Key takeaways:

• The H-1B visa program was created to fill labor shortages in professional fields and could be a valuable temporary work visa program, but new data show it is being subverted by employers that are not facing labor shortages and by outsourcing firms.
• H-1B use is overly concentrated among a small number of employers. In 2022, the top 30 H-1B employers hired more than 34,000 new H-1B workers, accounting for 40% of the total annual cap of 85,000.
• The top 30 companies also laid off, or will imminently lay off, at least 85,000 workers in 2022 and the first quarter of 2023.
• Thirteen of the top 30 H-1B employers were outsourcing firms that underpay migrant workers and offshore U.S. jobs to countries where labor costs are much lower.
• Laid-off H-1B workers, who likely number in the thousands, must find a new employer to sponsor their visa within 60 days after their layoff or they may be forced to leave the United States.
• President Biden should use executive authority to fix the H-1B program and implement new rules that raise wages for migrant workers and prevent outsourcing companies from exploiting the H-1B program.

The H-1B program is the largest U.S. temporary work visa program, with a total of approximately 600,000 workers employed by 50,000 employers. The program’s intent is to allow employers to fill labor shortages for jobs that require a college degree, by providing work authorization for migrant workers in fields like accounting, journalism, health and medical, and teaching. Most H-1B workers, however, are employed in occupations like computer systems analysis and software development.

Visas for new workers are capped at 85,000 per year, but many employers are exempt from that annual cap, including universities and their affiliated nonprofit entities, nonprofit research organizations, and government research organizations. Approximately 130,000 temporary migrant workers will receive new H-1B visas each fiscal year to begin new employment for capped and cap-exempt employers, with another 300,000 receiving renewals (which are not subject to the cap). Every April 1, the government decides, via lottery, which employers will receive the 85,000 new visas subject to the cap.

The H-1B program has many flaws that have become especially evident in light of recent mass layoffs in the tech sector. Instead of being used to fill genuine labor shortages in skilled occupations without negatively impacting U.S. workers’ wages and working conditions, the latest data show that the H-1B’s biggest users are companies that have laid off tens of thousands of workers in 2022 and the first quarter of 2023. The rest of the companies that dominate the program have an outsourcing business model that exploits the program by underpaying skilled migrant workers and offshoring U.S. jobs. President Biden can and should implement regulations and policy guidance to prevent misuse of the program, stop the exploitation of college-educated migrant workers, and ensure the program is consistent with congressional intent.

The top 30 H-1B employers hired more than 34,000 new H-1B workers in 2022 and laid off 85,000 employees

The H-1B program was created with the intent to attract skilled and talented workers to the United States to fill labor shortages in professional fields—a sensible goal that has widespread support. But its implementation has been bungled by the U.S. Departments of Labor and Homeland Security. Since employers aren’t required to test the U.S. labor market to see if any workers are available before hiring an H-1B worker or pay their H-1B workers a fair wage, employers have exploited the program. Rather than turning to the H-1B program as a last resort when U.S. workers cannot be found, most employers hire H-1B workers because they can be underpaid and are de facto indentured to the employer. This is evidenced by government data showing that technology companies continue to hire H-1B workers in large numbers while significantly reducing the sizes of their workforces.

Table 1 at the end of this post illustrates this by showing the top 30 H-1B employers that are subject to the annual cap according to the number of approved petitions for initial employment (i.e., for hiring new H-1B workers, not extensions for existing H-1B workers) for fiscal year 2022. In 2022, 48,000 employers registered with United States Citizenship and Immigration Services (USCIS) in hopes of hiring at least one H-1B worker, and nearly 30,000 employers ultimately hired at least one new H-1B worker. However, visa use is and has been highly concentrated among a small number of employers: The top 30 H-1B employers—representing 0.001% of employers that hired a new H-1B worker—hired more than 34,000 new H-1B workers, accounting for 40% of the new H-1B visas available under the annual limit for cap-subject companies.1

We then looked to see how many of the top 30 H-1B employers had announced layoffs of their workers in the United States, and how many of those workers were laid off in 2022 and the first quarter of 2023. To compile these data, we referred to Layoffs.fyi, an open source website tracking tech industry layoffs from publicly available news reports. (Layoffs.fyi has been widely cited by the media, due to the fact that the federal government does not track layoffs with specificity in terms of individual firms.) For firms on the list that did not appear in Layoffs.fyi, we did basic internet searches for news articles and included the citations in the source section of Table 1. Because of the limited nature of available data on layoffs by employer, as well as the Layoffs.fyi website and our searches, the number of layoffs reported in Table 1 should be considered a minimum of layoffs at the top 30 H-1B employers.

As Table 1 shows, 13 of the top 30 H-1B employers announced layoffs in 2022 and the first quarter of 2023. The layoffs at those companies totaled nearly 85,000, the same number as the H-1B annual numerical limit for cap-subject employers.

Amazon was at the top of the list in terms of both new H-1B workers and layoffs. Amazon hired 6,400 new H-1B workers in 2022, and hired the most new H-1B workers in 2021 as well, when it hired nearly 6,200 workers. Amazon has either recently laid off or plans to lay off 27,150 of its employees, more than twice the number of H-1B workers it hired in 2021 and 2022 combined.

Google and Meta (the latter formerly named Facebook) are both long-time top H-1B employers, together hiring over 3,100 new H-1B workers last year. Meta employs so many H-1B workers that for years it has declared itself an “H-1B dependent” firm in government filings because more than 15% of Meta’s total U.S. workforce is made up of H-1B workers. Together, Google and Meta laid off 33,000 employees, almost 11 times the number of new H-1B workers they hired in 2022. For more than a decade, top Google and Meta executives have been at the forefront of industry’s public calls for large increases in the H-1B cap, with Meta creating a lobby group, FWD.US, almost exclusively to push for more visas.

Four other leading tech companies on the list have announced mass layoffs. Microsoft, Intel, Qualcomm, and Cisco are the 13th-, 15th-, 18th-, and 28th-largest H-1B employers, respectively. Microsoft founder Bill Gates himself has testified before the U.S. Congress to decry the cap on H-1B visas, arguing for raising the cap significantly, even in the midst of the Great Recession in 2008. Together, these firms hired 2,735 new H-1B workers in 2022, but collectively they laid off close to 14,900 employees, nearly five and a half times the number of H-1B workers they hired.

Two nontech firms in the top 30 also announced significant layoffs: Goldman Sachs—the world’s second-largest investment bank which operates a services subsidiary—and McKinsey & Company—the well-known management consulting firm. Together, the two hired just over 1,000 new H-1B workers while laying off 5,200 employees.

Mass tech layoffs have left migrant workers vulnerable

It is important to note that no information source is available that reveals whether laid-off employees were migrant workers on an H-1B or other temporary visa, or if they were permanent residents, or U.S. citizens. We do know anecdotally—thanks to various news reports—that many H-1B workers were dismissed as part of recent layoffs, including at least 300 at Meta.

Because H-1B visas are tied to a specific employer, H-1B workers are in a precarious position if they are terminated. If they want to remain in the United States, they must find a new employer to sponsor their visa within 60 days—no easy task during a time of mass layoffs in the tech industry.

This is especially heartbreaking considering many H-1B workers have deep ties to the United States and their local communities. Many are married and have children who are U.S.-born, and own homes. This is to be expected, given that H-1B visas are valid for up to six years, and many workers remain in H-1B status well beyond that because their visas can be extended for longer if they are waiting for a permanent immigrant visa to become available while they remain in the green card “backlog.” If a laid-off H-1B worker can’t find a new job within the time allotted or adjust to another valid immigration status, they will have to leave the country, along with any family members who are also on a temporary visa.

While all H-1B workers have little power to bargain with employers because of their temporary visa status, laid-off workers are in an extraordinarily weak bargaining position. With the 60-day clock ticking and massive layoffs in their industry sectors and occupations, they will feel pressure to accept a job offer that pays substandard wages and offers poor working conditions just to remain in the country.

The H-1B workers who remain employed face other substantial pressures. For those workers, the very real threat of a future layoff will make them less likely to complain about longer hours, cuts to benefits and pay, and other forms of workplace exploitation—which in turn will degrade labor standards for all similarly situated workers. And their prospects for becoming permanent residents have now diminished greatly, because some tech companies like Google have decided to pause their efforts to obtain green cards for their H-1B workers in light of recent layoffs.

Outsourcing companies were again the biggest beneficiaries of the H-1B visa in 2022

In addition to employers exploiting the H-1B program while laying off tens of thousands of employees, outsourcing firms once again dominated the H-1B visa program in 2022, even among the top 30 H-1B employers. For more than 15 years, leading lawmakers from both parties have criticized outsourcing firms’ exploitation of H-1B and offered bipartisan fixes, yet the abuse continues unabated. Thirteen of the top 30 H-1B employers were outsourcing firms, and they were issued a total of 17,534 visas for new H-1B workers (21% of the total annual cap).

As we discussed in depth last year, this continues to be problematic because outsourcing companies—which have a fissured business model, do not make a product, and are staffing firms that resell labor to other firms—have been associated with paying their H-1B workers the lowest wages permitted by law, much lower than the U.S. market rate. Wages account for the vast majority of information technology service firms’ operating costs, but the outsourcing firm business model is viable only if it cuts the customers’ labor costs substantially while also earning profits for its shareholders. After cutting costs in the United States by using the H-1B visa, the outsourcers realize further cost savings and profits by shipping as many of the U.S. jobs and tasks as possible to their overseas operations where wages for tech workers are substantially lower.

In addition, we recently published evidence that at least one outsourcing firm is likely stealing tens of millions of dollars in wages from its H-1B employees, something we hope the Wage and Hour Division at the U.S. Department of Labor (DOL) will investigate. It is also notable that one of the major outsourcing firms was hit with the largest-ever civil fine for a violation of U.S. visa laws.

And finally, among the top outsourcing firms, only one—IBM—announced layoffs, with 3,900 workers laid off after hiring 1,239 new H-1B workers. Over the years, however, there have been countless shocking revelations in the press about how outsourcing companies have used the H-1B program to help U.S. companies subvert the law to lay off hundreds of their well-paid employees at a time. U.S. companies do this by contracting with major outsourcing firms like Infosys (#2 on the top 30), Tata (#3), Cognizant (#4), and HCL (#7)—and replacing their employees with H-1B workers paid tens of thousands of dollars less. Some of the documented cases were with clients like Disney, Southern California Edison, and even the University of California. 

DOL could end this shocking abuse of the program by closing the outsourcing loophole through new policy guidance that simply requires the end-user companies like Disney that contract with outsourcers to file an H-1B Labor Condition Application (LCA). In the LCA, companies would have to attest that their use of the H-1B program will not “adversely affect the working conditions” of their employees, and DOL would be able to enforce that promise.

H-1B needs major reforms to prevent the degradation of labor standards and exploitation of migrant workers

While the H-1B visa program has become a common pathway for attracting skilled migrants to the U.S. labor market, it has been usurped by employers that are not facing real labor shortages and by outsourcing firms, and all employers remain allowed to pay H-1B workers less than the local rate for the jobs they fill. These problems are well known and well documented but most members of Congress and presidents from both parties have taken no lasting action to fix it.

