August 13, 2020

Short-time Compensation Programs Can Prevent Layoffs


KEY TAKEAWAYS

  • Under state short-time compensation programs, businesses temporarily reduce workers’ hours instead of laying them off, and unemployment benefits partially replace the workers’ lost wages.
  • These programs can help businesses and workers, especially when the economy declines, but they have historically had low participation due to a lack of awareness and other factors. 
  • In the CARES Act, Congress provided money to help states administer and improve their STC programs and to temporarily cover the costs.

Short-time compensation programs are one way states can keep workers connected to their jobs when the economy slows. Under these programs, an employer reduces hours for workers instead of laying them off. The workers get their normal pay for the hours they work, plus partial unemployment benefits from the state to replace some of their lost wages. Employers avoid layoffs and the cost of hiring new employees when conditions improve. Employees do not have to find a new job in an uncertain economy. About half of the states have an STC program, but their use historically has been limited. In the Coronavirus Aid, Relief, and Economic Security Act, Congress provided funds to help states pay for their STC programs, as well as to administer and improve them.

How STC Programs Help Fill a Wage Gap

STC Program

State Programs

State departments of labor manage STC programs, which some of them call “work-share” or “shared work” programs. Under the program, a business that needs to cut its payroll costs by 20% could cut its employees’ workweek by 20% − from 40 hours to 32 hours − instead of laying off 20% of its employees. In this scenario, a worker who normally earns $773 per week would receive about $618 per week from his employer for working fewer hours. In addition, he would get a prorated amount of unemployment insurance benefits from the state. If the worker would normally receive $320 a week in benefits had he been laid off, he would get 20% of that under the STC program, or $64 per week. In total, with payments from his employer and the state, he ends up making about 88% of his previous wage. All of the business’ workers are able to keep their jobs and make more than if they were unemployed, and the business is able to cut costs.

Congress passed a law in 1982 that allowed states to experiment with STC programs, but it expired after three years. In 1992, Congress permanently provided for state programs. In the Middle Class Tax Relief and Job Creation Act of 2012, Congress enacted a more specific definition of STC programs and provided grants for states to set up and promote them. Under the rules, employees’ workweeks may be reduced by as little as 10% or as much as 60%. Employers’ participation must be voluntary. If an employer provided health or retirement benefits before participating in an STC program, it has to certify that it will keep providing them as if the workers were full time. The amount of the prorated UI benefits workers will receive depends on their earnings and their state’s benefit formula.

Despite the advantages of STC programs, participation has been low. In February 2020, before the pandemic-related shutdowns began, there were just under 2.8 million people working part time due to slack work or business conditions, but only 11,578 receiving STC benefits the last week of the month. According to the Congressional Research Service, STC programs are more popular during economic downturns, though still not widespread. The week of July 12-18, there were about 413,000 people receiving benefits under an STC program, but that was only 1.3% of everyone receiving some form of jobless benefit that week.

One commonly cited reason for the meager participation rate is that few employers know about their state’s STC program. A 2017 Labor Department study of two state programs also suggested that some states would need to upgrade their IT systems to be able to expand their programs. Employers may not find STC programs suitable for their business models or workers. They also have to weigh what they could save on wages against the cost of maintaining health and retirement benefits for employees working reduced hours.

response to the pandemic

Under the CARES Act, the federal government is reimbursing 100% of the short-time compensation costs that states incur through the end of this year for states that already have a program or set one up. If a state has no formal program but agrees to administer a federal STC program temporarily, the government will reimburse half of the compensation costs through the end of the year. The CARES Act also made $100 million in grants available to states for administering STC programs and for promoting the programs and enrolling employers. States have until December 31, 2023, to apply. On August 11, the department awarded $1.8 million to Missouri, the first state to apply.

Huge Jumps in Businesses Participating

STC Program

As states have been telling more businesses about their existing programs, participation has surged. By mid-April, Colorado had almost 700 businesses participating, up from about 10 before the pandemic. As of March 15, Maine had three businesses in its program, but by mid-June it had signed up 168 employers and was covering 2,300 workers. At the end of July, Maryland had approved 223 businesses to participate in its program, compared to just two at the start of the year. The governor’s office quoted the president of Tulkoff Food Products, a Baltimore-based business that makes condiments and sauces, saying: “The program allowed us to save 20% of our hourly payroll for eight weeks until the business picked back up. We are now back to full time for all hourly staff. The program was a perfect solution for our issue.” Arizona approved about 400 businesses for its shared work program between March and May. One report quoted the head of the Catalina-based Golden Goose Thrift Store praising the result: “To me, it’s an excellent program … It allows us to keep all of our people working and whole.” Since mid-March, Wisconsin also has seen a big uptick in participation in its work-share program, which in June was covering almost 18,000 employees through 520 plans with employers.

Some states have sought to increase participation by changing their program rules. Wisconsin now allows a greater reduction in work hours and allows plans to cover as few as two workers, down from 20 before. Arizona temporarily is permitting employees’ hours to be reduced by as much as 60%, up from the previous 40% limit in the state’s program.

Some states have taken steps to establish a program or may be considering one. In April, Virginia passed a law to set up an STC program by January 1, 2021, though it will end if the state’s employment commission does not receive federal funds for program costs such as IT upgrades and marketing by then. Otherwise, the law expires July 1, 2022. Wyoming’s legislature may consider a short-time compensation bill that a committee recently approved. In March, North Carolina’s governor issued an executive order that extends UI eligibility to workers whose hours are reduced due to COVID-19, and there is a short-time compensation program bill in the state’s general assembly.

Several factors could explain why few states have explored STC programs during the pandemic. These include having to fix overwhelmed UI claims systems and implement the CARES Act’s temporary programs that supplement and extend state benefits. More states may yet decide to take advantage of the federal money to reduce their program costs and use this tool to try to keep workers and employers connected during the economic recovery.

Issue Tags: Labor, COVID-19