When the NC Employment Security Commission settles with an employer accused of 'SUTA dumping' (shifting employees to shell companies to dodge unemployment taxes), is that settlement agreement confidential or a public record?

Plain-English summary

"SUTA dumping" is a tax-avoidance practice where an employer with a high unemployment-tax rate (because of past layoffs) transfers employees to a shell company that has a lower rate. The State of North Carolina's Employment Security Commission investigates and assesses additional taxes against employers who do this. Some of those investigations end in settlement agreements where the employer agrees to unwind the shell-company structure and pay the back taxes.

ESC Chairman Harry Payne asked the AG whether those settlement agreements were confidential under the Employment Security Law (§ 96-4(t)(1)(i)) or public under § 96-4(t)(5).

The AG read the two statutes together. Section 96-4(t)(1)(i) makes ESC-collected information confidential by default. But § 96-4(t)(5) carves out an exception: records from a "proceeding before an appeals referee, deputy commissioner, or other hearing officer" that are "compiled for the purpose of resolving issues raised pursuant to the Employment Security Law" are disclosable.

The hard question was when a "proceeding" begins. The ESL itself doesn't define the term. The AG turned to the ESC's own regulations (Reg. 18.13, 18.15), which say the hearing process begins when an employer files a timely written appeal (protest) of an adverse administrative determination. After that point, the Tax Department assembles a hearing "file" and forwards it to a hearing officer.

Settlement agreements signed after an employer files that protest are documents "compiled" in the proceeding to resolve the dispute. The statutory text covers all records compiled for that purpose, not just records introduced at a hearing. So even though a settlement might be reached before the formal evidentiary hearing, the agreement is part of the proceeding record and is disclosable.

The opinion also cites § 132-1.3, which makes settlement documents in proceedings against the State public as a general matter. The SUTA dumping settlements are the end result of a proceeding the employer instituted against the ESC (protesting an assessment), so they fall within § 132-1.3 as well.

Signed by Senior Deputy AG Reginald Watkins and Assistant AG Daniel Addison.

Currency note

This opinion was issued in 2004. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

The North Carolina Employment Security Commission was reorganized into the Division of Employment Security within the Department of Commerce in 2011. Some of the underlying statutory citations have been renumbered or rewritten. Anyone applying this opinion today should pull the current text of Chapter 96 (Employment Security) and check for later decisions on the public-records status of settlement agreements with state agencies.

Common questions

Q: What is SUTA dumping?
A: State Unemployment Tax Act dumping. An employer that has been laying off workers (which raises its unemployment-tax rate) creates a shell company, transfers employees to it, and pays the lower new-employer tax rate at the shell. Federal SUTA Dumping Prevention Act (P.L. 108-295) eventually required all states to crack down on this practice.

Q: When does an ESC proceeding officially start?
A: Per ESC Regulation 18.13 and 18.15, the proceeding starts when the employer files a timely written appeal of an adverse final administrative determination of additional tax liability. The Tax Department then assembles a hearing file and sends it to a hearing officer.

Q: Are records confidential before the appeal is filed?
A: Yes. Section 96-4(t)(1)(i) makes information obtained under the ESL confidential by default. The carve-out in § 96-4(t)(5) only applies once the matter is a "proceeding before a hearing officer."

Q: Does the settlement have to be admitted as evidence at a hearing to be public?
A: No. The AG read § 96-4(t)(5) as covering all records "compiled" in the proceeding, not just records "introduced" at a hearing. Settlements that resolve a proceeding before the hearing happens are still proceeding records.

Q: What about § 132-1.3?
A: That section of the Public Records Act says settlement documents in proceedings against state agencies are public. The AG flagged this as an independent ground for disclosure of SUTA settlements, separate from the ESL-specific analysis.

Background and statutory framework

The Employment Security Law (Chapter 96, ESL) generally treats employer wage data, tax filings, and other information obtained by the ESC as confidential, with criminal penalties for unauthorized disclosure under § 96-4(t)(1)(i). The confidentiality is core to the system: employers report wage data on the understanding that it won't flow to competitors or the general public.

But the ESL has long made some categories of information public. Records of evidentiary hearings before appeals referees and deputy commissioners are open because public hearings are themselves a check on agency power. The § 96-4(t)(5) language was the legislature's way of saying that information from those hearings, once compiled and used to resolve ESL issues, loses the protection of confidentiality.