The good news is that as a candidate, President Biden explicitly supported reforms to U.S. work visa programs—and now as president, he has the authority to make them a reality. President Biden can issue new regulations, policy guidance, and other rules that would preserve and create good middle-class jobs, increase productivity by attracting skilled migrant workers who complement the U.S. labor force, and ensure migrant workers are paid fairly according to U.S. standards. Last year, the Congressional Progressive Caucus reminded him of this by calling on the president to fix the H-1B program using his executive powers.

In the remainder of his term, President Biden should implement these essential reforms to restore integrity and fairness to the H-1B program:

• Fix the outsourcing loophole by issuing policy guidance from DOL that requires secondary employers of H-1B workers (the companies that hire outsourcing firms to provide contract workers) to file labor condition applications. Guidance to require this was recently considered but never finalized, which would have prevented firms like Disney from replacing their U.S. employees with contracted H-1B workers.
• Implement DOL’s delayed H-1B prevailing wage methodology rule, so that H-1B workers are paid a fair wage and employers are prevented from undercutting U.S. wage standards. The rule currently appears on the White House’s regulatory agenda but it is unclear whether a rule will ever be proposed.
• Issue an updated version of USCIS’s H-1B visa allocation rule, which would distribute H-1B visas by wage level rather than random lottery. A rule like this would ensure that the highest-skilled H-1B workers are awarded visas and it also has bipartisan support.
• Direct the Wage and Hour Division to enforce the requirement in the H-1B labor condition application for employers to pay the “actual wage” rate they pay to other employees with similar experience and qualifications. Particular attention should initially be focused on firms that continue to hire large numbers of H-1B workers after conducting mass layoffs.

Table 1

Note

1. Stanford University ranked 29th in fiscal year 2022 according to the number of H-1B petitions approved for new H-1B workers but was excluded from Table 1 because, as a university, it is exempt from the 85,000 annual cap. Stanford was the only cap-exempt employer in the top 30.

• establishing dedicated local labor standards offices that enforce workers’ rights laws 
• establishing ongoing worker boards or councils 
• passing local worker protection laws
• actively enforcing local worker protection laws 
• setting job quality standards for contractors with the municipal government 
• establishing legal consequences for labor violations among applicants for municipal permits or licenses 
• practicing high-road employment principles in relation to municipal employees
• championing worker issues through public leadership 

While other reports have done an excellent job of exploring local action on specific issues like paid sick leave, living wages, and creation of worker boards, this report identifies and examines the broader trend of increased local action and analyzes the landscape of cities and other localities’ pro-worker actions in a comprehensive way.

Why it matters: Policies and enforcement that protect the rights of workers, ensure workers are able to meet their basic needs, and support workers’ efforts to organize are foundational to building healthy, thriving, and equitable communities. Working people in the United States today face multiple crisis situations that not only adversely impact their well-being, but also undermine the health and well-being of communities. Outdated labor laws are skewed against workers trying to form and join unions, and workers who try often face retaliation and other violations by employers. Public enforcement resources are inadequate, and workers are increasingly unable to bring their claims in court because of forced arbitration. In this context, cities and localities are vitally important and necessary actors in the effort to expand and enforce workers’ rights. They are close to their residents, and often are nimble and fast-moving in responding to emerging needs. A few cities (along with a few states) are also at the vanguard of innovating on policy and piloting new approaches to expanding and protecting workers’ rights. There is very meaningful work currently happening at the local level, with untapped potential for much more local action. 

What can be done about it: Local policymakers, enforcers, advocates, and community members can work together to pilot new local laws, create dedicated labor enforcement agencies and worker boards, develop strategic community enforcement partnerships, and use permits to drive compliance. Localities can fight abusive state preemption that impairs the abilities of local governments to build upon minimum standards set at the state level. Unions, worker advocates, and the public can think creatively about how to enact measures within their own localities and press for action. Other actors and observers in this space—federal and state government, the media, funders, academics, and more—should develop a greater understanding of the emerging role of cities in protecting working people. They should work to institutionalize and chronicle protecting and supporting workers as part of our understanding of what localities do. This report offers a road map of opportunities to enact policies at the local level that advance workers’ rights and improve working conditions.

Executive summary

In recent years, cities, counties, and other localities have become innovators and leaders in standing up for working people. Responding to increased inequality, degraded working conditions, and insufficient or inconsistent worker protections at the state and federal level, localities have in many cases joined states as the “laboratories” of experimentation (as Supreme Court Justice Louis D. Brandeis described) in relation to workplace matters.1 A number of localities have come to view protecting workers and improving their conditions as part of their core municipal function.

This report provides an overview of some of the most noteworthy ways in which localities have taken action on behalf of working people in recent years:

• Some localities have established dedicated local labor standards offices that enforce workers’ rights laws; educate employers, workers, and the public about these laws; and in some cases help formulate or inform municipal policy in this area.
• Localities have established ongoing worker boards or councils to provide workers with a formal role in local government and/or access to local officials and agencies.
• Other localities have focused on passing local worker protection laws, including ordinances regarding minimum wages, paid sick leave, and fair scheduling; industry-specific protections for sectors with high violation rates or specific vulnerability (such as the domestic worker, gig, hotel, retail, fast-food and freelance industries); broader anti-discrimination protections; and specific laws responsive to the COVID-19 pandemic.
• Localities are actively enforcing local worker protection laws, including with funded community partnership models in some instances.
• Some localities have established job quality standards for contractors, while others have established legal consequences (including denial and revocation) for applicants for initial or renewed municipal permits or licenses who have a history of wage theft violations or unresolved labor standards orders.
• Localities are demonstrating how to be a high-road employer of municipal employees, including by incorporating labor standards like higher minimum wages and paid sick leave, and enabling or facilitating collective bargaining among workers in local government.
• Active localities and local elected and appointed government leaders are exerting leadership in the public sphere, through education and outreach about labor laws, issuance of reports, convenings and public hearings, and use of the bully pulpit.

Federal—and in some cases state—preemption creates some limitations on what localities can do to expand and protect workers’ rights. Preemption occurs when federal or state law prevents subordinate levels of government (in this case, municipalities) from legislating or acting on a given issue. Still, local governments have considerable opportunity to take meaningful action on behalf of the working people within their jurisdictions.

The time is ripe for local action to advance workers’ rights. Working people are expressing dissatisfaction with worsening working conditions by resigning, forming and joining unions, and demanding change. 

Overview and introduction

Policies and enforcement that protect the rights of workers, ensure that workers are able to meet their basic needs, and support workers’ efforts to organize are foundational to building healthy, thriving, and equitable communities (Bhatia et al. 2013; USC ERI 2020). Working people in the United States today face multiple crisis situations that not only adversely impact their well-being, but also undermine the health and well-being of communities. The COVID-19 pandemic has led to many workplace clusters. Federal and state workplace measures have been varied, yet insufficient, to provide adequate protection from the virus.

Even before the pandemic, working people had been experiencing a multitude of serious challenges. Two widespread challenges are wage theft—the practice of employers failing to pay workers the full wages to which they are legally entitled—and misclassification of workers as independent contractors—the practice of employers labeling workers as independent contractors, rather than employees, to avoid paying unemployment and other taxes on workers and covering them with workers’ compensation insurance. Outdated labor laws are skewed against workers trying to form and join unions, and workers who try often face retaliation and other violations by employers (McNicholas 2019). Public enforcement resources are inadequate, and workers are increasingly unable to bring their claims in court because of forced arbitration (Hamaji et al. 2019). Employers who fail to pay unemployment or other taxes deprive public coffers of resources needed for programs serving important human needs (Erlich 2019). Meanwhile, the labor market itself is skewed—workers’ wages have not kept up with their productivity (Mishel 2021), and corporate concentration along with anti-competitive practices add to workers’ challenges in getting a fair wage (Stansbury 2021). These challenges have fallen hardest on workers of color and workers in low-wage industries.

Federal and state leaders who wish to take action on these thorny and deep-seated issues often face significant obstacles when they seek to pass laws, promulgate regulations, or take other steps responsive to workers’ needs. Such challenges can be even greater in relation to emerging developments in the workplace.

Supreme Court Justice Louis Brandeis famously described states as laboratories of public policy experimentation.2 In relation to workers’ rights, U.S. localities3 have been true laboratories of experimentation in recent years (Diller 2014).4 Historically, the federal government and states have been responsible for workplace regulation; over the years, cities and localities have not generally taken a leading role.5 But in roughly the past decade, cities and localities have become increasingly important actors in expanding and enforcing workers’ rights—what some commentators have called the “municipalization” of labor law (Sarchet 2021).

Cities and localities have introduced cutting-edge laws that do not exist at the federal or state level (including some responsive to newly emerging problems); established new offices devoted to protecting workers; used their contracting, licensing, and permitting powers to drive employer compliance; and implemented new methods of enforcement, including close and even funded partnerships with worker and community organizations. Such action by localities has occurred not only in traditionally worker-friendly regions, but also in progressive cities located within more conservative states. (Efforts in such locales have often, but not always, been met with state-level preemption measures, as noted by Blair et al. 2020 and Wolfe et al. 2021). And in some cases, such as the expansion of paid sick days, policy leadership at the local level has provided proof of concept and helped build momentum for states (and earlier in the pandemic, even the federal government) to take action. Local government action on workers’ rights also often reflects efforts to address local conditions when it comes to cost of living, dominant and emerging industries, and the needs and organizing of specific communities (especially communities of color and immigrant communities).

This report provides both an outline and a road map: an outline of actions that cities and localities have taken in recent years to protect workers, and a road map of possible policy and enforcement options for local leaders, both elected and appointed, to consider.6 Such actions include:

• establishing a dedicated department, office, or subagency within city government focused on worker issues
• creating boards or councils that provide workers with a voice, a role, and/or access to local government
• passing laws that create new and essential rights for workers
• enforcing worker protection laws, including through strategic, innovative, and/or collaborative approaches
• leveraging contracting, licensing, and/or permitting powers to raise and address worker issues
• incorporating high-road employment practices and labor policies in relation to their own municipal workforces
• using soft powers, including community education and outreach, issuance of reports, and other “bully pulpit” vehicles for reaching the community and highlighting worker needs and available resources

Notably, some cities and localities have taken meaningful action to protect workers and advance their rights and well-being during the COVID-19 pandemic; more should follow suit. This report also outlines a number of measures taken at the local level in response to COVID-19.

This report is intended not only for local leaders, but also for labor unions and worker advocates, to help deepen their understanding of policy and enforcement levers at the local government level in order to guide advocacy and collaborative governance efforts. This report can also inspire academics and other researchers to study local efforts to advance workers’ rights. Finally, policymakers at all levels of government should pay attention to the innovative solutions advanced by localities. ​​

At least 20 localities have created or are creating dedicated local labor agencies

A number of localities have created agencies specifically dedicated to enforcing workers’ rights under local ordinances, including laws addressing minimum wages,7 wage theft, paid sick and safe leave, fair scheduling/fair workweek requirements requiring advance notice of scheduling, fair chance hiring laws, gig worker rights, and more. Several of these agencies are also charged with analyzing and potentially proposing local labor policies. In other instances, localities do not have a dedicated stand-alone office, but units of other municipal agencies focus specifically on workers’ rights matters. And some localities without dedicated units have tasked specific government entities with enforcing wage theft or paid sick leave laws, such as a city manager, treasurer, or attorney; office of human rights; unit of the mayor’s office; or other officials (A Better Balance n.d.b.; Boulder 2022; Pinellas OHR n.d.; Miami-Dade WTP n.d.).8

Creation of a dedicated unit within local government focused on workers’ rights can be transformative. It ensures that municipal public servants will be involved in worker protection in a continuous, proactive, ongoing, and in-depth manner. It allows specialized staff to develop expertise on the relevant municipal laws and policies, as well as deep knowledge of issues affecting local workers. Where there is a dedicated worker-focused office in local government, staffers can develop ongoing relationships with relevant stakeholders like worker advocacy groups, unions, immigrant rights advocates or service providers, employment lawyers, and employer associations, as well as other relevant government enforcement agencies at the local, state, and federal levels. A dedicated office also can be mobilized to address emerging needs, including those that arose in the COVID-19 pandemic. Most importantly, establishment of a dedicated office institutionalizes and embeds the work within local government, ensuring the focus on workers and their challenges will continue beyond a particular administration.

