One of the most frustrating aspects of the COVID-19 pandemic has been that overseas criminals successfully infiltrated Washington’s unemployment insurance system through fake unemployment claims. According to the Employment Security Department (ESD), these fake claims received payments totally nearly $600 million – benefits that should have been paid to laid-off workers in Washington state.

To better understand how ESD could have fallen prey to such a massive fraud scheme, it’s important to understand how the Unemployment Insurance Trust Fund operates:

• The Unemployment Insurance Trust Fund (UI) provides a vital safety net for Washington workers
• The UI is 100% employer-paid
• Before Gov. Inslee ordered the mandatory economic shutdown, Washington had one of the most solvent UI programs in the country
• There are three different taxes that make up the UI:
  1. Experience-rated payroll taxes based on benefits charged directly to a specific employer
  2. Social taxes to pay for benefits paid, but not connected to an individual employer
  3. A solvency tax (federal and state) if the UI trust fund is at risk of insolvency

How it all Went Awry

Inslee’s edict to shut down all but “essential” businesses in March forced a massive influx of layoffs. Those people who lost their jobs correctly sought unemployment benefits. In fact, the governor actively encouraged businesses to lay off their employees and for those employees to access the enhanced benefits that had been approved by Congress.

Due to the onslaught of layoffs, by the end of March, ESD received 30 times as many claims as were received the same week in 2019 and did not have the capabilities to handle the number of claims. ESD’s solution was to alter its system to get claims moving quicker.

When Washington’s ESD announced these changes to security checkpoints, the federal government warned ESD that it would put the program at risk for identity fraud. ESD ignored the federal government’s warnings. With security checkpoints removed, an open invitation for fraud was issued.

Once ESD was alerted to fraud from outsiders and federal investigators in April, tens of thousands of counterfeit claims had already been processed. In fact, according to data released Aug. 3 by ESD, by the last week of April, ESD was averaging the approval of 2,000 fraudulent claims each day. By mid-May, 56.4% of all claims received were fraudulent. In response to the massive number of fraudulent claims, ESD locked access to all accounts. This assisted in stopping fraudulent claims, but it also locked over 80,000 accounts of Washingtonians in need of aid. Somehow ESD thought the best customer service response for people in need would be to stop accepting calls or answer emails – people in need had no way of correcting misinformation or getting needed benefits for the government compelled removal of incomes.

Insolvency of UI Fund

Due to the unprecedented scale of COVID-related unemployment and the theft that amounted to nearly $600 million in UI funds, the UI trust fund is predicted to reach insolvency by the fourth quarter of 2020 or the first quarter of 2021. The worry is the only solution to replenish the fund is UI tax increases on employers. This scenario will likely mean a tripling of UI taxes on businesses in 2021.

The UI system was not designed for government-mandated layoffs and shutdowns.

Employers are not responsible for the pandemic, which precipitated government action to stop its spread. Businesses were ordered closed to achieve a societal goal. Employers were directed by the government to close or curtail their operations, thwarting traditional means that they can use to avoid layoffs.

Businesses should not be forced to bear the costs of unprecedented COVID-related unemployment. Small businesses are particularly impacted since their UI use, and UI taxes are often very low. Due to the design of the UI system, even a single layoff can exponentially increase UI taxes on small businesses.

The UI trust fund has been drained because of the pandemic and government-mandated curtailments in the economy, as well as theft. Employers recognize their responsibility to pay into the trust fund at levels that fairly reflect benefits used by former employees; however, the overwhelming demands placed on the trust fund use were not caused by, and are not the responsibility of, employers in Washington state. Lawmakers should replenish the UI trust fund with federal funds the state has already received from the CARES Act or with existing state funds to fix a problem it created.

For more information about ESD fraud, contact Government Affairs Director Jan Himebaugh at janh@biaw.com or (360) 352-7800 ext. 135.