As mentioned earlier, H.R. 15119 makes material improvements in the present law while preserving these two basic principles. We therefore urge its enactment.

APPENDIX TO STATEMENT OF FRANK MALONE

THE FEDERAL REQUIREMENT FOR EXPERIENCE RATING PROVISIONS IN STATE LAWS SHOULD BE CONTINUED

"Experience rating" is the arrangement currently in the laws of all States under which State tax rates for unemployment compensation tend to vary among employers in most instances in proportion to the benefits paid to their former employees. Serious proposals have been made (S. 1991 and H.R. 8282) which would have the effect of eliminating experience rating.

Under present law, an employer in any State is allowed a credit against the Federal tax of 3.1% for the amount of State tax he actually pays up to 2.7%. However, if his State tax rate is less than 2.7% he is allowed an additional credit for the difference, but only if the lower rate is based on his experience as an employer "with respect to unemployment or other factors bearing a direct relation to unemployment risks . . ."-in other words, if the reduction is based on "experience rating." This means that under present law the less unemployment an employer causes, the less tax he is likely to pay.

By deletion of certain key words in Section 3303 (a) of the Internal Revenue Code of 1954, S. 1991 and H.R. 8282 would change the law to allow a credit against the balance of the Federal tax on the basis of factors other than an individual employer's experience rating. Under these proposals, credit also would be given if the State levied a uniform tax on all employers at a flat rate less than 2.7%.

Simply put, this would mean that regardless of how much of a drain on the Unemployment Compensation funds a particular employer caused, his tax rate would be no greater than the rate of those employers who, through careful planning, minimize unemployment.

VALUE OF EXPERIENCE RATING SYSTEM

Experience rating systems have been in effect in all States for many years. Usually a State has several tax schedules involving different levels of rates. The lower schedules, which go into effect when the State reserve Fund is in a favorable position, prescribe low rates for employers having a good experience rating and high reserves. Conversely, an employer having a poor experience rating is required to pay a higher tax rate tending more nearly to defray the Unemployment Compensation costs which arise from the operation of his business.

The Federal requirement for merit rating was the result of a farsighted amendment to the Social Security Bill in 1935, which required separate accounts in the unemployment fund in order for an employer to obtain maximum credit against his Federal tax even though his individual state tax rate was below 2.7%.

The original purpose behind an individual experience rating system was wise, and its wisdom has been proven during the last 30 years. The underlying philosophy was stated by Senator La Follette during the debates in 1935. The Senator stated:

"Prevention of unemployment is very much more important than compensation for unemployment.

"Under the (individual experience rating amendment), unemployment compensation will tend to stimulate the regularization of employment, without which the reverse effect may result. (When) employers must pay the same rate of contributions, whether they have much or little unemployment, there is no incentive at all to reduce unemployment.

"Separate reserve accounts furnish a stronger incentive to employers to regularize their employment. Where an employer is charged with the cost of compensation payable to workmen he lays off, he naturally will make greater efforts to avoid having to lay off anyone than under a system where discharges cost him nothing. ***"1

1 Congressional Record, Vol. 79, Part 9, Page 9360-9361, June 15, 1935.

There are important advantages of experience rating. In the first place it provides an incentive for employers to stabilize their employment so as to take advantage of ensuing lower tax rates. This, with careful planning, is possible to do in many situations, even in the face of automation or other technological change.

For example, in the telephone business when new inventions, machines and methods come along, we take many steps to minimize disruptions of employment. These changes often require reassignment of people, necessitating considerable re-training, which is provided on company time and at company expense. Alternative assignments in other departments and other localities are offered. Where changes in location are involved, moving expenses are defrayed by the company. As a result of all of this very few regular employees, if any, must be laid off at the time the new method or machine is made effective.

One of the reasons for this extensive effort to reduce unemployment among our work force is the incentive to preserve a good experience rating.

For instance over a period of the last several years the New Jersey Company introduced new methods and machines for billing toll messages which, in turn, reduced the number of employees otherwise required to handle this operation by approximately 65%. This was accomplished with no layoffs.

The repeal of the Federal requirement for individual experience rating may very well turn Senator La Follett's 1935 warning into reality. In his words, there will then be, for many employers, "no incentive at all to reduce unemployment."

In addition to the incentive to stabilize employment, experience rating provides an incentive to the employer to assist in evaluating the merits of a claim. The practice in most States is to notify the employer when a former employee applies for benefits. If the employer believes the claim is unwarranted he is given an opportunity to present his reasons. Although most applications for Unemployment Compensation are meritorious, there are many applicants who attempt to obtain benefits because they misunderstand the law or through distortion or suppression of facts. With employer participation, the State Employment Office frequently is able to make a more informed decision as to the merits of the claim.

