State Unemployment Systems at High Risk of Fraud, Watchdog Says

The need for states to rapidly provide jobless benefits during the coronavirus pandemic will expose the federal-state unemployment insurance system to greater fraud and waste, the Labor Department’s independent watchdog warned in a new report.

The report DOL’s Office of Inspector General released Thursday outlined “initial areas of concern” related to the massive expansion of jobless benefits provided by new coronavirus-relief laws. It cautioned that states and the department’s Employment and Training Administration, which oversees state unemployment insurance systems, face significant challenges. Unless a series of preventative actions are taken, the report said, states will struggle to balance the influx of claims with their responsibility to ensure that only those eligible for unemployment insurance are approved.

In previous years, Labor Department watchdog reviews found rampant abuse in state disbursement of federal jobless-benefits dollars. Those results highlighted problems with staffing and technology that remain unaddressed and may now lead to increased levels of improper payments amid the unprecedented surge in unemployment, the department’s Assistant Inspector General for Audit Elliot P. Lewis wrote in the report. The report was released as the latest unemployment statistics showed that more than 26 million people have filed claims for benefits since the pandemic began.

States also are still adjusting to unfamiliar unemployment insurance programs authorized by Congress’s $2.2 trillion relief package, such as processing payments for independent contractors, which creates eligibility complications that can lead to wrongfully accepted claims.

“As ETA and the states implement the relevant CARES Act provisions and in light of the unprecedented demands on the unemployment system, more needs to be done to ensure those receiving compensation are eligible and receive accurate and timely payment,” Lewis said. “ETA and the states also need to develop effective fraud prevention measures and ensure any overpayments are detected and recovered.”

The CARES Act (Public Law 116-136), signed into law March 27, gives workers impacted by the coronavirus a $600 weekly supplement on top of a regular unemployment payments for up to 39 weeks. It also established a program called Pandemic Unemployment Assistance that extends jobless benefits eligibility to gig workers and other independent contractors who wouldn’t traditionally be eligible for aid.

As of Tuesday, only seven states had started paying PUA claims, as software upgrades and questions over which types of self-employed workers qualify continue to stall the program’s rollout.

The CARES package also allocated $26 million to DOL’s Office of Inspector General to provide oversight over the department’s virus response.

Eligibility Challenges

Previous inspector general audits of unemployment compensation programs showed that states face difficulties ensuring individuals are eligible when employers fail to provide needed information.

An automated system exists for employers to inform state workforce agencies about reasons why workers lost their jobs. But a 2017 review of five states showed that less than 20% of employers signed up to use it. And even when employers did sign up, they only responded to 41% of state requests for employee-separation details, the audit found.

In the new virus-response report, the inspector general recommended that the department do more to work with states on boosting employer participation in the information-sharing system. Now that the pandemic has placed unprecedented strain on federal-state unemployment insurance systems, the agency watchdog said it remains “concerned that some states may not have effectively increased employer use of” the system.

The Pandemic Unemployment Assistance program presents states with particular challenges in verifying eligibility. “The risk of fraud and improper payments is even higher under PUA because claimants can self-certify their UI qualifications,” Lewis wrote.

The program for self-employed workers is modeled after disaster-unemployment-assistance programs used in states responding to hurricanes and weather-related crises.

A 2004 audit of one state’s disaster-relief program found that 71% of sampled claims were improperly paid, either because the claimant wasn’t actually unemployed due to the disaster or didn’t have proper documentation.

Return to Work

Another problematic scenario could arise when states need to determine when to stop paying benefits because people have resumed working. The department estimates states misspent $1 billion in unemployment benefits in fiscal year 2017 by making payments to people who should’ve been denied because they had returned to work.

As employers prepare to gradually bring back their workforces if the pandemic subsides, DOL will need to do more to work with states to ensure they’re properly using tools that allow them to check unemployment insurance claims against a database of new hires, the agency watchdog advised.

The IG also cautioned that identity thieves and organized crime groups have previously found ways to “exploit program weaknesses.”