The drafting question the AG faced was at the boundary: does the protection lift only when a hearing actually happens, or earlier in the process? The AG chose the earlier interpretation, anchored in the ESC's own procedural regulations. The protest-filing date is administratively clean (the agency knows when an employer protests an assessment) and treats settlements the same as litigated outcomes — both flow from the appeal process and both involve the agency's exercise of its enforcement power.

NC's general Public Records Act, Chapter 132, also reaches state-agency settlement agreements separately under § 132-1.3, which the AG cited as a backstop. The reasoning is that the public has an interest in seeing how state agencies resolve enforcement actions, separate from the procedural mechanics of how those actions are conducted.

Citations

• N.C.G.S. § 96-4(t)(1)(i) (general confidentiality of ESC information)
• N.C.G.S. § 96-4(t)(5) (disclosure of records from a hearing proceeding)
• N.C.G.S. § 96-4(m) (procedure for hearings on employer tax liability)
• N.C.G.S. § 96-4(p) (Commission rule-making authority)
• N.C.G.S. § 132-1.3 (state settlement documents public)
• ESC Regulation 18.13 and 18.15 (hearing process commencement)

Source

• Landing page: https://ncdoj.gov/opinions/disclosure-of-settlements/

Original opinion text

REPLY TO:

Daniel D. Addison
LABOR SECTION
Phone 919/716-6680
Fax 919/716-6709

March 26, 2004

Mr. Harry E. Payne, Jr., Chairman
Employment Security Commission of North Carolina
P.O. Box 25604
Raleigh, North Carolina 27611

Re: Advisory Opinion on Disclosure of Settlements; N.C. Gen. Stat. § 96-4(t)(1)(i) and N.C. Gen. Stat. § 96-4(t)(5)

Dear Chairman Payne:

On February 19, 2004 you wrote asking for an opinion about whether settlement documents related to certain Employment Security Commission (ESC) proceedings may, or must be, publicly disclosed. Specifically, you said that the ESC conducts investigations of employers to determine if they have unlawfully avoided unemployment taxes by transferring employees to shell companies controlled by the employers, a practice referred to as "SUTA (state unemployment tax act) dumping." You noted that the ESC has entered into settlements with employers who, due to ESC investigations, have agreed in writing to dismantle certain SUTA tax shelter arrangements and pay additional unemployment taxes to the State. You said that these settlement agreements were executed after the employers had filed written protests over ESC tax assessments, but before the ESC Chairman ordered the matters referred to hearing officers to conduct hearings. You asked whether the information contained in the settlement documents is confidential or subject to public disclosure.

Your letter notes that North Carolina's Employment Security Law ("ESL") contains two provisions addressing the confidentiality and disclosability of ESC information and records:

1) N.C. Gen. Stat. § 96-4(t)(1)(i): "Except as hereinafter otherwise provided, it shall be unlawful for any person to obtain, disclose, or use, or to authorize or permit the use of any information which is obtained from any employing unit, individual, or unit of government pursuant to the administration of this Chapter or G.S. 108A-29..."

2) N.C. Gen. Stat. § 96-4(t)(5): "... Nothing in this subdivision shall be construed to prohibit the Commission, upon written request and on a reimbursable basis only, from disclosing information from the records of a proceeding before an appeals referee, deputy commissioner, or other hearing officer by whatever name called, compiled for the purpose of resolving issues raised pursuant to the Employment Security Law."

Reading these two provisions together, it appears that information obtained in the administration of the ESL should generally be kept confidential, unless: 1) that information is in a record of an ESL proceeding before an appeals referee, deputy commissioner, or other hearing officer; and, 2) the information is compiled for the purpose of resolving ESL issues. The information in a SUTA dumping settlement agreement appears to fall into the category of information "compiled for the purpose of resolving issues raised pursuant to the Employment Security Law." The ultimate question is whether the information in these settlement agreements is information in the records of a "proceeding before an appeals referee, deputy commissioner, or other hearing officer." If so, it is disclosable.