Jurisdictions with dedicated agencies, subdivisions, or staff include Berkeley (California), Boston, Chicago, Denver, Duluth (Minnesota), Emeryville (California), Flagstaff (Arizona), Los Angeles City, Los Angeles County, Minneapolis, New York City, Philadelphia, San Francisco, San Jose, Santa Clara County (California), Seattle, St. Paul (Minnesota), and Tacoma (Washington).9 In addition, the San Diego County Board of Supervisors voted in 2021 to create a county labor office, and the San Diego City Council followed suit in 2022 by voting to create a labor enforcement office in a new Compliance Department.10 Tucson, Arizona, voters in 2021 passed a ballot initiative to create a local minimum wage and also a city Department of Labor Standards.11 Numerous Florida localities have created wage theft enforcement or mediation programs of various kinds: Broward County (complaint form), Miami-Dade County, and Pinellas County.12 Via court order, Palm Beach County created a Wage Dispute Division within the county civil court.13

More dedicated units to enforce workers’ rights are likely on the horizon. For example, a legislative proposal resulting from the work of an Earned Sick and Safe Leave Task Force is currently under consideration in Bloomington, Minnesota (population of approximately 90,000), home of the Mall of America.14 The city manager there has stated that two full-time equivalent staffers (one attorney and one paralegal) would be needed for this work.15

Snapshots of several local agencies in cities of varying size:

Berkeley, California (Pop. 124,321): The Workplace Enforcement and Standards Unit was created in 2014. It currently has a single full-time equivalent (FTE) employee, who also holds nonlabor-related responsibilities in addition to enforcing the city’s minimum wage, living wage, paid sick leave, and other laws (U.S. Census Bureau 2022a).

Chicago (Pop. 2.7 million): Chicago’s Office of Labor Standards, housed in the Department of Business Affairs and Consumer Protection, began operating in 2019 (its official launch date was in 2020). As of June 2022, the office has eight FTEs. It enforces the city’s minimum wage, wage theft, paid sick leave, fair workweek, COVID and vaccine anti-retaliation laws, as well as a law effective in January 2022 requiring employers of domestic workers to provide them with written contracts (U.S. Census Bureau 2022b).

Denver (Pop. 715,522): Denver Labor, created in 2019, is a division enforcing wage and hour laws located in the Denver auditor’s office. The office has 25 FTEs, and it enforces the city’s minimum wage laws, as well as a number of laws related to government work: a minimum wage applicable to city contractors, the city’s prevailing wage, the city’s living wage, and more. The office also has a community education emphasis: there are full-time community education staff and an annual outreach/education plan, including radio and internet ads, weekly online training, hundreds of outreach events, and multilingual written materials (U.S. Census Bureau 2022c).

Duluth, Minnesota (Pop. 86,697): Enforcement of Duluth’s earned sick and safe time law (effective in 2020) is handled through the equivalent of one employee housed in the city clerk’s office (U.S. Census Bureau 2022d).

Los Angeles City (Pop. 3.9 million): The Office of Wage Standards in the city of Los Angeles was created in 2015. It is authorized to have 30 FTEs, although in February 2022, this figure included nine vacancies. It enforces the city’s minimum wage, paid sick leave, and fair chance hiring laws (U.S. Census Bureau 2022f). (The county of Los Angeles has a separate enforcement agency that enforces the county’s own workplace laws.)

Minneapolis (Pop. 429,954): The Labor Standards Enforcement Division was created within the city’s Department of Civil Rights in 2016. The office has five FTEs, and it enforces the city’s paid sick and safe time, minimum wage, wage theft, and freelance worker protections laws, as well as a law giving hospitality workers the right of recall, which will sunset one year after the COVID-19 public health emergency (U.S. Census Bureau 2022g).

New York City (Pop. 8.8 million): New York City’s Office of Labor Standards and Policy was created in 2016, and is housed in the Department of Consumer and Worker Protection (DCWP). (That agency was long known as the Department of Consumer Affairs; its name changed in 2019 (Greenbaum 2019) in part to convey the agency’s focus on workers as well as consumers.) In 2021, the office had 33 FTEs. While it lacks jurisdiction to set a city minimum wage, the office enforces the city’s Paid Safe and Sick Leave Law, Freelance Isn’t Free Act, and the Fair Workweek Law in retail and fast-food, as well as several new cutting-edge laws, including a “just cause” termination law giving fast-food employees protections against arbitrary termination, and a law giving food delivery workers greater control over their working conditions and authorizing DCWP to set a minimum pay rate (U.S. Census Bureau 2022h).

Philadelphia (Pop. 1.6 million): In the June 2020 primary election, voters of Philadelphia overwhelmingly approved a ballot question to amend the city charter to create a city department of labor, demonstrating widespread public support for municipal involvement in workers’ rights issues (U.S. Census Bureau 2022i; Ballotpedia n.d.). The head of the Philadelphia Department of Labor is the deputy mayor for labor, holding a high-profile position within city government. The Office of Worker Protections, located within the department, has a total of nine FTEs, and enforces wage theft, paid sick leave, and fair workweek laws; laws covering specific industries (domestic worker bill of rights, wrongful discharge of parking employment, recall and/or retention of hotel, travel and hospitality workers); and more. The office established a domestic worker task force and has been tasked with creating a portable benefits system for domestic workers (Orso 2020), likely to be the nation’s first. In addition, in 2020 and 2021, the office partnered with worker organizations on a citywide effort on the Philadelphia Worker Relief Fund (MF Phila. n.d.; Cox 2020), which distributed more than $2.2 million to 2,820 families left out of COVID-19 government relief (Philadelphia 2020a). The office also collaborated on a referral system with the city health department’s COVID-19 containment unit to mediate paid sick leave when workers reported exposure.

San Francisco (Pop. 873,965): San Francisco’s Office of Labor Standards Enforcement (OLSE) was created nearly 20 years ago (San Francisco n.d.a; SF OLSE n.d.e). The office has 30 FTEs, and currently enforces more than 30 citywide laws, including ordinances on minimum wage, paid sick leave, fair chance employment, scheduling laws, and others, as well as a handful of other laws related to government contracting (SF OLSE n.d.f; U.S. Census Bureau 2022j).

San Jose (Pop. 983,489): San Jose’s Office of Equality Assurance, with a staff of eleven, implements, monitors, and administers the city’s wage policies, including the living wage law applicable to city service contracts, the prevailing wage law which covers public works (construction) projects, and the minimum wage ordinance applicable to employers for work performed within the city. The Office also contracts with a number of neighboring localities to provide minimum wage enforcement services for their own local minimum wages. For example, in 2020, the City of San Jose entered into contracts with the nearby cities of Burlingame, Cupertino, Milpitas, Redwood City, San Carlos, San Mateo, Santa Clara, South San Francisco, and Sunnyvale; maximum compensation under the contracts is $40,000 to $45,000 to cover a period of two and a half to three years. This arrangement allows smaller localities to functionally pool resources in order to have their local laws enforced (San Jose 2020; San Jose n.d.; U.S. Census Bureau 2022k).

Santa Clara County, California (Pop. 1.9 million): The County’s Office of Labor Standards Enforcement was created in 2017. The office has capacity for five FTEs; four were filled as of May 2022. Among other things, the office ensures that recipients of county permits, licenses, and contracts comply with labor laws and satisfy outstanding judgments issued by the California Labor Commissioner’s Office. The office also enforces wage theft prevention and living wage requirements related to contracting, contained in Chapter 5 of the Santa Clara Board of Supervisors Policy Manual (Section 5.5.5.4) (SC BOS 2020). In 2021, the office also enforced a hazard pay ordinance related to COVID-19 (SC OLSE n.d.c; U.S. Census Bureau 2022l).

A deeper dive into Seattle’s local labor agency

Seattle’s Office of Labor Standards has grown rapidly since its creation in 2015 as a division within the Seattle Office of Civil Rights. The Office of Labor Standards became an independent, standalone city agency in 2017, and the breadth and impact of its activities provide a useful example of the potential of municipal labor agencies.

Staffing: As of February 2022, the office had 34 FTEs and one full-time temporary position. These position include a director, deputy director, communications manager, seven outreach positions, four policy-focused positions, three operations and finance positions, and eighteen enforcement officials.

Ordinances: The office enforces 18 city laws. These include laws of broad application (paid sick and safe time, fair chance employment, wage theft, and commuter benefits ordinances); laws targeting specific industries (secure scheduling ordinance for retail and food services workers, as well as ordinances protecting domestic workers, transportation network company drivers, and hotel workers); and laws enacted during the COVID-19 pandemic (paid sick and safe time for gig workers, as well as premium/hazard pay for gig workers/grocery employees) (Seattle OLS 2012, 2013, 2015a, 2015b, 2017, 2020b, 2020d, 2020e, 2020h, 2021a). Finally, on September 1, 2022, the Independent Contractor Protections Ordinance (Seattle OLS 2021b) will take effect; it will require commercial hiring entities to provide certain precontract disclosures and payment disclosures, and also requires timely payment of contracts. See Section 6 for more in-depth discussion.

Enforcement: The office has brought a number of successful enforcement actions, including in fast-food, gig economy, construction, retail, grocery, and other industries. These cases are described in Section 7.

Policymaking: The office has helped develop city labor policy in various ways. The office ran a broad policymaking process to develop two labor standards ordinances for transportation network companies (TNC) drivers, including contracting for a minimum compensation standard study (Reich and Parrott 2020). The office conducted an extensive stakeholder process and drafted the eventual TNC Driver Minimum Compensation Ordinance (Seattle OLS 2020i), which went into effect in 2021 and the TNC Driver Deactivation Rights Ordinance (DRO). The DRO provides drivers protection against unwarranted termination from companies’ platforms, a pathway to resolve deactivation disputes before a neutral arbitrator, and which created a first-in-the-nation Driver Resolution Center to provide consultation and direct representation to drivers facing deactivation, along with culturally relevant outreach and education, and other support. The Office of Labor Standards completed a request for proposal to award an 18-month contract for just more than $5 million to a community organization to get the Driver Resolution Center up and running (Seattle OLS n.d.h).16

In addition, pursuant to a city council resolution and recommendation by the city’s Domestic Workers Standards Board,17 the Office of Labor Standards will be crafting a proposal for portable paid time off for domestic workers.

Pandemic response: The Office of Labor Standards has taken numerous actions in response to the COVID-19 pandemic. In April 2020, following amendment of the city’s Paid Sick and Safe Time Ordinance (PSST) to expand PSST uses in response to COVID-19, the office conducted emergency rulemaking to ease the burden of verification for use of PSST on workers and the health care system. The office provided updated information in more than 11 languages and, with the city’s Department of Neighborhoods, increased access to this information through audio and video recordings, as well as through trainings and town hall meetings. Responding to the increase of domestic violence during the pandemic, the office also partnered on a safe leave training with a local community organization, API Chaya, and the Mayor’s Office on Domestic Violence and Sexual Assault.

