Webinar Recap. Brent Gow of Starbucks: Spring Cleaning for Your Unemployment Accounts WORKFORCE SOLUTIONS. Employment Tax Services May 2016.

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WORKFORCE SOLUTIONS Webinar Recap Employment Tax Services May 2016 Brent Gow of Starbucks: Spring Cleaning for Your Unemployment Accounts Speakers Brent Gow Director, Global Payroll Starbucks Coffee

Sheldon Jackson of Equifax discussed key action items to consider in the coming months to make sure your state unemployment insurance ( SUI ) rates are as low as they can be.

1 WORKFORCE SOLUTIONS Webinar Recap Employment Tax Services May 2016 Brent Gow of Starbucks: Spring Cleaning for Your Unemployment Accounts Speakers Brent Gow Director, Global Payroll Starbucks Coffee Company Sheldon Jackson Director, Product Management, Unemployment Cost Management Equifax Workforce Solutions Summary Brent Gow of Starbucks, former APA president, author, and industry veteran, and Sheldon Jackson of Equifax discussed key action items to consider in the coming months to make sure your state unemployment insurance ( SUI ) rates are as low as they can be. By June 30 th, the majority of factors used in setting 2017 SUI tax rates will be finalized. The calculation of SUI tax rates is a complex process involving both controllable EMPLOYER factors and uncontrollable STATE factors. Brent is well known for the process and teamwork he s established at Starbucks for unemployment cost management and for the enviable record of success he s compiled. Through his presentation today, he wanted to address ways other employers can implement their own process for controlling EMPLOYER factors to achieve greater success. Among the issues addressed: Reviewing state notices to identify errors in your account and corrective actions to take Making sure state returns don t result in higher federal (FUTA) rates Targeting states for priority action based on state UI balances Managing vendor relationships Identifying opportunities for voluntary contributions and joint accounts Recognizing key metrics to track and internally communicate financial impact

Recessionary Impact Sheldon Jackson introduced the webinar by addressing the economic backdrop to the current unemployment insurance situation.

Claims are down now but the earlier surge caused state trust fund balances to become depleted, and balances aren t fully restored.

2 Recessionary Impact Sheldon Jackson introduced the webinar by addressing the economic backdrop to the current unemployment insurance situation. Early in the recession, claims spiked, as illustrated in the chart to the right. Claims are down now but the earlier surge caused state trust fund balances to become depleted, and balances aren t fully restored. As of January 1, 2016, 35 states still do not have adequately funded trust fund balances. However, only 3 states had outstanding Title XII loan balances totaling $3.2 billion as of 5/16/16: California, Ohio, and the U.S Virgin Islands. The next U.S. downturn is predicted to hit in 2018, according to the median of 31 economists surveyed by Bloomberg. This is troublesome since the impact of the last recession is still with us and although employers are enjoying reduced average SUI tax costs per employee (down from a peak of $567 in 2012 to $433 in 2016) the state trust fund balances are not growing to reach the necessary levels of funding prior to the next recession. Process matters Brent addressed key process issues. Two key metrics to monitor when processing claims are your protest rate and win-loss rate. It is beneficial to multiply these two rates together to come up with a composite rate. For example a protest rate of 85% with a win rate of 85% equals a composite rate of 72%. Increasing the protest rate to 90% and maintaining a win rate of 85% will result in a composite rate of 76% which highlights you are achieving good results by protesting claims at a higher percentage.

3 Another key metric is to track Total Liability Avoided, or cost avoidance. This is the dollar amount of liability eliminated from claims successfully protested plus charge credits applied to your SUI account. These dollar values will impact the SUI rate calculation and could lead to reductions in SUI tax rates. It is also helpful to track the controllable versus uncontrollable factors. These include: Controllable factors: How unemployment claims are administered; how SUI tax rate management strategies are administered. Uncontrollable Factors: State rate schedules, wage bases; and state rating factors. For example, one of our state unemployment tax rates decreased 0.30% from 2014 to Of this tax decrease, 0% was due to uncontrollable factors and 0.3% all of it in this case was due to controllable factors. Thus, proactive unemployment claim discipline by our UI team helped to achieve a lower rate. Knowledge is power Brent discussed the value of tracking how many average claims need to be avoided to reduce the tax rate by one tax bracket and how many additional average claims will increase the tax rate by one bracket. The employer in this chart has an average claim amount of $1,523. The cumulative charges from the annual rate notice show $129,476. To reduce the tax rate, a reduction in claims valued at $6,229 would lower the tax rate by.02% which equates to winning 5 additional claims. Achieving this level of reduction means increasing the protest and win ratios. This analysis is very beneficial in understanding which states offer the opportunity to make the greatest impact. Our UI team works very closely in a partnership with Equifax to focus on winning claims in states where we can have a significant impact.

Protesting claims Brent discussed goals you should have for your UI program. He showed a pair of charts to illustrate Starbucks progress in this area.

4 Protesting claims Brent discussed goals you should have for your UI program. He showed a pair of charts to illustrate Starbucks progress in this area. To maintain a robust and cost-effective UI program, an employer should closely monitor the protest and win ratios. This first chart highlighted the low protest ratios which resulted in additional SUI taxes. Even if an employer is winning 85% of protested claims, the value would still be inadequate to meet best practice levels and reduce SUI expenses. A good UI program strives for ratios of protesting 90% of claims and winning 85% of the claims protested. The second chart showed a robust UI program where protest ratios were consistently above 85% and hovering around 90%. Brent noted that these results were made possible by entering into a partnership with Equifax to thoroughly monitor claims. Starbucks created a special team to provide data to Equifax on the initial claim and follow up data in case of an appeal. The program was created after the recession in the early 2000s. SUI tax rates increased significantly and Brent realized that to reduce tax rates, Starbucks would need to increase protest and win ratios. The return on investment was very quick and Starbucks was able to reduce SUI tax rates. The focus was on protesting every non-eligible claim and improving our processes to win protested claims. For example, Starbucks improved separation codes to be more specific, which helped in winning claims. Now, Starbucks is better focused on being proactive state-by-state.