The ESL does not define a "proceeding," as that word is used in N.C. Gen. Stat. § 96-4(t)(5). Nor does the ESL specify when a proceeding before an appeals referee, deputy commissioner or other ESC hearing officer officially commences. However, N.C. Gen. Stat. § 96-4(m) does describe generally the process by which the issue of an employer's liability for additional unemployment taxes comes before a deputy commissioner and/or a hearing officer. This statute authorizes the ESC to hold hearings to determine the rights and liabilities of employers and to have evidence taken in front of a hearing officer. Testimony is recorded, and the testimony and records from the hearing officer's hearing are transmitted to the Commission. A hearing is then held before the Commission, or a designated Deputy Commissioner, for a review of the evidence and a determination of the disputed issues. Notably, N.C. Gen. Stat. § 96-4(m) provides that hearings are open to the public. These hearing officer and Deputy Commissioner hearings provided for in Section 96-4(m) are the kinds of "proceeding[s] before an appeals referee, deputy commissioner or other hearing officer by whatever name called" that appear to be contemplated by the information disclosure provisions of N.C. Gen. Stat. § 96-4(t)(5).

Although the employment security statute does not specify when such Section 96-4(m) hearings officially begin, the ESC has adopted regulations describing the procedure for starting the hearing process. ESC Regulation 18.13 provides that the hearing procedure is invoked when an employer makes a timely appeal (also referred to informally as a "protest") of an adverse final administrative determination. Once the appeal is made, the ESC's Tax Department assembles the hearing "file," which consists of the employer's master file and relevant quarterly tax and wage reports. The file is forwarded to the ESC Commissioner, who in turn assigns the matter to a hearing officer for the initial Section 96-4(m) evidentiary hearing. ESC Regulation 18.15.

From these statutory and regulatory provisions, it appears that a "proceeding" before a hearing officer to determine an employer's additional tax liability in a case of alleged SUTA dumping commences when the employer appeals an adverse administrative determination that additional taxes are due and/or changes in employer tax reporting are required. From that point on, all documents and information compiled by the ESC relating to the dispute are "records of a proceeding before . . . [a] hearing officer . . . compiled for the purpose of resolving issues raised pursuant to the Employment Security Law." If an employer and the ESC reach a settlement and sign an agreement after the employer appeals a final administrative determination that additional taxes are due, the settlement agreement is also a document compiled in the proceeding, and as such, it appears to be subject to the disclosure provisions of N.C. Gen. Stat. § 96-4(t)(5).

Conceivably, it might be argued that the settlement agreements you described were never actually introduced in hearings because they were entered into before hearing officers held evidentiary hearings. Using this rationale, it might be suggested that such agreements are not part of the "records" of the proceedings. While this interpretation is arguable, the wording of the statute more strongly suggests that a settlement agreement is part of the records of the proceeding, even if it is entered into before the hearing is held. N.C. Gen. Stat. § 96-4(t)(5) does not provide that only records introduced into evidence in a hearing are disclosable. Rather, this statute says information from records "compiled" in the "proceeding" for the purpose of resolving the disputed ESL issues are disclosable. This phrasing suggests that once the proceeding has been commenced, all records and information compiled by the ESC for the purpose of resolving the disputed issues are disclosable. The words of N.C. Gen. Stat. § 96-4(t)(5) seem to apply particularly to settlement agreements, since their very purpose is to resolve issues raised pursuant to the ESL.

We also note that N.C. Gen. Stat. § 132-1.3 provides that settlement documents in proceedings against the State are public documents. Since the settlement agreements you described are the end result of proceedings instituted against the ESC to protest its official agency action (i.e., assessing additional unemployment taxes), it appears that SUTA dumping settlement agreements are the kinds of settlement documents the General Assembly intended to be subject to public disclosure, pursuant to N.C. Gen. Stat. § 132-1.3.

To summarize, it is our conclusion that information in a SUTA dumping settlement agreement that is entered into after the employer appeals a tax assessment is "information from records of a proceeding before . . . a hearing officer . . . compiled for the purpose of resolving issues raised pursuant to the Employment Security Law." As such, it is publicly disclosable, pursuant to N.C. Gen. Stat. § 96-4(t)(5).

Thank you for your inquiry. Please feel free to contact us if you have further questions regarding this matter.

Sincerely,

Reginald L. Watkins
Senior Deputy Attorney General

Daniel D. Addison
Assistant Attorney General