The office also assisted in distribution of food vouchers and masks via community-based organizations, including the office’s Community Education and Outreach Fund partners, to workers who experienced structural or institutional barriers to accessing support from government (e.g., language barrier, fear of deportation, experienced domestic violence, did not qualify for other benefits). The community-based organizations enrolled more than 800 workers who had lost their jobs or experienced a decrease in hours or wages due to the pandemic. Each worker received $1,920 in grocery vouchers over a seven-month period.

Finally, along with the mayor’s office and the Office of Immigrant and Refugee Affairs, the Office of Labor Standards worked to increase access to unemployment funds for workers, especially for potentially misclassified gig workers and domestic workers, and also to enhance access to information about unemployment benefits in multiple languages. One effort included contracting with a community organization for three months to provide cultural- and language-specific outreach and referral assistance to transportation network company, taxi, and for-hire vehicle drivers seeking to access COVID-19-related relief resources. The community organization assisted 1,400 workers with their unemployment insurance claims in 12 languages, including Kiswahili, Nuer, Twi, and Hausa. Another effort included partnering with a local civil legal aid organization to provide training on unemployment insurance, and paid sick and safe time.

Several cities have created boards or councils to provide workers with a formal role and/or access to local government

Workers’ boards are bodies established by governments that include worker representation and that typically aim to provide workers with a voice and formal role in setting higher minimum standards for jobs in particular industries. These boards typically investigate challenges facing workers by conducting hearings and outreach activities, issuing reports on findings, and making recommendations regarding minimum wage rates, benefits, and workplace standards. By focusing on workers in specific industries, these boards are able to address industry-specific issues and involve workers and their organizations directly in governance decisions.

Professor Arindrajat Dube, based on his analysis of industry-specific wage boards in Australia, concludes that wage-setting boards “are much better positioned to deliver gains to middle-wage jobs than a single minimum pay standard” (Dube 2018); the local boards described here do not have wage-setting powers, but some may make recommendations. In 2019, the Center for American Progress issued a how-to guide for state and local governments and advocates interested in developing workers’ boards or similar structures (Andrias, Madland, and Wall 2019). The guide’s detailed recommendations include ensuring a broad mandate; requiring representative and democratic selection of members; granting boards authority to gather relevant information through hearings and investigations; granting boards authority to issue recommendations; creation of strong enforcement mechanisms to ensure compliance with new standards; and empowering worker participation in board activities by requiring employers to provide reasonable time to participate and compensating workers for their participation, among other things.

In some states, preemption of local wage or standard-setting limits potential recommendations a board could make that would result in material policy change; however, even then, workers’ boards may be able to impact local government purchasing and contracting policies, workforce development programs, tax abatement and incentive policies, economic development planning and community benefits agreements, distribution of local government funding, and workplace safety trainings. They may also be able to provide independent monitoring of local, state, and federal public health and labor laws, and inclusive economic development planning. Worker boards are a relatively new development, mostly established in the last five years.

The following are examples of several local worker boards or similar structures:

Seattle Domestic Workers Standards Board: In 2019, Seattle passed the Domestic Workers Ordinance, which along with establishing a minimum wage and entitling workers to rest and meal breaks, also created a Domestic Workers Standards Board (Seattle CC 2018). The board, members of which are appointed by the mayor and city council (and one member is appointed by the board itself), requires representation from domestic workers (including workers who are and are no members of worker organizations), employers, and the community (with an emphasis on vulnerable populations like people with disabilities) (Seattle OLS 2018a). The board is empowered to provide recommendations to the city council on workplace safety standards, discrimination and sexual harassment, training for workers and employers, access to leave, wage standards, workers’ compensation, hiring agreements, and other topics, and has been granted funding to implement these recommendations.

Detroit Industry Standards Boards: Detroit passed an ordinance in November 2021 creating a structure for industry standards boards (SEIU Healthcare 2021; Detroit 2021). A standards board in a specific industry can be established under the ordinance by the city council, at the request of the mayor, or by petition of at least 225 workers in a given industry. The standards boards are composed of workers, employer representatives, and other individuals appointed by the mayor and city council. The industry boards are tasked with investigating industry conditions, conducting outreach to workers, making recommendations as to pay, benefits, training opportunities and scheduling, and forwarding complaints to relevant enforcement agencies.

Harris County (Texas) Essential Workers Board: Harris County established an essential workers board in 2021 to advise the county on programs and policies that support essential workers. All members must be “low-income essential workers,” with at least one worker representative from each of the following essential industries: airport or transportation; construction; domestic work or home care; education or child care; grocery, convenience, or drug store; health care or public health; janitorial; food services, hospitality, or leisure services; and retail (Trovall 2021; Harris County 2021). In addition to advising the county on its overall approach to protecting essential workers’ rights and providing a public forum, the board is also tasked with providing feedback on the county’s “purchasing and contracting policies, workforce development programs, tax abatement and incentive policies, community benefits agreements, distribution of federal COVID-19 relief and recovery funds, disaster preparedness and recovery programs, OSHA trainings, independent monitoring of local, state, and federal public health and labor laws, and inclusive economic development planning.”

Durham (North Carolina) Workers’ Rights Commission: In 2019, Durham formed the Workers’ Rights Commission as an advisory body to the city council on working conditions in Durham. Except for a liaison to the city council, all members are workers appointed by the city council and must include workers from the largest employers in Durham, workers in low-wage industries, workers organized in unions, and unorganized workers. The commission aims to provide a public forum for discussion and exploration of workers’ rights, conduct studies, recommend pro-worker policies for the city council’s state legislative agenda, craft a workers’ bill of rights and develop a voluntary recognition program to reward employer compliance, propose standards to encourage all employers within the city to establish a minimum standard, support workers in union campaigns, and provide channels of communication between organized and unorganized workers (Durham WRC n.d.).

Twin Cities’ Workplace Advisory Committees: In 2016, Minneapolis created a Workplace Advisory Committee in connection with passing the city’s safe and sick time ordinance (Minneapolis 2016a). The committee is composed of representatives from organized labor, workers, and employer representatives, among others. The committee is tasked with providing advice on workplace initiatives, recommendations on community engagement, and monitoring and evaluating implementation of workplace policies (Minneapolis 2016a). St. Paul’s Labor Standards Advisory Committee (St. Paul n.d.a) advises and supports the city’s Labor Standards Enforcement and Education Division. The committee includes representatives of employers, employees, and the public, and advises in the development and implementation of policies, procedures, and rules related to the city’s minimum wage and earned sick and safe time ordinances; recommends actions to improve strategic community outreach and education efforts; supports strategic enforcement and strategic outreach; explores and recommends opportunities and resources to help small businesses; assists with community partnerships; and engages business owners, workers, and community stakeholders to gather feedback and recommendations.

Los Angeles County Public Health Councils (LA PHC n.d.): In November 2020, Los Angeles County approved a program establishing public health councils to help ensure that employers follow COVID safety guidelines. Implemented and overseen by the county’s Department of Public Health, the program empowers workers to form public health councils at their worksites to monitor compliance with county health orders in the following industries: food and apparel manufacturing, warehousing and storage, and restaurant (LA County BOS 2020). The Department of Public Health will enlist the help of certified worker organizations to conduct outreach and education to workers interested in forming public health councils.

Localities can serve as model employers in relation to their own workforces

Localities can support working people by creating good working conditions for their own municipal workforces. Nationally, about one-third of state and local employees are paid less than $20 per hour, and more than 15% are paid less than $15 per hour. In 13 states, more than 20% of state and local workers are paid less than $15 per hour (Sawo and Wolfe 2022). Women and Black workers are more likely to be employed by local and state governments, so improving working conditions for local government workers advances important equity goals (Cooper and Wolfe 2020).

A significant portion of local government employees are union members (40.2% in 2021) (BLS 2022); high unionization rates among law enforcement and teachers contribute to these numbers. Working conditions for these employees are established through collective bargaining agreements with the locality. Working conditions of nonunionized municipal workers are governed by applicable federal, state, and local laws, as well as municipal policy.

Localities can support workers by raising labor standards for their own employees regardless of union membership. They can also take steps to allow and facilitate collective bargaining by their employees.

Limited public funds can lead to concerns about the cost of supporting municipal workers in light of other pressing public funding needs. However, in addition to improving municipal job quality as a matter of values and commitment to working people, localities themselves can benefit from doing so. High-road job offerings can help attract better-qualified workers to local government and reduce turnover, both of which enable local governments to provide higher-quality public services, as well as avoiding the cost associated with employee turnover. Municipal employers are often the largest employers in many regions (Hain and Coffin 2020), and thus improved standards for municipal workers can also lead to additional benefits, like public health gains when paid sick leave prevents spread of illness, and stabilizing and stimulating the local economy in times of stagnation or recession. By exemplifying practices of a model employer, local governments also can play a leadership role for private and nonprofit employers, helping create local norms that lift local working standards generally. And collective bargaining in particular can help reduce racial and gender pay gaps, attract workers to local government, and create high-quality jobs (Morrissey and Sherer 2022).

Local governments can also support municipal workers by limiting and resisting privatization, defined as the shifting of governmental functions and responsibilities to the private sector through such activities as contracting out (Local Progress 2019). Privatization of local government functions has proliferated in the recent past, affecting services and infrastructure like water treatment, trash collection, and toll collection (Early 2021; Dutzik, Imus, and Baxandall 2009). Privatization not only denies opportunities to municipal workers who are more likely to be unionized and to have higher job standards, it also undermines democratic accountability. Moreover, projected cost savings from privatization often do not materialize, and service quality often declines under private provision (PWF n.d.b).18

Localities have raised labor standards for municipal employees

A number of localities have raised the minimum wage paid to their own municipal workforce; recent examples include Atlanta; Jersey City, New Jersey; Milwaukee; New Orleans; North Miami Beach, Florida; Tallahassee, Florida; and West New York, New Jersey (Noble 2021; Fox 2021a, 2021b; Atlanta 2017; Miami Times Staff 2021). More than 100 localities have passed paid family or parental leave policies for their municipal employees (NPWF 2020). Many local governments extended emergency paid sick leave to their municipal workers during the pandemic, and some front-loaded the annual sick leave allotment for all employees (Hain, Yadavalli, and Wagner 2020). The city of Austin distributed stipends to some city workers who continued to provide in-person services during the COVID-19 pandemic (Newberry 2020).

Localities can enable and support collective bargaining and union organizing by municipal workers

Localities also can enable or facilitate collective bargaining and unionizing among their municipal workforce. Public employee unions can be stable bargaining partners to local governments, promote labor peace, and ensure the delivery of high-quality services.19 In addition, unions reduce inequality as well as race and gender disparities (EPI 2021; Bivens et al. 2017) and boost democratic participation (McElwee 2015).

