Problematic DOL Guidance on Nonprofit Unemployment . . . and How to Fix It

Last updated: April 28, 2020

David Heinen, Vice President for Public Policy and Advocacy

Last night, the U.S. Department of Labor (DOL) issued guidance (Unemployment Insurance Program Letter No. 18-20) on how states can implement a new federal law (Section 2103 of the CARES Act) intended to help minimize nonprofits’ liability for unemployment insurance (UI) claims related to COVID-19. The DOL guidance cuts against the intent of this CARES Act provision by:

1. Delaying payments to nonprofits that would offset a portion of the costs related to their workers’ COVID-19 related UI claims; and
2. Penalizing some states that try to provide additional assistance to these nonprofits.

Practically, the impact of this DOL guidance will be devastating for many nonprofits. They will need to delay the rehiring of laid-off or furloughed workers, make further cuts to essential programs and services, and, in some cases, close their doors altogether.

Background on Unemployment Coverage for 501(c)(3) Nonprofits

As quick background, nonprofits fall into one of three categories for the purposes of UI laws:

1. Some charitable nonprofits pay state unemployment taxes (SUTA) like other businesses. These organizations pay quarterly taxes based on their “experience rating,” a formula based on the recent history of unemployment claims by their former employees.
2. Charitable nonprofits have the option of electing to self-insure rather than paying SUTA. Nonprofits that elect to take this option are required to reimburse their state unemployment insurance trust funds for the amount of benefits their terminated or laid off employees claim. In North Carolina, self-insuring nonprofits must also maintain an escrow account with the state with 1% of their annual payroll.
3. Some nonprofits are exempt from unemployment laws. These include houses of worship, religious organizations that are affiliated with houses of worship, and religious schools. Nonprofits with fewer than four employees who work during 20 weeks of the year are also exempt. Employees of SUTA exempt charitable organizations are generally not eligible to receive unemployment insurance benefits if they lose their jobs. The CARES Act provides federal funding (Pandemic Unemployment Assistance) so states can provide UI benefits to employees of exempt nonprofits who are out of work due to COVID-19.

CARES Act Assistance for Self-Insured Nonprofits

Section 2103 of the CARES Act provides federal funds to states to reduce by half the liability of self-insured nonprofits for their COVID-19 UI claims. This provision is intended to partially mitigate the financial harm these nonprofits are experiencing due to governmental decisions that forced them to lay off or furlough workers for (valid) public health reasons. This section of the CARES act provides that these funds “shall be used exclusively to reimburse” self-insured nonprofits (and local governments and federally recognized Indian tribes) for the costs of their COVID-19 related UI claims. It also authorizes DOL to issue guidance that would “provide maximum flexibility to reimbursing employers as it relates to timely payment and assessment of penalties and interest pursuant to such State laws.”

DOL’s Guidance on the CARES Act Assistance for Self-Insured Nonprofits

The new DOL guidance includes two troubling provisions:

1. Self-insured nonprofits must pay for their claims and then seek partial refunds. States must require self-insured nonprofits to reimburse their UI trust funds for the full amount of their COVID-19 related UI claims and then seek reimbursement from their state UI trust funds of 50% their reimbursement (you read that correctly!). DOL appears to have developed this backwards approach because Section 2103 of the CARES Act requires funds to be used to “reimburse” self-insured nonprofits.
2. States may be penalized if they are too generous in holding harmless self-insured nonprofits. Based on the examples provided at the end of the guidance, it appears that states can cover some or all of the remaining 50% of self-insured nonprofits’ costs for COVID-19 related claims from their UI trust funds. However, the guidance warns that states that cover more than 50% of self-insured nonprofits’ claims from their UI trust funds will not receive full federal support under Section 2103 of the CARES Act. State legislators and Governors that seek to hold nonprofits’ harmless will need to be careful in how they word their legislation or executive orders to ensure that they are not inadvertently forfeiting a portion of their federal funding.

This guidance is essentially the opposite of the approach that would be most helpful for self-insured nonprofits.

Impact on Self-Insured Nonprofits

There are two problems with reimbursement of a reimbursement approach in the guidance:

1. This essentially requires nonprofits to make an interest-free loan to state unemployment trust funds. Under normal circumstances, nonprofits might use their operating reserves to provide the capital for this payment. However, this process will be particularly problematic during and after the COVID-19 crisis, since many nonprofits have already exhausted any operating reserves they may have had to mitigate immediate financial losses (otherwise, they probably would not have had to lay off or furlough staff in the first place!).
2. This process adds unnecessary red tape – and inevitably further delays – both for self-insured nonprofits and for overburdened state unemployment agencies.

The backwards process will force many financially challenged nonprofits to take one (or more of three actions):

1. Delaying the rehiring of some or all of their staff until they have received the partial reimbursement of their reimbursement for UI claims. This will harm the economy by slowing recovery from the COVID-19 crisis.
2. Making further cuts to programs and services. This will harm communities, since they will have reduced access to health care, childcare, food assistance, affordable housing, and other critical services.
3. Going out of business altogether. This would harm the economy and harm communities.

Policy Responses to this DOL Guidance

Fortunately, the federal and state governments can help fix the shortcomings of this DOL guidance. Here are four actions they should consider taking:

1. Congress should amend Section 2103 of the CARES Act to replace the word “reimburse” with “reduce the costs of” so it is clearer that states need not have self-insured nonprofits seek a partial reimbursement of a reimbursement.
2. Congress should amend Section 2103 of the CARES Act to hold harmless self-insured nonprofits for 100% (rather than just 50%) of their COVID-19 related UI claims.
3. If Congress does not hold these nonprofits harmless, states can still provide this assistance by covering the remaining 50% of self-insured nonprofits’ COVID-19 related UI claims from their UI trust funds. State legislatures or Governors taking this action will need to be careful in wording their statutes or executive orders in a way that does not forfeit federal support.
4. Most immediately, states should heed the guidance suggested in Section 2103 of the CARES Act and offer maximum flexibility in payment options for self-insured nonprofits. Specifically, states should delay payment liability for self-insured nonprofits through at least 2022.