TN unemployment program problems cost business owners

9:48 AM, Apr 4, 2013   |    comments
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By Duane Marsteller | The Tennessean

Peter Demos, president of Demos' Restaurants, says he has seen problems firsthand for years -- from inadequate notifications from the state Labor Department to state hearing officers' ignorance of recent changes in employment law.

Peter Demos, president of Demos' Restaurants, says he has seen problems firsthand for years -- from inadequate notifications from the state Labor Department to state hearing officers' ignorance of recent changes in employment law. - Helen Comer / File / Gannett Tennessee

Many Tennessee business owners say an audit released last week that showed the state overpaid $73 million in unemployment benefits validates their longstanding complaints about the state's unemployment program. Now they hope it leads to reform.

State auditors found several troubling issues for Tennessee employers, including:

* The state may be charging some employers higher premiums than are warranted.

* Many employers have been unable to challenge unemployment claims because they did not get adequate or timely notification from the state that the claims had been approved.

* The state received $800,000 in federal funds to install a new case management system to help ease these problems, but the state didn't install it properly.

None of these findings surprised Peter Demos, president of Demos' Restaurants, which has four locations in Middle Tennessee.

Demos says he has seen the problems firsthand for years -- from inadequate notifications from the state Labor Department to state hearing officers' ignorance of recent changes in employment law. Those continuing issues so frustrated Demos that he sued the Tennessee Department of Labor and Workforce Development almost a year ago, accusing the agency of violating his company's due process rights.

"This audit just proved what I've been saying all this time," Demos said. "I just want to see it fixed."

Other employers echo Demos, saying longstanding problems in the program have taken a far greater toll than the $73.4 million in overpaid benefits cited in the report. Employers also say they're hopeful that the blistering audit will result in meaningful improvements.

"This audit has given this administration some good guidance on what needs to be done," said Jim Brown, the National Federation of Independent Business' Tennessee director. "Our members are gratified and relieved that this is out there and these problems are being addressed."

Agency lapses

In the report, the state comptroller's office said the labor agency often failed to follow its own procedures in administering the program, which pays up to 26 weeks of benefits to employees who lose their jobs through no fault of their own.

That led to the $73 million in overpayments to ineligible employees in a recent six-year period. The agency's lapses also worsened a growing backlog in processing new claims from employees, along with claims challenges by former employers, the report said.

For instance, the state sends notices called "benefit charge cards" to employers each time the division approves a new claimant.

Companies are charged premiums paid into the fund based on the company's size and the number of former employees added to the unemployment rolls.

However, if the "charge cards" aren't processed in a timely fashion, there's no way to accurately determine how much a company should actually be paying. As of Feb. 23 auditors said the state had more than 31,000 unprocessed "charge cards," or a four-month backlog of claims.

In addition, many employers have been unable to challenge the unemployment claims of former employees because they never received verification letters from the state -- or received the letters after the former employee had already been approved for payments. The department was paying claims automatically "without a proper review process in place," auditors said.

Finally, the state received $800,000 in federal funds to install a new computer system that could help address some of the administrative issues, but that, too, was handled incorrectly.

The new system was supposed to allow state workers to scan in claim forms and automatically forward them to the proper department, but because the work order for the vendor that installed the system was "poorly written," the system didn't work as it should.

The department IT administrator also told auditors that there also had been "inadequate testing and monitoring of the project."

In the report, state auditors questioned "whether (department) management used appropriate care when spending federal award funding to implement the system."

Those and other problems have "threatened the integrity" of the unemployment program, the audit said. Its release followed the sudden resignations of three top Labor officials, including Commissioner Karla Davis.

Past problems

Employers, who fund the program through premiums paid to the state, say the audit's findings mirror their own experiences.

For example, three retired Rutherford County employees still collected unemployment benefits in recent years even though the county had notified the state that they were ineligible, said Sonya Stephenson, the human resources director for county government.

In a separate case, another ex-employee received more than $6,000 in unemployment before state officials determined she was ineligible after the county terminated her for cause, which is one of the ways a claim can be invalidated. The county has yet to be reimbursed, Stephenson said.

Despite those cases, the state agency has made recent improvements such as implementing an online claims application and verification system, she said. "Our experience has been a lot better in the past year," Stephenson said.

One contentious issue for employers has been notification letters. When a worker files for unemployment, the state is supposed to notify the former employer so it can either accept or challenge the worker's claim within seven days.

If the employer doesn't respond by the deadline, the claim usually is approved automatically. But employers say they often receive no notice or get one that arrives after the deadline.

"Some employers would just give up and not contest" the claim, Brown said.

That has financial implications for employers, as each approved claim goes onto its experience rating that is used to calculate their unemployment taxes. The more claims against an employer, the more it pays.

"Employers are the ones paying into the system," said Jeff Bates, managing partner of TA Staffing in Nashville and a frequent critic of the unemployment system. "Every time a claim is erroneously approved, every business in Tennessee is affected."

Notification issues

Demos said late notifications were costing his company, not only financially but in terms of time and effort as well.

"Every time we received our statement, there were people on there that we were unaware of or people who were off unemployment, but we were still paying for them," he said.

He blamed the notification problems on the state failing to verify employer addresses submitted by workers and sending notifications via regular U.S. mail.

Demos said the notification issues led to his federal lawsuit aimed at getting the Labor Department to address the problem. The suit has since been settled; the terms were not disclosed, court records show.

He and other employers now hope the audit leads to more changes, starting with fresh leadership at the top.

"The administration's challenge this time is to get someone who truly understands employment security," Bates said. "It's a watershed moment for employers. I think it will lead to more attention being paid to the problems."

Contact Duane Marsteller at 615-259-8241 or Follow him on Twitter @DuaneMarsteller.

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