Reducing Your UI Tax Rate Starts with Improving Your Experience Rating
Unemployment insurance (UI) taxes and claims expenses are often seen as unavoidable costs of doing business. However, organizations that take a proactive approach to claims management understand that these costs can be significantly reduced by focusing on the controllable portion of their UI taxes: the experience rating.
Despite this, a surprising number of organizations fail to tap into the substantial savings potential within their UI tax strategy. By understanding and optimizing their experience rating, companies can transform it into a powerful tool for cost control, lowering their tax rate and boosting their bottom line.
The Experience Rating: A Complex Calculation with a Big Impact
One of the greatest determinants of your total UI tax paid is your unemployment experience rating. The intent of the experience rating is to allocate UI costs fairly among employers and create an incentive for businesses to reduce layoffs.
Most states’ experience rating systems are complicated, so it’s not easy to determine how a given employee’s separation and potential claim will impact your rating and tax bill. However, no matter where you do business, four primary factors typically impact your experience rating:
- Unemployment claims filed against your company (both the number and claims amount)
- Your taxable payroll
- Your UI taxes paid
- Total benefits charged to your UI account
Most states evaluate these factors over a three-to-five-year period to determine your experience rating, and some also weigh other variables. For example, some jurisdictions adjust your rating based on your organization’s age (charging newer businesses a higher rate to compensate for a lack of historical claims data). Others factor in the solvency of your state UI trust fund, which can fluctuate based on economic conditions.
Using factors like these, the state will apply one of two methods to calculate your experience rating.
- Reserve Ratio Method. The reserve ratio is the difference between your UI taxes paid and the benefits paid to claimants that were charged to your account, divided by your average taxable payroll. If the amount of benefits charged is greater than the amount of tax paid, your reserve balance will go down and your experience rating will go up (and vice versa).
- Benefit Ratio Method. The state calculates the ratio of benefits paid out to your former employees that were charged to your account vs your taxable payroll. As this ratio increases, so does your experience rating (and vice versa).
In some states, the experience rating is your base UI tax rate for the year. Other states may include additional factors, such as a multiplier or add-on to take into consideration the state’s general funds balance and overall economic and unemployment conditions.
How Your Industry Impacts Your Experience Rating
In addition to state-specific differences, your industry can affect your experience rating and UI tax bill.
Industries that face significant seasonal fluctuations or are disproportionately impacted by economic volatility—such as construction and manufacturing—tend to have more frequent separations, increasing the experience rating. In industries with higher turnover rates, such as retail and hospitality, businesses often have higher experience ratings.
An industry with a higher-than-average unemployment rate also could face a less favorable experience rating. And in industries that pay lower wages than the national average, studies suggest that experience ratings could be higher because the potential UI benefits represent a greater percentage of the average worker’s wages, encouraging more claims.
Use These Strategies to Reduce Your Experience Rating
Since the experience rating is a big driver of your UI taxes paid, one of the most effective ways to reduce your unemployment-related costs is to reduce this figure. The following strategies will help bring down your experience rating and improve your bottom line.
Evaluate Your HR Practices
Proper HR policies and procedures help you avoid the most common mistakes that lead to unnecessary unemployment claims. Maintaining accurate employment records, following well-documented procedures when discharging employees, and providing training on how to handle employee misconduct are a few examples of HR practices that help you avoid unemployment pitfalls and win more claims.
Take Decisive Steps After a Bad Hire
If you hire a new employee and quickly discover they cannot perform the work satisfactorily, don’t delay in taking action. Terminating their employment sooner rather than later will help to minimize the amount of benefits paid. In some states, including Florida and North Carolina, the employer is relieved of any charges if the separation was due to an employee’s inability to perform the work and it occurred during a specified introductory (probationary) period.
Manage Claims Strategically
Since total claims and benefits paid impact your experience rating, you can reduce this figure by winning more claims upfront through strategic claims management. For instance, it’s important to review claim notices timely and craft compelling, accurate, and complete responses that include sufficient documentation. You should take steps to identify and reverse fraudulent or ineligible claims, as well as erroneous charges. And in cases where the state rules in favor of the claimant, you should thoroughly prepare your witnesses to testify at the appeal hearing to achieve a successful outcome.
Track Your UI Tax Rate
Few companies pay attention to their UI tax rate, even though it impacts their bottom line. Those that are serious about reducing unemployment costs turn this task over to an outsourced provider, which monitors the UI tax rate and compares it to the average for the organization’s industry in their state. Once you know how the rate is trending and how it compares to your peers, you can develop a plan to improve it.
(Download this case study to learn how a nursing care company used this approach to reduce its UI tax rate well below the state average for this industry, saving nearly $200,000 annually.)
Consider Making Voluntary Contributions
Some states allow you to make voluntary contributions to your UI tax account. It’s worth determining whether a small voluntary contribution could keep you in a lower bracket and result in a net tax savings, which might be the case if you operate in a reserve ratio state.
Proactive strategies like these can significantly reduce your experience rating and UI tax rate, but implementing them effectively requires time and expertise that many organizations may not have in-house. This is why some companies choose to outsource their unemployment claims management.
A skilled third-party provider like UC Alternative can help you set realistic tax rate goals, develop a tailored plan, and handle the administrative workload—allowing your team to focus on higher-value priorities. By leveraging specialized expertise and proven processes, they can improve your claims outcomes, lower your tax rate, and ultimately save your organization money.
Use our free online calculator to estimate your potential unemployment cost savings. Then request a consultation with UC Alternative to learn how we can help you achieve those results.
