As reported in our Client Alert, the new Coronavirus Aid, Relief, and Economic Security (CARES) Act includes provisions to increase the use of short-time compensation (STC) programs (also known as work sharing or shared-work programs). Section 2108 of the CARES Act provides federal funding for 100% of the STC paid by states with programs already in place. In addition, Section 2109 provides federal funding for 50% of the STC paid by states that currently do not have formal programs but implement arrangements, and Section 2110 provides grants for implementing and improving STC programs.

What are short-time compensation programs?

STC programs are an alternative to layoffs for employers experiencing a reduction in available work. In particular, an STC arrangement allows an employer to reduce hours for groups of employees, and enables the affected employees to collect a percentage of their unemployment compensation. To implement an STC arrangement, employers must submit an STC plan to the appropriate state workforce agency for approval.

STC programs are implemented at the state level, and while there are differences among state programs, states have been required to meet certain federal requirements under Internal Revenue Code (the Code) Section 3306(v) in order to use funds from their accounts in the federal Unemployment Trust Fund and to receive certain federal incentives.[1] Under Code Section 3306(v) an STC program must have certain features, including:

  • the reduction in the number of hours worked by employees must be in lieu of layoffs and employers must submit an estimate of the number of layoffs that would have occurred absent the ability to participate in the STC program;
  • the amount of unemployment compensation payable must be a pro rata portion of the unemployment compensation which would otherwise be payable to an employee if such employee were unemployed; and
  • an employer must certify that, if the employer provides health benefits and retirement benefits to any employee whose workweek is reduced under the program, that such benefits will continue to be provided to employees participating in the STC program as though the workweek of such employees had not been reduced or to the same extent as other employees not participating in the STC program.

In order to receive federal funding under the CARES Act, state programs must meet the requirements of Code Section 3306(v).

What states have short-time compensation programs?

Twenty-seven states have STC programs in their state codes that meet the federal definition under Code Section 3306(v), and twenty-six of these states currently operate programs: Arizona, Arkansas, California, Colorado, Connecticut, Florida, Iowa, Kansas, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nebraska, New Hampshire, New Jersey, New York, Ohio, Oregon, Pennsylvania, Rhode Island, Texas, Vermont, Washington, and Wisconsin. As a result of the funding available for these programs under the CARES Act, it is expected that additional states will implement STC programs.

What are the advantages of short-time compensation programs?

Participating in an STC program can allow an employer to retain its trained workforce during periods of slow business activity. Thus, the employer can preserve operational continuity during the slowdown and mitigate hiring and onboarding costs once business conditions improve. Avoiding layoffs may improve morale, while the pro-rated unemployment benefit helps to offset the economic impact of the hours reduction to workers. Further, employees who are in an STC program do not need to satisfy the work search conditions typically required to receive unemployment benefits; rather, employees only need to be available for their work week.

What are the disadvantages of short-time compensation programs?

For employers that operate in multiple states, implementing STC programs may involve navigating requirements that differ from location to location. For example, Minnesota requires that hours be reduced to between 50% and 80% of their normal levels, while Texas requires that hours be between 60% and 90% of normal levels. As a result, different plans will need to be developed and submitted to each state in which an employer desires to utilize an STC program.

Also, for some employers, a particular state’s STC program may not offer sufficient flexibility for the employer’s operations. For example, New York and Pennsylvania generally require that all employees in an affected unit (i.e., a department, shift, or other organizational unit) have their work reduced by the same percentage, while Texas only requires that the reduction in hours affect at least 10% of the unit and the percentage reduction can be different for different individuals. Many states do not allow employers to hire additional employees for the group that is covered by an STC program. Further, changes to an STC program, including hours adjustments and adding or removing participants, typically require state approval.

Participation in an STC program also may increase an employer’s state unemployment insurance tax rate.

What are next steps for employers who might be interested in short-time compensation programs?

Employers potentially interested in STC programs should identify the states in which the relevant employees are located, and determine whether such states currently have programs or may be implementing new STC arrangements under the CARES Act. Employers should carefully review and follow the state-specific requirements for participation in that state’s program.

Note that other options may also be available where employees will have temporary changes in work flow. For example, California has a Partial Unemployment Insurance Claim program that may be available if employees are temporarily working reduced hours or are placed on layoff status for no more than two consecutive weeks.

[1] States were first authorized to implement STC programs using funds from their accounts in the federal Unemployment Trust Fund by the Tax Equity and Fiscal Responsibility Act of 1982. A decade later, the Unemployment Compensation Amendments of 1992 established a definition of an STC program with certain requirements, which were then subsequently amended by the Middle Class Tax Relief and Job Creation Act (TRA) of 2012. The TRA provided temporary funding for state STC programs and added Code Section 3306(v).