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Proposed effective audit measure for unemployment employer audits
Summary ETA proposed changing how state unemployment insurance employer audits are evaluated, including detection of worker misclassification, and asked states for comments. The attachment shows sample state results. ETA later implemented the measure in UIPL 03-11; this document is the proposal rather than the final measure.
Document
Federal guidance
Agency
U.S. Department of Labor, Employment and Training Administration (ETA)
Document number
UIPL No. 30-10
Date issued
September 2, 2010
Status
Superseded
ETA still lists this proposal Active as of 2026-10-24, but UIPL No. 03-11 later implemented the effective audit measure after considering comments on this proposal.
Status last verified October 24, 2026
Is this still the rule?
This document has been superseded. Ezel checks what federal law requires today, under current federal labor law, and answers your situation with citations.
About this page: The full text below is the official document from U.S. Department of Labor, Employment and Training Administration (ETA). Ezel adds the plain-English summary and tracks the document's status. The official source linked on this page is authoritative for any reliance.
UIPL30-10acc.pdf (https://www.dol.gov/sites/dolgov/files/ETA/advisories/UIPL/2010/UIPL30-10acc.pdf)
CLASSIFICATION
EMPLOYMENT AND TRAINING ADMINISTRATION UC – Audit Measurement
ADVISORY SYSTEM CORRESPONDENCE SYMBOL
OUI/DUIO
U.S. DEPARTMENT OF LABOR
DATE
Washington, D.C. 20210 September 2, 2010
ADVISORY: UNEMPLOYMENT INSURANCE PROGRAM LETTER NO. 30-10
TO: STATE WORKFORCE AGENCIES
FROM: JANE OATES /s/
Assistant Secretary
SUBJECT: Proposed Effective Audit Measure for State Unemployment Insurance (UI)
Employer Audit Programs
1. Purpose. To advise states of proposed changes for evaluating state UI employer audit
programs through a new measure that will 1) include factors of worker misclassification
detection and enforcement, and 2) become a new Core Measure in the UI Performs management
system and to solicit comments on these proposed changes.
2. References. Employment and Training (ET) Handbook No. 401, 4th Edition, Unemployment
Insurance Reports Handbook and subsequent changes; ET Handbook No. 407, 4th Edition, Tax
Performance System; ET Handbook No. 336, 18th Edition, UI State Quality Service Plan (SQSP)
Planning and Reporting Guidelines, Unemployment Insurance Program Letter (UIPL) No. 14-05,
Changes to UI Performs.
3. Background. States are responsible for administering effective employer audit programs that
verify employers are reporting wages properly and paying the appropriate amount of UI taxes.
Employer compliance with regard to these two activities promotes accurate UI benefits and UI
trust fund solvency. This background section describes the existing Tax measures and
introduces the worker misclassification initiative. The proposed changes to the measurement of
the employer audit program take into account the following considerations related to how audits
are conducted and issues of worker misclassification.
a. Tax Quality Measure. The Tax Performance System (TPS) Tax Quality measure
evaluates whether the UI employer audit program complies with the minimum
requirements in Chapter VII of ET Handbook No. 407. The audit function is just one of
13 tax functions that are evaluated aggregately to determine the overall quality of a
state’s UI tax program. The state TPS reviewer verifies a random sample of audits to
determine whether individual state audits comply with certain requirements including
conducting pre-audit discussions, performing payroll records tests, searching for hidden
wages and preparing adjustments properly. While the TPS Tax Quality measure is
important, it does not adequately focus on the overall effectiveness of a state’s audit
RESCISSIONS EXPIRATION DATE
None Continuing
program, as measured by the number of audits performed, the amount of wages audited
and the amount of change discovered by the auditor.
b. Employer Audit Penetration Rate. Section 3677 of the Employment Security Manual
(ESM) recommends that states audit two percent of their contributory employers
annually. Chapter VII of ET Handbook No. 407 describes the employer Audit
Penetration Rate Computed Measure. The U.S. Department of Labor (USDOL)
publishes the TPS Computed Measures annually on its web site and advises states to
comply with the recommended audit penetration rate of two percent. The computed
measure for the Audit Penetration Rate, however, is designated as management
information and is currently not a Core Measure of the UI Performs management system.