If the experience rating system is eliminated, there will be little incentive for the employer to make the effort and to incur the expense of contesting unwarranted claims.

Therefore, the effect of such proposals would through the partial loss of these two advantages—incentive for stabilization of employment and control of improper claims-increase unjustifiably the cost of the Unemployment Compensation program.

THE STATES SHOULD CONTINUE TO BE PERMITTED TO PRESCRIBE DISQUALIFICATIONS Another original objective of the Unemployment Compensation law was to pay benefits to those who are "unemployed through no fault of their own." In other words, Unemployment Compensation benefits were not established just to give employees an automatic post-employment income.

Unless the objective of paying benefits only to those unemployed through no fault of their own is to be eroded away, there must be practical and effective ground rules for determining when benefits should not be paid. Experience has shown that "disqualifications" are needed. Serious proposals (S. 1991 and H.R. 8282) have been made which would weaken this necessary feature by effectively prohibiting a state from disqualifying an individual for more than six weeks except:

1. For a labor dispute.

2. For fraud in connection with benefits.

3. For conviction of a crime arising out of his work.

This proposed list of disqualifications is much too restrictive. Other State disqualifications are now effective for much longer periods and should continue to be permissible. Common present disqualifications also apply to an individual who quits his job voluntarily, who refuses a suitable job. who is unable to work due to pregnancy, or maternity, who receives retirement benefits under a private pension plan or under Social Security, and who is discharged for misconduct.

First, as to the individual who quits his job voluntarily. A State should be able to consider that such an individual is not unemployed "through no fault of his own." He has voluntarily assumed a risk that he may not be able to

obtain other employment as soon as he might like to have it. He should not be subsidized simply because he chose to search for a new job.

Similarly, a State Employment Service should be able to disqualify an individual who has refused a suitable job.

A third reason for refusal of benefits now is, and should continue to be. inability to work due to pregnancy or maternity. In some States this reason for non-payment of benefits for a stated period of weeks is treated as a disqualification. The District of Columbia so treats it for a period of twelve weeks. This is one of the shorter periods of disqualification for this cause. In certain States there is a presumption of inability to work.

Receipt of private pensions or Social Security benefits is a further reason for a total or partial disqualification now applied in 33 States.

Without disqualifications applying to those individuals who receive these payments, there will be many instances where a retired person will receive more take home pay than he did while working.

Finally, an employee who has been discharged for misconduct cannot reasonably be considered to be unemployed "through no fault of his own." Where the State employment agencies are satisfied that the employee was discharged for misconduct it is entirely reasonable that he be disqualified for unemployment benefits for a period of more than six weeks.

It is significant that State legislatures have considered these disqualification problems year after year. All States have some disqualification for voluntary leaving (See Bureau of Employment Security release, dated May 1963). In 22 States, the disqualification was for the duration of unemployment or longer. Seven of the 10 most heavily industrialized states, those with over 500,000 manufacturing workers were in this category, i.e., New York, New Jersey, Pennsylvania, Ohio, Michigan, Indiana, and Illinois. Massachusetts, another of the 10. in 1963 had a 10-week disqualification period. Wisconsin, which narrowly misses this category, cancels all benefits based on employment with the employer the individual voluntarily left. North Carolina and Texas, which have just under 500,000 manufacturing employees, had variable periods running up to 12 and 26 weeks, respectively.

Thus the most heavily industrialized States, those with the greatest problems in this area, had either rejected any limits or had provided periods longer than 6 weeks for the disqualification for voluntary leaving.

Moreover, the trend has been "toward longer periods of disqualification, increase in the reduction or the cancellation of benefit rights and the imposition of disqualification for acts occurring prior to the period of unemployment for which compensation is being sought.” 3

3

At the same time that States have been tightening up on qualifications they have also liberalized benefits. This indicates that those who have had the local responsibility for the program have been aware of changing conditions and have been willing to increase benefits to those involuntarily unemployed.

CONCLUSION

Over the last few decades the Bell System has constantly taken advantage of innovation, automation, and technological development. These new ideas. new machines, and new methods have been introduced for the purpose of improving and expanding telephone service to the public-not for the purpose of reducing employment. In fact, the number of employees in our business has steadily increased. In 1940 we had 275,000 employees, in 1950 the work force had risen to 523,000, and in 1960 to 580,000. In 1965 we took 100,000 people out of the labor market.

