraudulent payments and identified 500,000 fraudulent claims since the start of the pandemic. In response, New York launched a web page with a guide on preventing identity theft when online. In addition, about 20 states, including California, Arizona and New York, are using id.me, an online identity verification service, to help identify cases of external fraud.