Consequently, states that audit less than the recommended employer audit penetration
rate of two percent are not required to include a Corrective Action Plan (CAP) in the
annual SQSP (see ET Handbook No. 336). For the calendar year (C/Y) 2009, only
twenty-five states attained the two percent penetration rate target and the national audit
penetration rate declined to 1.4 percent. By comparison, in CY 2005 thirty-one states
attained the two percent penetration rate target and the national audit penetration rate was
1.6 percent.
c. Worker Misclassification. A worker is considered to be misclassified when the employer
erroneously characterizes an employee’s service as something other than employment.
The worker could be classified incorrectly as an independent contractor, or hidden as an
unreported (off-the-books) worker. The issue of worker misclassification is receiving
considerable and growing attention at both the state and Federal levels and across
government programs. Worker misclassification impacts the UI program by restricting
claimant eligibility for UI benefits and reducing UI employer tax revenue on the
unreported wages. For those reasons, worker misclassification detection has been an
important focus for the UI audit program.
d. Targeted Employer Audit Selection. Legislative and advisory groups outside of the
Federal and state unemployment programs have advocated for targeted audit selection
methods and suggested that USDOL’s Employment & Training Administration change
the evaluation of the UI audit program. In 1999, the Office of Inspector General report
Adopting Best Practices Can Improve Identification of Noncompliant Employers for State
UI Field Audits made the following recommendation: “modify existing performance
measures by establishing new benchmarks that measure the effectiveness of states in
selecting noncompliant employers for audit and identifying hidden wages.”
4. Proposed Effective Audit Measure. A team of state and Federal UI tax experts was formed
in November of 2009 to examine the effectiveness of current audit measurements, and to
consider recommendations for a new audit measure. The team explored the existing audit
measurements of the employer audit penetration rate, and the Tax Quality measure under TPS.
The team used six years of historical data to benchmark performance and to propose a new
measure. The team recommended that USDOL establish a new measure for the audit program
and designate it as a UI Performs Core Measure, which would require states that fail the measure
to complete a CAP.
The team proposed an Effective Audit Measure that consists of four factors, each of which a state
must meet or exceed established minimum levels of achievement. Additionally, the proposed
Effective Audit Measure will have a minimum overall score. To pass the measure, states will
have to meet or exceed each factor’s minimum as well as the overall score. These four factors
are described below:
Factor 1
Percent of Contributory Employers Audited Annually
Factor 1 National Data for 2009
New Target Lowest State Highest State National Average
1.0% 0.07% 2.4% 1.4%
There is an expectation that every state audit a minimum number of its employers annually. The
team proposed lowering the current two percent requirement to one percent because targeted
audits will take more time to conduct. On average, employers selected for audit by a targeted
approach are larger, more complex, and require more resources to search for hidden wages and
misclassified workers.
Factor 2
Percent Total Wage Change from Audit
Factor 2 National Data for 2009
Target Lowest State Highest State National Average
2.0% 0.8% 15.9% 6.8%
Detecting errors in reported wages and discovering unreported workers are two of the most
important outcomes of an audit. Historical data shows that states have reported a wide range of
values for this measure. Data from 2004 through 2009 indicates that the median score, where
half the states score greater and half the states score less, averages 3.5 percent. The Team
believes that a 2.0 percent score would be a reasonable minimum expectation for all states to
achieve.
Factor 3
Percent Total Wages Audited
Factor 3 National Data for 2009
Target Lowest State Highest State National Average
1.0% 0.02% 3.3% 1.2%
It is important for employers of every size to be audited. This factor encourages states to include
larger employers in their targeted audit selection criteria.