Whether or not local government workers can form and join unions varies by state and by the type of municipal worker. Many state statutes expressly authorize collective bargaining by teachers, police officers, and firefighters (Sanes and Schmitt 2014). In some states, local governments are permitted to collectively bargain with all municipal workers (Monroe 2018; Vermont 1973).20 In some states, local governments are prohibited from doing so.21 In states where collective bargaining for local employees is neither guaranteed nor prohibited by state law, localities can facilitate unionizing and collective bargaining by their own workforces by passing local ordinances permitting collective bargaining. Two states where there has been heightened attention to this issue in recent years are Virginia and Colorado. In Virginia, the General Assembly in 2020 passed a law lifting a previous ban, thereby allowing localities to recognize and collectively bargain with unions by passing an ordinance. A number of Virginia localities have since passed collective bargaining ordinances, including the city of Alexandria, Arlington County, Fairfax County, Loudoun County, and the Richmond School Board (Alexandria Magazine Living Staff 2021; Armus 2021; Olivo 2021; Loudoun 2021; Hunter 2021). In 2022, the Colorado state legislature passed a bill granting public employees the right to collectively bargain; previously localities could decide whether to grant such rights, and out of approximately 270 localities in the state, only 16 had collectively bargained contracts with any of their workers (Colorado General Assembly 2022; Miller 2022; Vo 2022; Kenny 2021). For example, Adams County, Colorado, had passed a resolution in 2017 authorizing collective bargaining for county employees.22 In states such as Colorado and Virginia, localities can explicitly grant their municipal workforce the right to collectively bargain. Cities like Louisville, Kentucky, Memphis, Tennessee, Salt Lake City, Utah, and Tulsa, Oklahoma, have recognized and entered into collective bargaining agreements with municipal unions (Louisville HR n.d.; AFSCME 1733 2021; SLC HR n.d.; Tulsa HR n.d.).

In addition, localities can emulate legislative measures taken by certain states to facilitate public employee union access to government workers in response to the Supreme Court’s decision in Janus v. American Federation of State, County, and Municipal Employees, Council 31, et al. That case held that requiring public employees to pay union fair share agency fees to cover the costs of collective bargaining violates the First Amendment (McNicholas 2018).23 The decision bars unions from requiring workers who benefit from union representation to pay their fair share of that representation, thereby reducing public employee union resources and potentially their stability. In the wake of the Janus decision, a number of states, including California, Massachusetts, New Jersey, Washington, and several others, passed measures to reduce barriers to public-sector unionization, such as by requiring public employers to allow public employee unions access to new employee orientations, and to provide public employee unions with lists of new and current employees with contact information (NCSL 2019).

Finally, the 2022 Report of the White House Task Force on Worker Organizing and Empowerment (Harris and Walsh 2022) contains a number of recommendations for the federal government to increase unionization rates among federal employees. While some of the measures contained in the report would potentially be preempted by the National Labor Relations Act, many of them could be adopted readily by local governments, such as:

• facilitating exposure to unions during the hiring process for job applicants and onboarding process for new employees, including listing information about whether a position is in a bargaining unit and the relevant union in job opportunity announcements, and encouraging agencies to offer their unions more opportunities to communicate with new hires during onboarding
• developing guidance and labor relations materials for agencies to use in trainings for managers and supervisors regarding unfair labor practices and neutrality in union organizing campaigns
• increasing and visibly supporting workers’ right to organize, including a know-your-rights initiative on the right to organize and collectively bargain

The report contains extensive analysis and practical suggestions about ways to encourage and facilitate collective bargaining.

Localities have enacted worker protection laws on a range of topics

Local governments typically have some authority to initiate legislation, subject to their authority under the relevant state constitution, state statutes, and city charters. In recent years, local governments have increasingly used this power to pass laws to advance workers’ rights.24

Laws setting higher minimum wages

In recent years, localities have often led the nation in policymaking to raise workers’ wages. The Fight for 15 campaign and other worker advocates and organizations have played a key role in seeking increased local minimum wage floors, which has paved the way for more innovative policymaking to advance workers’ rights by local governments (Meyerson 2019).25 Local wage and hour laws exist in a statutory landscape, including the federal Fair Labor Standards Act (FLSA), which establishes a federal minimum wage, overtime pay, record-keeping, and youth employment standards, and state laws that similarly establish their own state-level minimum wage and hour standards. The FLSA, and in some cases state law, acts as a floor, permitting local governments to provide more generous protections for workers. Some states, however, preempt local governments from setting higher local requirements, as discussed in further detail below (EPI 2019).

Currently, 52 cities and counties have local minimum wage laws that raise the minimum wage above the level established by state and federal governments (UC Berkeley Labor Center 2022; Lathrop 2021).26 Local minimum wages aim to keep workers out of poverty and to increase consumer purchasing power to spur economic growth. Such wages sometimes are enacted in metropolitan areas where the costs of living are higher relative to the rest of the state or region. Local minimum wages may vary in terms of wage levels, implementation timelines, and exemptions (for example, based on the size or classification of an employer, such as employers with more than 25 employees or nonprofits). Since 2012, local minimum wage increases have affected more than 4 million workers, more than half of whom are workers of color, and generated more than $33 billion in additional income for these workers each year (Lathrop, Lester, and Wilson 2021).

One way to increase the wages of many service workers without setting a higher minimum rate is for a locality to disallow the lower minimum wage that is permitted in many states and under federal law for workers who customarily and regularly receive tips (USDOL 2022b). Tipped workers are more likely to be women and people of color, and more likely to be subject to sexual harassment (Schweitzer 2021).27 In 2016, the city of Flagstaff eliminated the tipped minimum wage by referendum (Results for America n.d.). Las Cruces, New Mexico, also has enacted a higher tipped minimum wage than the state.28

In some instances, laws setting local minimum wage rates have focused on particular industries. Seattle’s Domestic Workers Ordinance requires domestic workers be paid at least the city’s minimum wage (Seattle OLS 2018a). At least four California cities—Los Angeles, Oakland, Santa Monica, and West Hollywood—have required a higher minimum wage for their hotel workers (LA DPW n.d.; Oakland n.d.; Santa Monica n.d.; West Hollywood n.d.).29

Laws addressing wage theft

Wage theft occurs when employees do not receive wages to which they are legally entitled for their work, including paying workers less than the minimum wage, not paying overtime premiums to workers who work more than 40 hours a week, or asking employees to work “off the clock” before or after their shifts. Cooper and Kroeger (2017) investigated just minimum wage violations, and found that in the 10 most populous states in the country (California, Florida, Georgia, Illinois, Michigan, New York, North Carolina, Ohio, Pennsylvania, and Texas), 17% of eligible low-wage workers reported being paid less than the minimum wage, amounting to 2.4 million workers losing $8 billion annually. Cooper and Kroeger estimate that workers nationwide lose $15 billion annually from minimum wage violations alone. A 2021 study found that more than $3 billion was recovered on behalf of workers by federal and state enforcers and through private litigation (Mangundayao et al. 2021).

In addition to setting up dedicated enforcement agencies and ensuring that these agencies are robustly funded to pursue violations, local governments can pass laws to address the problem of wage theft. For example, Denver passed a wage theft ordinance that classifies wage theft as a criminal misdemeanor and empowers the city attorney’s office to prosecute claims of $2,000 or less and seek restitution (Denver 2021).

In some instances, such measures may be a way for cities preempted from setting minimum wage rates to nonetheless have an impact on wage-related concerns and to protect workers within their jurisdiction from predation and abuse. Numerous localities in Florida have passed ordinances setting up administrative processes that make it easier for workers to file a complaint and recoup stolen wages without retaining a lawyer. In Florida, Miami-Dade County led the way, followed by Alachua County, Broward County, Hillsborough County, Osceola County, Pinellas County, and the city of St. Petersburg (Huizar 2019b). These ordinances set out a procedure for administrative resolution of wage theft claims by first allowing workers with claims of more than $60 in unpaid wages to settle claims with the city’s help. If those claims are not resolved, workers then may proceed to a hearing where the employer may be exposed to additional penalties (Miami-Dade WTP n.d.). An analysis of the Miami-Dade County Wage Theft Program found that between its adoption in 2010 and September 2014, workers recovered $2,039.83 in unpaid wages, on average, an amount researchers found was “well above the average recovered by federal enforcement” (RISEP-FIU 2014).

Finally, more wage theft protections at the city level may be on the horizon. The Austin (Texas) City Council passed a resolution in early 2022 directing the city manager to develop an ordinance on wage theft, with stakeholder input.30 Houston and El Paso, Texas, had previously passed similar resolutions (Ramirez 2022).

Paid sick and safe leave

Presently, 19 cities and counties have laws requiring employers to permit workers to take time to recover from an illness or care for a sick loved one and to be compensated for that time (A Better Balance n.d.b, 2021).31^, 32 Now 14 states and Washington, D.C., also have passed laws requiring paid sick leave (A Better Balance n.d.b), but local governments first led the way. For example, Jersey City, New Jersey, first enacted a paid sick leave ordinance in 2013, followed by 12 additional cities before a statewide law took effect in 2018.33 Research shows that paid sick leave ordinances effectively slow and reduce the spread of contagious illnesses by reducing the likelihood that workers will go to the workplace sick (otherwise referred to as sick presenteeism) (WCEG 2020). Especially for workers in low-wage industries, paid sick leave provides economic security when facing illness. Meanwhile, research has shown that businesses do not find such laws to be particularly burdensome once they are in effect. For example, a study of New York City employers revealed that “[b]y their own account, the vast majority of employers were able to adjust quite easily to the new law, and for most the cost impact was minimal to nonexistent” (Appelbaum and Milkman 2016). Moreover, 86% of the employers surveyed expressed support for the paid sick days law.

Local paid sick leave laws vary—i.e., exemptions for smaller employers, how family and loved ones are defined, the rate at which workers accrue sick time, and when workers start to earn sick time and whether it rolls over. However, many of them were developed with the technical assistance of groups like the nonprofit organization A Better Balance (A Better Balance n.d.a), and therefore have similar features. They generally provide somewhere in the range of 40 to 48 hours of leave annually, and prohibit retaliation against workers for taking leave.

Some of these laws also create a right to “safe leave” for situations in which workers or their family members are victims of domestic violence, stalking, and sexual assault (A Better Balance 2019). Safe leave laws can be used, for example, to obtain a protective order, access social services, or relocate.

Fair scheduling

Eight cities—Chicago; Emeryville, California; New York City; Philadelphia; San Francisco; San Jose, California; SeaTac, Washington; and Seattle—have laws to ensure workers have predictable schedules, more opportunities for existing employees to work, and sufficient periods of rest between shifts (A Better Balance 2022c). This set of policies, which have commonly been referred to as fair workweek or fair scheduling laws, have been championed and implemented because workers, particularly in the service sector, commonly receive their weekly work schedules only a few days in advance, and their scheduled work hours and workdays often change substantially from week to week. Fair workweek laws were first passed at the local level (Fair Workweek Initiative n.d.), paving the way for state-level action; Oregon has now adopted a statewide fair scheduling law.

Research suggests that unstable and unpredictable work scheduling practices undermine workers’ health and well-being and also lead to economic insecurity and income volatility, and that the fair workweek law in Seattle increased not only schedule predictability, but also subjective well-being, sleep quality, and economic security (Harknett, Schneider, and Irwin 2021). Most fair scheduling laws cover specific industries, such as retail or fast-food. They require covered employers to provide an initial estimate of a worker’s schedule upon hiring, advance notice of schedules, and compensation (predictability pay) for employer-initiated schedule changes with less than the requisite notice; workers also typically have the right to decline shifts that do not allow for a requisite period of rest, and the right to request a modified schedule.

