Our Award Winning New York Department of Labor Defense Attorney has discussed frauds allegedly perpetuated by employers. For example, we have discussed the issues and consequences of paying employees off the books and misclassification of workers. Both of these deprive New York State of payroll-related taxes. This blog post will discuss a third type of fraud – SUTA (State Unemployment Tax Act) Dumping. On August 2, 2005, Governor Pataki enacted legislation to mirror the federal SUTA Dumping Prevention Act of 2004.
As you can see, it is a relatively new law. It may be investigated by the Department of Labor. It can be investigated by other agencies but this blog post focuses on enforcement under New York Law and by the NYS Department of Labor. It occurs when a business intentionally manipulates its unemployment insurance contribution rate. An employer’s unemployment insurance tax rate and liability to New York State is partially based on the number of unemployment insurance claims against it; if the employer transfers all of its employees to a new company with no history of claims it will obtain a lower rate and save substantially on its tax obligations.
It can occur as follows:
1. When a business transfers some or all of its workforce to another business which it owns, manages or controls at least 10% of both businesses. This common ownership is critical. OR
2. When a business acquires another business for the sole purpose of obtaining a lower contribution rate when it previously was not liable for contributions.
This issue can also arise in mergers and acquisitions. Due to the interplay with criminal law and employment law issues, employers should seek counsel at the earliest point to understand the risks and consequences. There are defenses to SUTA Dumping cases. For example, there may be legitimate business related reasons why the workforce was transferred. Contemporaneously created documents may help support such a claim.
The New York Department of Labor will impose a penalty for SUTA Dumping violations. The penalty may be the greater of the following:
1. 10% of your wages subject to contribution in the last payroll year; OR 2. $10,000.00.
In some cases, 10% of wages will be much greater than $10,000 and may be in the hundreds of thousands of dollars. Violations can also lead to criminal penalties. Individuals who advise someone to engage in unlawful SUTA Dumping can also be liable for a civil penalty of up to $10,000.00.
Since this provision of the law is relatively new (approximately 10 years), there are not many published cases involving SUTA Dumping in New York. Helmer Toro, the owner of H&H Bagels on the Upper West Side in New York City, was charged with violating the labor law for, among other things, manipulating unemployment insurance tax rates. It was alleged that Toro created six companies and transferred many of its workers from an existing company to a new company for the sole purposes of gaining a lower unemployment insurance tax rate. This may not seem like a much but employers can achieve significant savings under this unlawful scheme. He was charged in 2009 and he denied the allegations. Ultimately, it was reported that he pled guilty to certain allegations and agreed to pay over $200,000 in restitution for non-payment of unemployment insurance taxes.
Other states have stepped up their anti-SUTA Dumping efforts as well. For example, Michigan, Minnesota and North Carolina have recovered millions of dollars.
As you can see, SUTA Dumping allegations should be taken seriously. Contact our Award-Winning New York Employment Lawyer to understand your options and potential exposure.
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