Tax rate formula calculation Brent discussed the major factors that go into a rate calculation. He highlighted the fact that differences in state rate calculation can be a challenge.

5 Tax rate formula calculation Brent discussed the major factors that go into a rate calculation. He highlighted the fact that differences in state rate calculation can be a challenge. With so many variables involved in the tax rate calculation, it is critical that a robust UI program include an UI third-party administrator to analyze the accuracy of claims and other reporting of information to the states. There are various tax rate formula calculations that a UI administrator can monitor for an employer. In some states, it is easier to lower tax rates as higher claims can roll off the calculation, such as under the benefit ratio method of rate calculation. These states may calculate your rate based on a time period of 3-5 years of data. As higher claims activity rolls off, employers have a better chance that their tax rates will decrease. For example, an employer over 4 years might have benefit charges that total $80,000 and taxable wages of $2,000,000. If $50,000 of benefit charges were to roll off the next year and no charges were added, the employer would likely be in better position for a lower tax rate. For some states, such as California, which utilizes the reserve ratio method, the unemployment data is cumulative and no data rolls off; as a result, it will require a longer period of time over which tax rates may be reduced. Taxable payroll trending upward year to year may have a positive impact on benefit ratio states and a negative impact for reserve ratio states. A reduction in benefit charges will always have a positive impact to SUI tax rates.

6 SUI checklist Brent provided a summary of the key areas to consider for reducing SUI tax rates. Among the topics he highlighted: Voluntary contributions: This is a payment made to the state to adjust the rate calculation factors to receive a decreased SUI rate. Example: When working for another employer, we opened a new location in Georgia and the SUI rate notice showed that we had a small amount of taxable payroll the previous year. We had completed a small transfer of experience so we were eligible for a regular rate rather than a new employer rate. Since we anticipated a significant increase in taxable payroll the next year, we opted to make a voluntary contribution which would result in a reduced tax rate and savings in SUI tax for that year. Watch claims and wage trends: Analyze benefit charges each quarter where possible (some states may not make this information available on a quarterly basis) to verify any unusual variances for example, separations being submitted with an incorrect separation code of Reduction In Force could result in erroneous claims being eligible, increasing benefit charges and possibly increasing SUI tax rates. A quarterly analysis may catch these errors earlier, helping to minimize SUI expenses. Monitor assessment rates: Many of the SUI assessment rates were added because states had to borrow Title XII loans to pay unemployment benefits. Some of these assessments helped pay off these loans and are now being abated. Employers should keep monitoring as to when these assessments will be reduced or roll off.

7 Impact Brent discussed a chart that shows the progression since he started deepening the partnership with Equifax. The chart showed the yearover-year variance for gross (SUI total) wages, taxable wages and taxes. When the economy is stable the three values should run close to a parallel line. You can see how the variance tends to be above 0 for most years for Starbucks, due to our growth. But in a recession year, tax rates increase significantly, causing higher taxes. The two recessions are clearly demonstrated by those spikes in the blue line; total payroll tax variance jumps 70% in 2004 and 40% in No employer could avoid that impact completely because the increase is due to UNCONTROLLABLE state factors. Keeping the SUI increase less than 70% was a pretty big win; many employers were over 100%. Also key: note how quickly Starbucks was able to bring the variance back to normal levels due to our enhanced UI program which started in In fact, notice that Starbucks SUI taxes (blue line) were even below the parallel line highlighted by the white markers. Within a year or two of the tax rate spikes after each recession we lowered tax rate back down and under the trend line for taxable payroll. As Starbucks tax rates start to stabilize, with many at minimum rates, we can expect the tax line to move closer to the total and taxable lines. We compared our results with other accounting firms to validate our results and we continue to out achieve other national trends.

8 Partnering with your vendor Brent discussed some of the key elements to consider in maintaining a strong relationship with a vendor. He recommended employers use a separate statement of work for claims administration and SUI tax services, tailored to an employer s specific needs. Although Equifax gets rate notices and monitors what has been paid, it is still important that Starbucks reviews and validates taxable payroll, especially when reviewing voluntary contribution opportunities A UI administrator can generate reports or provide you online access to important information, including reports on protest/win ratios (to monitor adherence to best practices). Wage audits: if you're not using unemployment insurance administrator, you're leaving dollars on the table. This is extremely time consuming to do on your own whereas the service companies have tools that will be able to automate these features. Telling your story Brent shared a photograph of a mountain of coffee cups that his team displayed at a Starbucks executive forum. The coffee cups told a story by representing the value of a single claim compared to sales needed to cover the cost of the claim. The photograph illustrated the importance of communication and telling the story. Determine your average potential liability of one UI claim and compare it to some part of your business to highlight the value of the cost of even one claim. Annualize that value over a year to demonstrate the true impact.

9 This proved an excellent story to get attendees attention to reduce UI claims whenever possible. One executive stated that it was the best example he had seen to demonstrate the cost of even one claim. It helped drive change management in the area of unemployment claims. Learn More To learn more about how Equifax Workforce Solutions works with employers like Starbucks to help manage unemployment costs, please send an to Or take a moment to visit our Unemployment Cost Management Knowledge Center.

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