In addition, because many workers in the relevant sectors seek additional work hours, fair workweek laws generally require employers to offer additional hours to existing employees before hiring new staff. Such laws also typically include provisions that prohibit employers from retaliating against workers for exercising rights under fair scheduling laws. Fair scheduling laws differ as to which employers are covered (typically limited by size and industry), notice and rest times, the level of predictability pay, and the like. San Francisco’s Family Friendly Workplace Ordinance specifically entitles workers to request a flexible or predictable schedule to assist with caregiving responsibilities, and requires employers to engage in an interactive process with the worker (San Francisco 2013).

Laws governing platform companies in the ‘gig’ economy

Almost all federal and state laws governing the workplace protect employees and not independent contractors. Platform companies in the so-called “gig” economy, in which workers are hired via apps, treat workers as independent contractors instead of as employees, thereby avoiding the obligations of an employer. This practice has led to considerable litigation, including lawsuits by the attorneys general of California and Massachusetts, alleging that such workers are misclassified (Gerstein 2020). Employer misclassification of workers as independent contractors is a longstanding, pervasive problem affecting millions of workers annually (Rhinehart et al. 2021).

New York City and Seattle have both passed ordinances creating various rights and protections for these workers, even as the cities have refrained from determinations about employee status. In 2018, New York City passed legislation34 empowering the relevant regulatory agency, the Taxi and Limousine Commission (TLC), to set minimum pay rates; accordingly, later that year, the TLC issued a rule (NYC TLC 2018) setting a minimum pay standard based on a study it had commissioned (Reich and Parrott 2020). In 2020, Seattle passed a similar ordinance (Seattle OLS 2020i) setting minimum pay for transportation network company drivers. New York City has also passed legislation35 allowing a city agency to set minimum payments for third-party (typically app-based) food delivery and courier providers. A comprehensive proposal to improve pay and transparency about working conditions for such workers was passed in 2022 by the Seattle City Council (Bull 2022, Taylor 2022a).

Seattle also passed a Transportation Network Company (TNC) Driver Deactivation Rights Ordinance (Seattle OLS 2021l), which grants drivers the right to challenge unwarranted deactivations before a neutral arbitrator, and creates a Driver Resolution Center to provide representation for drivers.36

Finally, in 2021, New York City passed a series of policies to protect delivery workers whose precarity was made clear during the COVID-19 pandemic (Figueroa et al. n.d.). An organization of bicycle delivery workers, Los Deliveristas Unidos, played a significant role in advocating for the new law (Los Deliveristas Unidos n.d.; City Staff 2021). The policies include a requirement that restaurants allow delivery workers to use their restrooms as long as they are picking up an order; minimum per-trip payments; transparency for customers and workers about tips (whether the tip goes to workers, in what form, and on what timeline); a prohibition on fees for receiving payment and a requirement that payments are made weekly, including at least one option that does not require a bank account; a prohibition on charging workers for insulated delivery bags; and permission for workers to limit their personal delivery zones (Sugar 2021).

Protections for freelancers or independent contractors

Minneapolis, New York City, and Seattle have passed laws to aid freelancers and independent contractors in securing timely payment for their work. Because such workers are not generally protected by employment law, they often face challenges in securing payment for their work, which is enforced by contract law and therefore typically requires securing legal counsel for any enforcement action (Yang et al. 2020). These local ordinances protecting freelancers require a written contract that includes certain written terms (e.g., pay rate and payment schedule) for a value greater than a minimum amount, require payment within 30 days of completion of the contract, offer protection against retaliation, and set up an administrative enforcement process. In 2022, the New York State legislature passed a state-level Freelance Isn’t Free Act based on New York City’s model (Maher 2022).

Protections against discrimination

Although the focus of this report is labor standards, not discrimination, it is worth noting that local governments have passed laws to expand protections from employment discrimination beyond what is protected under federal and state law. These local laws are typically enforced by local fair employment practices agencies (FEPAs), which are typically separate from agencies that enforce labor laws that regulate workers’ wages, hours, and benefits. For example, at least 330 local governments have passed nondiscrimination ordinances protecting workers from discrimination at work on the basis of sexual orientation, and at least 225 have done so to protect workers from discrimination on the basis of gender identity as well (MAP n.d.; HRC n.d.). Some local ordinances also protect workers from discrimination on the basis of marital or partnership status, family status, immigration status, status as a veteran, credit history, caregiver status, sexual and reproductive health decisions, salary history, weight and height, and status as a victim of domestic violence, stalking, or sex offenses (Vanderbilt 2012; Eidelson 2022; Brown 2002). In addition, federal employment discrimination protections only apply to employers with 15 or more workers, and local ordinances also often cover smaller workplaces (Clampitt n.d.). New York City in 2022 included domestic workers in the law prohibiting workplace discrimination (NYC CHR 2021). In addition, San Francisco in 2017 passed a law requiring employers to provide a reasonable break for a worker desiring to express breast milk for their child and to provide a space for lactation, other than a bathroom, that is shielded from view and intrusion (San Francisco 2017).

Several types of local anti-discrimination laws are described in more detail below.

Fair chance hiring

At least 22 local governments have passed laws requiring private and public employers to consider a candidate’s job qualifications before inquiring about a candidate’s criminal history—commonly referred to as “ban-the-box” or “fair chance” policies (Avery and Lu 2021). They may also prohibit consideration of certain types of past offenses, or require hiring entities to consider evidence of an applicant’s rehabilitation. Even more cities and counties have adopted fair chance hiring for their vendors’ or their own hiring. Fair chance policies vary as to the size of covered employers, when a background check is permitted in the job application and interview process, penalties, and enforcement.

Salary history bans

At least 20 local governments have passed laws prohibiting employers from inquiring about a job applicant’s salary history during the hiring process (HR Dive 2022; AAUW 2022).37 These ordinances seek to remedy systemic pay discrimination against women and people of color by allowing applicants to negotiate a salary based on their qualifications and earning potential, rather than being measured by their previous salary. Some local ordinances apply to private employers operating in the jurisdiction, whereas others apply only to local government hiring processes.

Pay transparency law

In January 2022, New York City became the first city38 to enact a pay transparency law,39 which requires employers to list a minimum and maximum salary for positions located in the city. This type of pay transparency law helps curb pay inequities. The law amends the New York City Human Rights Law (NYCHRL), the city’s ordinance that protects against employment discrimination, and makes any failure to post salary ranges an “unlawful discriminatory practice.” Ithaca, New York also passed a similar pay transparency law in May 2022 that applies to any employer with more than three permanent workers based in Ithaca (Zerez 2022).

Crown Act

Twenty eight municipalities, including New York City, have passed laws prohibiting discrimination based on a worker’s hairstyle or hair texture (NYC CHR 2019). Often known as the Crown Act (NAACP LDEF n.d.), these laws aim to address the impact of natural hair-based discrimination Black workers face in the workplace.

Protections against wrongful termination

Throughout the United States, almost all states have what is known as at-will employment; employers may terminate workers for reasons unrelated to job performance, as long as they are not discriminatory, retaliatory, or otherwise violative of the law. Just cause protections prevent employers from legally firing workers without warning or explanation (Tung, Sonn, and Odessky 2021). Such laws promote economic security and stability for workers and their families; they also protect workers from retaliation for raising concerns about violations of workplace laws.

Both Philadelphia and New York City have adopted ordinances that prohibit employers in certain industries from arbitrarily terminating employees. In Philadelphia, parking workers may only be terminated for just cause (which requires progressive discipline) or a bona fide economic reason (Philadelphia DOL 2021). New York City passed similar legislation applicable to fast-food workers (NYC OM 2021e).40 That legislation was recently upheld in the face of a legal challenge.41

In addition, in the wake of Hurricane Irma in 2017, the Miami-Dade Board of County Commissioners passed an ordinance (Miami-Dade Cty. 2018) prohibiting employers from retaliating or threatening to retaliate against nonessential employees for complying with county evacuation or other county executive orders during a declared state of local emergency.

Worker retention laws

Some localities have passed laws to protect workers’ employment when services are contracted out or when a contract changes hands (see Weil 2014, Weil n.d. on the “fissured workplace”). At least four cities (Hoboken, Newark, New York City, and Philadelphia) have passed laws that generally require successor contractors that operate in those cities to retain employees for at least 90 days, provide written offers of employment, retain employees by seniority, and maintain a preferential hiring list of employees not retained (Keon 2021; Kiefer 2022; Hoboken n.d.b., Jackson Lewis P.C. 2016). These laws differ in the categories of workers that are covered; Philadelphia’s ordinance provides the broadest coverage including security, janitorial, building maintenance, food and beverage, hotel service, and health care services workers (Keon and Sopher 2021). Unlike the policies addressing contractors discussed in Section 8, these ordinances apply to all contractors and subcontractors, not only those contracting with the relevant local government.

Industry-specific protections

Workers in certain industries may be subject to specific harms or be especially vulnerable to violations of the law. As a result, some local governments have passed laws specifically protecting workers in those industries.

Domestic workers

Chicago, Philadelphia, and Seattle have passed laws to provide domestic workers’ rights. In Seattle and Philadelphia, domestic worker bills of rights seek to ensure healthy working hours, sufficient earnings, and protections from sexual harassment and other exploitation. There are 2.2 million domestic workers in the United States—these housekeepers, child care workers, and home care workers are overwhelmingly (91.5%) women and are likely to be people of color, born outside of the United States, and older than other workers (Wolfe et al. 2020). Domestic workers are three times as likely to be living in poverty as other workers, and often are not protected by federal and state labor laws (Wolfe et al. 2020).42 Bill of rights ordinances typically provide domestic workers with meal and rest breaks, paid time off, and protections from sexual harassment and discrimination. Seattle’s law also created a Domestic Workers Standards Board, which provides a forum for employers, domestic workers, worker organizations, and the public to consider, analyze, and make recommendations to the city on other possible legal protections and standards for domestic workers (Seattle OLS 2018a). Chicago and Philadelphia have laws that provide domestic workers with the right to a written contract in English, as well as the language preferred by the worker (Chicago Dept. BACP 2021b; Philadelphia 2021b; Esposito 2021).

Hotel workers

At least seven cities have passed laws requiring hotels to equip workers with panic buttons, GPS-enabled devices that alert security when activated, and other protections (Hotel Tech Report 2022; Oakland OCA 2019). Entering a hotel room occupied by a visitor often places workers at risk of sexual harassment and assault, and data show that women in the hospitality and restaurant industries have the highest rates of sexual harassment on the job (Campbell 2019). In addition to requiring panic buttons, local ordinances typically require notice in each hotel room indicating that workers are equipped with panic buttons, and, in some cases, require hotel employers to develop and comply with a sexual harassment policy, take safeguarding steps after receiving an allegation of harassment, and prohibit retaliation for reporting sexual harassment or assault (UNITE HERE Local 1 2022; West Hollywood CC 2021). At least five cities have also passed laws regulating workloads, including regulation of hours and amount of work denoted in maximum square footage cleaned in a day (Stokes and Sarchet 2018; Santa Monica 2019; Sarchet 2021; Wagner 2020; Seattle OLS 2020f; Emeryville 2022). A few localities require additional payments from employers to increase health care access, and preferential hiring to retain workers when hotel ownership changes (Wagner 2020; Sarchet 2021; Santa Monica 2019).

Fast-food workers

New York City in 2017 passed a law, which is no longer in effect, requiring fast-food employers, upon authorization by an employee, to deduct voluntary contributions from workers’ paychecks and remit them to a nonprofit organization (not a labor union) designated by the employee (NYC n.d.c).43 The voluntary contributions were intended to enable and facilitate such workers having support and assistance from an organization advocating on their behalf, addressing work-related issues and other matters affecting working people.