Factor 4
Average Number of Misclassifications Detected per Audit
Factor 4 National Data for 2009
Target Lowest State Highest State National Average
Average 1 per Audit 0.1 6.6 1.77
This new measure will encourage states to focus audit activity on those employers more likely to
misclassify their workers. The factor will require state audits to detect, on average, at least one
misclassified worker per audit.
Effective Audit Measurement Summary Score
Effective Audit Measurement
Factor Description Minimum Score
1 Percent of contributory employers audited 1
2 Percent of wages changed as a result of the audit 2
3 Percent of the state’s total wages that were audited 1
4 Average number misclassified workers discovered per audit 1
Subtotal 5
Plus: State-Directed emphasis for individual factor(s) 2
Minimum total score to pass 7
Each of the four factors is an important indicator of the effectiveness of a state’s audit
program. Therefore, state performance must meet or surpass each factor’s minimum score.
Any state that fails to achieve the minimum level of performance for any one of the factors
fails, regardless of the overall score.
The minimum scores for the four factors are established at minimum levels of performance.
States with effective audit programs are expected to achieve results greater than the
minimums, particularly in the areas that they choose to emphasize. For example, if a state
decided to continue auditing two percent of their contributory employers, they would attain a
score of two for the Percent of Contributory Employers Audited Annually factor. If that
same state attains a score of two for the Average Number of Misclassifications Detected per
Audit factor, they would only need to achieve the minimum scores for the two remaining
factors; two for the Percent Total Wage Change from Audit factor, and one for the Percent
Total Wages Audited factor. Another state could choose to emphasize different factors. The
required overall total score of seven provides a state the flexibility to emphasize which
factors it deems important enough to score above the minimum scores, which total five.
Examples: Pass and Fail Scenarios
Factors #s
Achieved
(Minimum Scores)
Total Minimum
Example Pass/Fail Reason
(Min = 7) for all 4
1 2 3 4
Factors?
(1) (2) (1) (1)
State 1 State failed to attain
1 2 1 1 5 Y Fail
Scores minimum overall score of 7
State 2 State failed to pass all four
2 2 0.9 10 14.9 N Fail
Scores factor minimum scores
State passed each factor
State 3
1 2 1 3 7 Y Pass minimum score and attained
Scores
minimum overall score of 7
State passed each factor
State 4 minimum score and
2 3 1 3 9 Y Pass
Scores exceeded minimum overall
score of 7
5. Proposed Changes to ETA 581 Definitions. The Audit Measurement Team proposed
that the current definition in Handbook No. 401, Section II, ETA 581 Contributions
Operations report, for Item 52, Number of Employees Misclassified as Independent
Contractors, be revised to: Employees discovered through audits that were previously
misclassified by the employer. This would include counting all employees that were
discovered through audit; including those reported by the employer on Internal Revenue
Service form 1099, as well as workers that were unreported (off the books).
6. Proposed Implementation Schedule. USDOL will compile the data on the proposed
Effective Audit Measure and report the results as management information during the
implementation period, which will be the calendar years 2010, 2011 and 2012. The proposed
Effective Audit Measure will become part of the UI Performs Core Measures for the 2013
calendar year evaluation period, which would require a state that fails the measure to write a
CAP for the SQSP submitted during the summer of 2014.
States that experience problems attaining a passing score during the implementation period will
be provided technical assistance and training by USDOL to strengthen their audit efforts.
7. Evaluation Period. The proposed Effective Audit Measure is expected to promote changes in
the employer audit program. USDOL will evaluate the employer audit summary data on the
ETA 581 Contributions Operations report three years after the initial implementation date to
determine whether the proposed employer audit measure was effective in promoting the
detection of worker misclassification and determine whether it will remain a core measure as
proposed.
8. Action Requested. State administrators should distribute this advisory to appropriate staff
and submit comments to their Regional Office by September 30, 2010.
