Unemployment comp fraud and outdated systems are high risks for employers
The economic fallout from the COVID-19 pandemic exposed severe flaws in states’ unemployment insurance (UI) programs, as overstretched agencies with obsolete technology struggled to meet unprecedented demand and police a spike in fraud and other improper payments according to the U.S. Government Accountability Office (GAO).
GAO report
“The unprecedented demand for UI benefits, coupled with programmatic flexibilities … that increased risks of improper payments, including those due to fraud, have added to the UI system’s long-standing challenges of balancing effective service delivery and program integrity,” the GAO stated in a June 7 report. “These challenges highlight the need for transformation and improved federal and state management to better support the purpose of the UI system.”
The report details the GAO’s findings regarding:
- The challenges the UI system faces in responding to the needs of unemployed workers and to changing economic conditions
- The risk of improper payments, including from fraud
- The resulting risks to the UI system of significantly impaired performance and financial loss and how to address such risks
- Potential options for transforming the UI system
Unemployment fraud
“The risk of UI improper payments, including from fraud, greatly increased during the pandemic,” the GAO reports. Improper payments reported by the U.S. Department of Labor (DOL) increased nearly tenfold from fiscal year (FY) 2020 to FY 2021, and even in proportion to overall payments, the rate more than doubled (from 9.2% to 18.9%).
And while improper payments have traditionally resulted from eligibility determination issues, such as employees returning to work and failing to report their earnings, identity theft emerged as a major cause during the pandemic. In particular, the GAO notes, the new UI programs created by the CARES Act created new fraud risks and heightened existing ones.
A certain rate of improper payments is unavoidable given that states are legally obligated to pay claims in a timely fashion and resolve any eligibility issues within one week. But during the pandemic, the problem was exacerbated by “untimely and unclear federal guidance, and insufficient and under-trained state personnel,” according to the report. And the problem’s full extent is not even clear because “DOL and states have struggled to reliably report improper payments information.”
Outdated systems
Unemployment fraud detection, along with the effectiveness and responsiveness of UI programs more generally, has been hampered in many states by outdated, underfunded infrastructure.
“Long-standing challenges with UI administration and outdated IT systems have affected states’ ability to meet the needs of unemployed workers, both historically and during times of economic downturn—particularly the COVID-19 pandemic,” the GAO reports. These deficiencies contributed to the widespread claim processing backlogs that “led to substantial delays in first payments of regular UI benefits early in the pandemic,” and to longer-lasting delays in some states.
The GAO blames these problems in part on chronic underfunding. “States’ benefit amounts and approaches to UI financing, risk the viability of the program,” according to the report. Funding declined more than 20% between 2010 and 2019, and then when the pandemic hit, “states received record levels of UI claims as they simultaneously implemented the new CARES Act UI programs, which overwhelmed their existing staff resources.”
Recommendations
To help UI programs improve service while mitigating their financial risk, the GAO calls for a “transformation plan” from the DOL to identify where changes to the law might be needed, achieve quantifiable results in reducing fraudulent and otherwise improper payments, and make claim processing more efficient.
The full text of the report, titled Unemployment Insurance: Transformation Needed to Address Program Design, Infrastructure, and Integrity Risks (GAO-22-105162), is available on the GAO website.
Employer Takeaways
Employers may often be the first to discover unemployment fraud, but they must be alert to the signs to respond accordingly. In particular, employment attorney Abbygale Martinen of Sheehan Phinney Bass & Green PA, a member of the Employers Counsel Network, cited the following as possible red flags:
- Unexpected communications from an employment agency;
- Unauthorized transactions on your personal or business accounts;
- Attempts to charge you or an employee a fee for a jobless benefits application; or
- Fictitious websites that mimic an unemployment agency or government portal.
State unemployment agencies generally have a hotline or online portal for reporting fraud, as does the DOL Office of Inspector General. Employers also should “notify employees who might be victims so they can take all necessary precautions,” Martinen said. “And train them on how to identify potential fraud.”