Grocery workers

Los Angeles, New York City, and San Francisco have grocery worker retention policies that require new grocery store owners to retain employees of the previous owner for a 90-day transitional period after a change in ownership of the grocery store (NYC OLPS n.d.a; PWF n.d.e).44 The ordinances also establish a review process through which workers will be considered for continued employment.

Car wash workers

New York City’s car wash accountability law requires car washes to obtain a license to operate (NYC DCWP n.d.a). In addition to a license application, car washes must provide proof of workers’ compensation insurance, proof of disability benefits insurance, proof of commercial general liability insurance, and proof of unemployment insurance. Notably, car washes must also post a surety bond (also known as a wage bond) to cover potential wage claims as a condition of doing business.

Adult entertainment workers

Minneapolis in 2019 passed an ordinance requiring adult businesses to give workers copies of their contracts, post rules for customer conduct and workers’ rights, and prohibit retaliation against workers who report violations (Otárola 2019). Under the law, managers and owners are also prohibited from taking tips from workers, and workers will be provided security escorts when leaving after a shift. The ordinance also requires businesses to follow standard cleaning procedures, clear tripping hazards, and install security cameras to monitor all areas where entertainers interact with customers.

Wage standards and other requirements for local contractors or license/permit holders

Many localities have placed requirements on their contractors, including prevailing wage laws, living wage laws, and responsible bidder rules. In addition, some localities have created requirements for license or permit holders, in relation to compliance with labor laws or disclosure of past violations. Section 7 contains a detailed discussion of local laws affecting government contractors, and those affecting license and permit applicants and holders.

Higher labor standards for airport workers

Airports throughout the country are owned and operated by public entities—local and state governments, and regional entities composed of such governments (NASEM 2017).45 These public entities have required minimum wages for contractors and vendors at airports as a condition of being permitted to operate there. Many airport workers are low-paid; research has shown declining or stagnant wages, and poor working conditions (Sainato 2018; Editorial Board NYT 2018; Houston n.d.; Dietz, Hall, and Jacobs 2013). The Service Employees International Union (SEIU) has catalyzed airport-driven wage increases as a way to improve the working conditions of poorly paid janitorial, catering, food service, and other workers in airport facilities.

In places where local governments have authority to regulate the airport, many localities have exercised this authority to require all airport contractors to pay a higher minimum wage than the wage broadly required within the surrounding jurisdiction. Counties that have taken such action include Broward County (Fort Lauderdale, Florida) and Miami-Dade County, Florida (Miami-Dade Cty. n.d.a, n.d.b; Broward 2021). Cities taking similar action include Chicago, Denver, Houston, Los Angeles, Oakland, Philadelphia, Portland, Oregon, St. Louis, San Francisco, and San Jose, California (Spielman 2022; SEIU 2019; Houston n.d.; LAWA n.d.; Philadelphia CC 2021b; Holton 2021; Philadelphia CC 2021a; Port of Portland 2020; Port of Oakland 2001, 2021; STL Air Portal n.d.; SF OLSE n.d.d; Aitken 2021). In some instances, additional labor standards are required of airport contractors; for example, San Francisco also applied its health care ordinance to airport workers (San Francisco 2020), and the city of Los Angeles includes a worker retention provision (LAWA n.d.).

Some localities like Miami-Dade County, Philadelphia, and San Francisco, require certain contractors operating at the airport to enter into labor peace agreements with labor unions (LAWA n.d.).46 A labor peace agreement generally requires the employer and union to waive certain rights under federal law with respect to union organizing (for example, neutrality and nonopposition to the union on the employer side and a promise not to strike, picket, or disrupt the employer’s operations on the union side) to ensure uninterrupted workflow or, in the case of government, uninterrupted delivery of public services. In addition, the city of SeaTac, Washington, does not contain Seattle’s airport, but largely surrounds the airport; it passed an ordinance setting minimum employment standards for hospitality and transportation industry employers that requires higher wages for hotels and other businesses in the airport’s immediate vicinity (SeaTac n.d.).

Protecting workers and public health during the COVID-19 pandemic

Local governments have played a crucial role in protecting public health and worker safety during the COVID-19 pandemic. Especially given the failure of the federal government to take actions to protect worker safety in the beginning of the pandemic—and then subsequent action by the U.S. Supreme Court preventing the federal government from implementing a vaccine-or-test standard for workplaces—local and state governments have had to take emergency action to protect workers and public health (Rosenberg 2021; Totenberg 2022). Given that COVID-19 spreads through airborne transmission of respiratory droplets from infected people, protecting workers from contracting and spreading COVID-19 also plays an important role in protecting overall community public health and safety. Moreover, because of racial health disparities and the overrepresentation of people of color as essential workers, Black and Latino workers have been and remain at higher risk of contracting and developing serious complications from COVID-19 (UIC SPH 2021).

Local governments have used myriad authorities and programs to address the challenges facing workers during the pandemic, including emergency authorities often pegged to the duration of a local public health emergency order.47 Local governments—most typically by mayoral executive order—have used these emergency authorities to issue stay-at-home orders, as well as masking, testing, quarantine, and vaccination requirements (Foster n.d.; Kim and Romero 2021). For example, in December 2021, New York City’s mayor issued an order requiring all workers who perform in-person work or who interact with the public to be vaccinated (NYC DOH n.d.). These orders were typically enforced by local public health departments which, in some places, have taken complaints from workers and taken enforcement actions to stop workplace spread. Although these local public health measures are not always tied to the workplace, they are crucial to worker health and safety by ensuring that workers can stay home when necessary and reducing the likelihood of unmasked interactions.

In addition to the specific policies and programs intended to protect workers and public health during the pandemic outlined below, local governments also have established worker boards to hear from workers affected by the pandemic;48 mounted public education campaigns to inform workers, employers, and patrons about COVID safety at work (SAW LA n.d.); provided personal protective equipment (PPE) to employers for distribution to workers (St. Louis 2020); and set up funds for undocumented workers who were excluded from unemployment insurance and other federal funding (MF Phila. n.d.).

Paid sick leave: Modifications, enforcement, and emergency policies

As discussed above, 19 local governments have permanent paid sick leave laws. At least 16 local governments have made clear that paid sick leave may be used when their workplace or their child’s school or child care facility is closed due to a public health emergency (A Better Balance 2020, 2022b).49 Philadelphia, San Francisco, and Seattle temporarily limited employers from requiring a doctor’s note for employees to take sick leave (Philadelphia OMD 2020; SF OLSE 2020; Seattle OLS 2020g).

In addition to clarification and enforcement of permanent paid sick leave policies, local governments have also enacted emergency paid sick leave policies to supplement or extend federal emergency protections.50 For a period, the federal Families First Coronavirus Response Act required employers with fewer than 500 employees to provide workers with paid sick leave or expanded family and medical leave for reasons related to COVID-19, including the need to quarantine, care for an individual in quarantine, or care for a child whose care or schooling has been disrupted by the pandemic. Several local governments have passed paid sick leave legislation that supplements federal protections, for example by applying to employers with more than 500 workers, adding eligibility by permitting workers to take paid leave because they are older than 65 or are particularly vulnerable to COVID-19, and expressly permitting workers to take leave for vaccination-related illness (A Better Balance 2020). Local governments like Burlington, Vermont; Flemington, New Jersey; Shelby County, Tennessee; and Wilmington, North Carolina, enacted such emergency paid sick leave policies for their local government employees (A Better Balance 2020). Philadelphia51 and Seattle52 have passed emergency paid sick leave policies that extend to food delivery and transportation gig workers. Los Angeles County passed legislation requiring employers to provide additional paid leave for vaccination and recovery for workers who had exhausted their paid leave (LA County LED 2021).

Protection against retaliation in connection with workplace safety

Los Angeles County and Philadelphia passed ordinances prohibiting employer retaliation against workers in connection with workplace safety and compliance with COVID-19 public health orders. Los Angeles County’s law prohibits any adverse action by an employer against a worker for blowing the whistle on noncompliance with public health orders; discussing any perceived noncompliance with the county, other employees, or members of a public health council; belonging to a public health council; or informing employees of their rights under this ordinance (LA LED 2020; LA County n.d.). Notably, Los Angeles County’s law does not sunset. Philadelphia’s law53 prohibits employers from taking any adverse action against a worker for refusing to work in unsafe conditions if the worker reasonably believes the employer is operating in violation of a public health order and has notified the employer. An anti-retaliation law passed in Chicago (Chicago Dept. BACP 2022) protects against retaliation in relation to compliance with COVID-19 public health orders.

Hazard and premium pay

More than two dozen local governments in California and in the Seattle metropolitan area passed laws mandating hourly hazard pay bonuses of typically $4 or $5 per hour for grocery store workers (Egan et al. 2021; King 5 Staff 2021). Some laws also cover drugstore employers and vary as to the size of the employer covered (Kinder and Stateler 2021). Seattle also passed an ordinance providing food delivery gig workers premium pay on a per pick-up and drop-off basis (Seattle OLS 2020c).

Right to recall

At least 18 cities (Fair Hotel 2021) have passed laws—commonly referred to as “right to recall” or “right to return” laws—to protect workers in certain affected industries that were laid off during the pandemic. In particular, the leisure and hospitality sector accounts for 39% of total jobs lost due to the pandemic, which disproportionately affected workers of color (Huang 2021). These laws require employers to offer positions that become available first to qualified laid-off workers, typically in order of seniority. The laws vary as to which employers are covered (hospitality, event centers, commercial real estate), and whether laid-off workers can become qualified for the position with the same training that would be provided to a new employee hired into that position, enforcement, and notice. Detroit also passed a resolution in support of the right of recall, but is preempted by the state of Michigan from enacting an ordinance to that effect (DeVito 2021). Five cities have also applied this right to recall to changes in ownership of the employer (Fair Hotel 2021).

Severance

Shortly after emergency federal unemployment insurance relief in response to the COVID-19 pandemic expired, New York City passed a severance law requiring hotels with at least 100 rooms to pay a weekly severance of $500 per employee per week to laid off-employees for up to 30 weeks until the hotel has recalled 25% or more of its employees or reopened to the public (Moss 2022).

Vaccination

In addition to providing emergency paid sick leave for vaccination and recovery, local governments also have partnered with worker organizations to promote vaccination. Philadelphia partnered with the National Domestic Workers Alliance to transport workers to vaccine sites, where city officials addressed concerns by providing information about paid sick leave laws. Houston partnered with SEIU to deliver vaccines to janitors (Gerstein and Salas 2021).

Discrimination

San Francisco ​​enacted an ordinance prohibiting employers from discrimination based on exposure to or having tested positive for COVID-19 (SF OLSE n.d.b). Employers are prohibited from taking any adverse action (i.e., firing, threatening to fire, suspending, disciplining, rescinding an offer) against a worker because the worker tested positive for COVID-19 or is isolating or quarantining due to COVID-19 symptoms or exposure.

Federal and state preemption should be considered but still permit considerable action on workers’ rights matters

Preemption occurs when a higher level of government (for example, the federal or state government) restricts or withdraws the authority of a lower level of government (such as a city council) to act on a particular issue. While a detailed discussion of preemption is beyond the scope of this report, it is important for local governments to consider potential preemption by federal or state law.