9. Inquiries. Questions should be addressed to your Regional Office.
10. Attachment.
I. Calendar Year 2009 Pro Forma Results - Proposed Effective Audit Measure.
UIPL30-10a1.pdf (https://www.dol.gov/sites/dolgov/files/ETA/advisories/UIPL/2010/UIPL30-10a1.pdf)
Attachment I
Calendar Year 2009 Pro Forma Results
Proposed Effective Audit Measure
Factor 1 Factor 2 Factor 3 Factor 4 Score Outcome
Percent Of Percent Total Average Number of
Annualized Effective Audit
Contributory Wage Change Misclassified Effective Audit
Percent Of Total Measure Total
Employers Resulting From Workers Detected Measure Results
Wages Audited Score
Audited Audit Per Audit
Passing Score Passing Score Passing Score Passing Score Passing Score Pass = P
>= 1 >= 2 >= 1 >= 1 >= 7 # Factors Passed
AK 2.2 5.2 1.0 1.7 10.1 P
AL 2.1 0.8 1.5 0.3 4.7 2
AR 0.1 14.9 0.0 4.0 19.0 2
AZ 1.5 3.8 1.4 2.1 8.8 P
CA 0.1 0.0 0.0 2.3 2.4 1
CO 0.9 4.7 0.9 2.6 9.1 2
CT 2.0 4.4 1.8 2.1 10.3 P
DC 2.1 2.1 0.9 0.6 5.7 2
DE 1.6 1.5 1.0 0.2 4.3 2
FL 1.3 10.1 0.9 0.5 12.8 2
GA 2.0 2.3 0.9 0.3 5.5 2
HI 2.2 1.7 3.3 0.4 7.6 2
IA 2.0 1.6 0.9 0.1 4.6 1
ID 1.0 9.8 0.7 1.2 12.7 3
IL 1.5 9.4 1.2 2.5 14.6 P
IN 2.2 8.1 1.1 3.2 14.6 P
KS 1.0 1.9 0.4 0.6 3.9 1
KY 2.1 2.9 1.6 1.0 7.6 P
LA 1.3 3.1 0.5 0.5 5.4 2
MA 0.5 3.8 0.6 2.5 7.4 2
MD 2.0 13.9 1.3 3.7 20.9 P
ME 1.6 4.6 0.6 0.7 7.5 2
MI 1.2 2.3 2.2 2.0 7.7 P
MN 2.0 6.7 3.0 0.2 11.9 3
MO 2.2 1.7 1.1 0.2 5.2 2
MS 2.0 3.2 1.1 0.3 6.6 3
MT 2.3 7.3 2.4 1.9 13.9 P
NC 1.6 5.7 1.4 0.6 9.3 3
ND 1.5 2.6 0.8 0.5 5.4 2
NE 2.2 1.0 1.9 0.7 5.8 2
NH 1.5 6.4 1.3 1.4 10.6 P
NJ 2.0 6.0 1.6 3.0 12.6 P
NM 1.9 2.2 1.3 0.6 6.0 3
NV 1.9 7.8 1.0 0.6 11.3 3
NY 1.8 10.8 2.3 6.6 21.5 P
OH 1.8 6.1 0.7 0.9 9.5 2
OK 1.7 3.2 1.1 0.6 6.6 3
OR 1.3 10.0 0.8 1.9 14.0 3
PA 1.0 13.3 0.5 3.1 17.9 3
PR 0.8 8.8 2.0 2.5 14.1 3
RI 1.9 5.6 1.3 0.9 9.7 3
SC 2.0 5.7 1.1 0.8 9.6 3
SD 2.1 1.3 2.2 0.6 6.2 2
TN 2.0 4.6 1.1 1.2 8.9 P
TX 2.0 3.2 0.8 0.7 6.7 2
UT 1.8 15.9 1.2 3.9 22.8 P
VA 2.0 2.0 1.6 0.4 6.0 3
VI 0.0 0.0 0.0 0
VT 1.9 3.5 2.8 0.6 8.8 3
WA 2.2 6.5 1.6 0.9 11.2 3
WI 1.7 11.7 1.0 4.1 18.5 P
WV 2.4 3.6 1.2 0.7 7.9 3
WY 2.1 8.3 2.0 0.5 12.9 3
Total #
Passing 47 43 35 23 35 15
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