But the point of emphasis here is that the employment these companies have provided has been quite stable. In each of the last five years, dislocations of employment because of the unavailability of jobs have been less than one-tenth of one percent of the work force. We believe this performance shows we have done, and are continuing to do, our part to provide jobs-and stable employ

ment.

2 Bureau of Census 1962 Annual Survey of Manufacturers.

3 From Preface to a series of tables through 1963 furnished to the members of the Federal Advisory Council on Employment Security by Bureau of Employment Security.

Since its inception, our national unemployment compensation policy has been to provide a spur to business to plan for continuity of employment-to reward the stable employer through the merit experience rating system. We think this is in the public interest, and we strongly recommend that it be continued and strengthened.

Senator TALMADGE. Mr. Malone, I notice in your statement, on page 1, that your associated companies paid $32,500,000 in Federal and State payroll taxes for unemployment compensation in the year 1965. On page 2 of your statement you state that that tax will be increased by $7 million annually by the year 1972.

Do you have a breakdown on the progressive increase in that tax? What would be the increase the first year of the bill's application?

Mr. MALONE. I do not have it with me. I can develop that and supply it to you.

Senator TALMADGE. Do that. I will appreciate it.

Dr. MALONE. I will do it very promptly. However, I wish to call attention to the fact that the increase of $7 million refers only to the Federal tax.

(The information requested follows:)

Year by year increase in Federal unemployment compensation taxes which would result from enactment of H.R. 15119, Bell System Telephone Operating Companies

Mr. MALONE. I might mention, Mr. Chairman, the $32,500,000 is both Federal and State taxes, whereas the increase of $7 million is Federal only.

Senator TALMADGE. Federal only?

Mr. MALONE. Yes, sir. I will be happy to break it down.

Senator TALMADGE. Thank you very much, Mr. Malone.

I appreciate your statement, sir.

Mr. MALONE. Thank you, sir.

Senator TALMADGE. I see the distinquished Senator from Utah, Senator Moss.

We are delighted indeed to have you before this committee, Senator Moss.

STATEMENT OF SENATOR FRANK E. MOSS, U.S. SENATOR FROM THE STATE OF UTAH

Senator Moss. Thank you, Mr. Chairman.

I appreciate the opportunity of coming before this committee. I have a brief statement that I would like to read.

C5-992-66-17

I have asked for time to appear personally before you so that I may give you my views and the views of the people of Utah on the proposed unemployment insurance amendments of 1966 as passed by the House in H.R. 15119. Rarely are labor and management in total agreement on legislation considered by Congress, but this particular bill before you finds these two groups in complete agreement in the State of Utah. Many businesses in Utah are relatively small in terms of the number of persons employed. The pesent law only allows the unemployment insurance program to apply when the employer has four or more employees working for him at one time. By redefining "employer" to include anyone who employs a person for 20 weeks during the year or pays an employee a salary of $1,500 per year, many more Utahans will be qualified to receive benefits from unemployment insurance than at present.

Likewise, Utah relies heavily on agriculture as a major income producer. Because of inadequate rainfall most farmers must irrigate constantly. It is often necessary to hire additional help to aid in the irrigation process. These people perform services that are more than seasonal in nature and their tenure is often year round. Prior law excludes these and other so-called fringe area agricultural workers from the benefits of unemployment insurance. The amendments would bring these people under the act's coverage providing they meet other State imposed requirements, such as duration of employment. The passage of this act would therefore be welcomed by farm laborers throughout Utah.

There are other fields of employment to which the unemployment insurance would be extended by this act. Estimates have placed the figure at close to 15,000 people in Utah who would be qualified to participate in the extended program.

The bill requires that minimum standards be included in State laws before benefits will be made available to the States. The Utah law meets these requirements in each aspect, so that no further action would be necessary on the part of the legislature for Utah to be in compliance.

Title II of the bill, which would allow extensions of periods of payment under unemployment insurance, could also be incorporated in Utah with little difficulty. A study based on Utah experience in this area indicated that the cost of this program to the State would increase its expenditure for unemployment insurance by less than 1 percent. The requirements of title II in regard to State law create no problem in Utah as the law now exists.

I would like to urge the committee to report this bill favorably. The number of people that would be affected and the ease with which it could be incorporated make the bill very appealing to the State of Utah.

Senator TALMADGE. Senator Moss, do I understand from your statement that you support the House bill without substantial amendments? Senator Moss. That is correct. Mr. Chairman.

Senator TALMADGE. Any questions, Senator Morton?

Senator MORTON. Senator Moss, you said in your opening sentence or paragraph that in your State both labor and management supported this bill insofar as you know.