For California’s employers, the new year brings new unemployment insurance (UI) tax increases.
Governor Gavin Newsom’s annual budget proposal, released January 10, foresees belt tightening for state government programs. But no group is more familiar with belt tightening than California’s entrepreneurs and employers.
Since the COVID-19 pandemic, employers have struggled to re-open, re-build, and attract new customers while facing higher interest rates, inflation, and increasing UI taxes.
California’s Employment Development Department (EDD) informs employers of their annual UI tax rates in December of the preceding year, so employers should have been notified about their 2024 rates in December 2023.
UI Fund Debt
This year, employers will suffer another increase in their per-employee taxes due to the UI Fund debt — accumulated during the pandemic — which presently amounts to approximately $20 billion. Any lingering UI Fund debt will cause employers’ taxes to increase by $21 per employee (temporary or full-time) each year until the debt is paid off.
As a quick refresher, California’s UI program is funded by employers (with some exceptions) via state and federal taxes on wages. Employers’ UI tax rates are calculated based on a combination of factors, including: the individual employer’s history of terminating employees; the overall health of California’s UI fund; and if the UI Fund is in debt, the number of years which the UI Fund has been in debt. (For a more detailed summary, here’s a brief primer from EDD for employers.)
In 2023, the California Legislature considered a measure, SB 799 (Portantino; D-Burbank), that would have pushed the UI Fund deeper into debt and employers’ future tax burden even higher.
SB 799 would have changed longstanding precedent by allowing workers who chose to go on strike to claim unemployment benefits as if they have been fired through no fault of their own.
The California Chamber of Commerce estimated this could have added as much as $215 million annually to the UI Fund debt, depending on the volume of strikes per year and other economic conditions.
SB 799 also would have had the bizarre consequence of forcing employers to, in effect, pay their workers to strike. As discussed above, one factor in calculating an employer’s UI tax rate is the employer’s history of claims against their account. Because SB 799 would have charged the entire striking workforce against their employers’ accounts, the employer would in effect be subsidizing those striking workers in the form of replenishing the UI Fund in future years.
SB 799 was vetoed by Governor Newsom, who acknowledged the drain it would have had on the UI Fund and the difficulties employers already face in recovering from the pandemic. But this may be only a temporary reprieve as more labor-supported UI tax-related legislation is likely to be proposed during the coming year.
Regardless of any new legislation, employers should anticipate continuing tax increases as long as the pandemic-related UI Fund debt remains unresolved. Employers should expect to face $21-per-employee tax increases for the next 6–10 years — and plan accordingly.