Federal preemption

An analysis of federal preemption starts with the question of congressional intent: Did Congress intend to displace state or local law? Federal preemption limits some possibility for local action on workers’ rights, but still leaves significant room for legislation, enforcement, contracting consequences, and other local innovation. Some relevant federal laws and points to consider are as follows:

• The National Labor Relations Act (NLRA) guarantees and regulates the right of private-sector workers to organize into unions, bargain collectively, and take collective action to improve their working conditions. NLRA preemption is quite broad, and for workers covered by the NLRA, local and state governments are preempted from regulating workers’ rights to form and join labor unions or to bargain collectively with their employers, employer speech about unionization, and bargaining rules and obligations (Sachs 2011). Notable exceptions are when a state exercises traditional police powers; also when a state or local government acts as a “market participant,” it enjoys the same freedom to structure its labor policies as a private party and is not limited by NLRA preemption. Thus, local governments can require contracts to honor prehire agreements, for example.57 Moreover, local governments are free to enact labor laws that otherwise would be preempted by the NLRA for workers who are not covered by the law (i.e., farmworkers and domestic workers).
• The Occupational Safety and Health Act (OSH Act) regulates workplace safety nationally. It only preempts local and state action when there is a standard set by the Occupational Safety and Health Administration (OSHA) addressing a particular and specific workplace hazard (Flanagan, Gerstein, and Smith 2020). However, even if there is an OSHA standard, a local law, regulation, order, or government action will not be preempted if it protects the general public; to wit, laws of “general applicability (such as laws regarding traffic safety or fire safety) that do not conflict with OSHA standards and that regulate the conduct of workers and non-workers alike would generally not be pre-empted.”58 For example, a New York City building code provision regulating cranes was found not to be preempted because it protected not only workers, but also the “safety of the general public in the vicinity.”59 In addition, 21 states and Puerto Rico have become OSHA-approved “state plans” (USDOL OSHA n.d.) that regulate private-sector workplace safety and health themselves; they are subject to OSHA oversight and their provisions must be as protective of workers as OSHA standards and regulations (USDOL OSHA n.d.).60 In such states, federal OSHA preemption would not apply.
• There is no preemption of local standards that are more protective of workers under the Fair Labor Standards Act (FLSA), which sets the floor for minimum wage, overtime pay, record-keeping, and youth employment standards nationwide.61 In other words, the FLSA does not preempt higher minimum wages at the state and local levels.
• As a general matter, exercise of traditional police powers (civil or criminal) does not lead to preemption concerns. Longstanding principle in preemption cases requires courts to “start with the assumption that the historic police powers of the states are not to be superseded…unless that was the clear and manifest purpose of Congress.”62 For example, criminal prosecutions of employers, or civil tort lawsuits, for conduct that would also give rise to occupational safety and health violations generally would not be preempted (Flanagan, Gerstein, and Smith 2020).

State preemption

Local policymaking to advance and expand and protect workers’ rights, as well as other progressive causes, is substantially hindered by the emergence of state preemption used in a punitive manner (Briffault 2018).63 In particular, conservative state legislatures have increasingly preempted local efforts to increase the minimum wage, guarantee paid sick leave, require fair scheduling, regulate gig employers, and set prevailing wages for municipal contracts (Wolfe et al. 2021). For example, at least 26 states have passed preemption laws to prohibit local governments from setting minimum wages higher than the state minimum wage (EPI 2019). The preemption of local policies to support workers’ rights is most common in the South and Midwest, where these laws are part of a long history of efforts to limit the rights and freedoms of Black people (Blair et al. 2020; Wolfe et al. 2021). Even a progressive state like Washington recently moved in this problematic direction when the state legislature passed a bill on transportation network companies (like Uber and Lyft) that preempts any local regulation of the industry.64

An encouraging development in this area occurred in Colorado, when the state in 2019 reversed its prior preemption of local labor standards, providing cities and worker advocates in other states with potential lessons in how to do the same elsewhere (Huizar 2019a).

Even in the face of state and local preemption, there are still opportunities for localities and local government leaders to take action to protect workers: passing legislation that is not preempted; setting high standards in relation to local government employees; conducting extensive know-your-rights outreach and public education about workers’ rights; supporting pro-worker state legislation; conducting research and issuing reports on worker issues; documenting the extent of labor violations; promoting labor compliance by local government contractors, permit-holders, and licensees; and advocating for an end to state-level preemption. In addition, the Local Solutions Support Center and National Employment Law Project have created resources to assist localities in making assessments regarding preemption of desired action (Huizar 2021; LSSC 2020a, 2020b).

Enforcing local worker protection laws

This section provides examples of the enforcement cases brought by local labor agencies in recent years. However, it is important to note that the case descriptions are just a sampling of enforcement work performed at the city level, based on publicly available media coverage and press announcements. Only a few city agencies routinely issue news releases or disclose employer information about their investigations. More could recognize news releases as a tool in their worker protection toolkit, given the documented impact (Johnson 2020) of deterring employer violations by issuing press releases in workplace enforcement.

Some office websites include dashboards, posted annual reports, or other compilations of enforcement work, which should be consulted in conjunction with the below case descriptions, in order to obtain a fuller picture of the work being done. For example, Denver Labor, a division of the Denver Auditor’s office created in 2019, posts restitution stories (Denver n.d.b) on its website, summarizing the office’s enforcement work, including industry of employers, type of work, amount of money recovered, and the number of workers involved, although it does not mention specific employer names. The Seattle Office of Labor Standards has a Resolved Investigations (Seattle OLS n.d.e) section of its website, with detailed information about closed cases, and in 2021 released a press announcement (Seattle OLS 2021h) commemorating the office’s six-year anniversary and detailing accomplishments in that time. In addition, a number of offices post annual or periodic reports that include information not only about enforcement actions, but also about legal developments, outreach and public education activities, regulations issued, and more. (See Section 9 for more detail).

In addition to dedicated labor standards offices, it should be noted that city and county attorneys, who represent local government entities in legal proceedings, have sometimes enforced local worker protection laws. Some city and county attorneys have criminal authority to prosecute misdemeanors, but they typically bring and defend civil suits on behalf of local governments. Many city and county attorneys have the authority to enforce local ordinances to protect workers, although such enforcement is uncommon in many jurisdictions. In some states, they also have the authority to enforce select state laws,65 and they also can bring impact litigation on behalf of local governments (Justice Catalyst et al. 2019). In some cases, city or county attorneys have enforced workplace laws, either independently or in conjunction with municipal labor standards offices or other government entities.66 District attorneys, and in some places county or state’s attorneys, are responsible for criminal enforcement, and are increasingly using those powers to prosecute employer crimes involving serious violations of workers’ rights. In some jurisdictions, they have authority to bring civil cases as well.67 Criminal prosecutors have also been increasingly active in bringing charges against employers to protect workers’ rights (Gerstein 2021). In addition, some local auditors and controllers also enforce workplace laws. For example, in New York City, the comptroller plays a significant role in enforcing prevailing wage and other laws within the city (NYC Comptroller n.d.), and the city controller also enforces Pittsburgh’s prevailing wage ordinance (Pittsburgh 2010). Local departments or agencies that focus on contract enforcement may also enforce worker protections and standards in local governments contracts (LA City BCA n.d.). While enforcement action by these various officials is noteworthy, the cases outlined below generally include those brought by local labor standards agencies.

Examples of enforcement

In the compilation of cases below, where the same employer has committed multiple violations of law, to avoid duplication, cases are listed in one category only.

Paid sick leave

Enforcing paid sick leave laws has been a significant focus for many local agencies, particularly since these laws often exist only at the local level. New York and Seattle have been particularly active in this area. Agencies have obtained restitution for workers, as well as reinstatement in some cases. In some instances, settlements have also included crediting workers with additional paid sick leave in the future. New York City required Starbucks to educate the public about paid sick leave laws through posters in public areas, and Minneapolis required a home health agency to train all managers and staff on the relevant law.

New York City’s Department of Consumer and Worker Protection has enforced paid sick leave laws in multiple industries, with noteworthy cases involving fast-food, home care, and airline industry workers.

• The department conducted multiple investigations of paid sick leave violations involving home health agencies, including a 2021 collaborative case with the New York state attorney general’s office resulting in the recovery of up to $18 million for 12,000 home health aides at two agencies that underpaid workers and did not provide paid sick leave. In 2022, the department also reached settlements involving two domestic workers who had been denied paid sick leave (NYC DCA 2018a; NYC OM 2020a, 2021c; NYC DCWP 2022).
• Fast-food industry cases include a $155,000 settlement with a McDonald’s franchisee in 2019 (also involving fair workweek violations); an ongoing case against Chipotle, in the midst of which the city obtained reinstatement for a worker who had been unlawfully terminated; and a 2019 settlement with Starbucks, jointly with the New York state attorney general’s office, in which the company agreed to create a $150,000 restitution fund for employees whose rights had been violated, and to promote public education about the paid sick and safe leave law by requiring Starbucks to post an educational poster about paid sick leave in public locations in all New York City stores (NYC OM 2019b, 2020c NYC OM 2019c).
• The department in 2019 sued American Airlines for violating the paid sick and safe leave law by assigning disciplinary points and thereby illegally retaliating against workers for taking leave. American Airlines later sued New York City challenging the law. The case was ultimately settled in 2021; the airline agreed to pay workers restitution and to comply with the law going forward. The department in 2021 also settled a case involving a Southwest Airlines ground crew worker who was illegally fired for using sick leave; the resolution required reinstatement and payment of restitution. And in 2020, the department settled a case with an American Airlines contractor that staffed wheelchair attendants, customer service representatives, baggage handlers, and cargo agents; the contractor was required to pay more than $100,000 in restitution, and also to credit workers with additional prospective paid sick leave (NYC DCWP 2019b, NYC OM 2021b, 2021d, 2020b).
• In one case involving a law firm that violated the paid sick leave laws, the department obtained a hearing officer decision requiring payment of $172,000 to the worker (NYC DCWP 2019a).
• The Department of Consumer and Worker Protection settled two cases involving domestic workers who were denied paid sick leave (one was fired for using sick leave and for filing a complaint, ultimately losing their housing as a result) (NYC DCWP 2022).
• New York City’s law also requires paid safe leave to be used by those experiencing domestic violence, human trafficking, stalking, or similar offenses; the office in 2020 obtained a $25,000 settlement in its first paid safe leave case (NYC DCWP 2020b).

The Seattle Office of Labor Standards in 2011 recovered (Seattle OLS 2021i) more than $290,000 from a cleaning company for paid sick leave and other violations, including not paying for all hours worked, paying subminimum wages, and making unauthorized deductions from workers’ pay for training and other costs. In 2021, Seattle’s Office of Labor Standards resolved a paid sick and safe leave (Seattle OLS 2021c) involving Compass, a multinational food service company with hundreds of thousands of employees worldwide.

The Labor Standards Enforcement Division of the Minneapolis Department of Civil Rights has brought a number of paid sick leave enforcement cases, including against the national sandwich shop Jimmy John’s (Mahamud 2021) and a local gas station (Minneapolis 2018), as well as a home care business (Du 2021). In that last settlement, the division required the employer to train managers and staff on the relevant law, and to credit all workers with 80 hours of sick leave.

Chicago’s Office of Labor Standards in 2021 reached (Chicago OM 2021) paid sick leave settlements (Channick 2021) with a Burger King franchisee, recovering more than $458,000 in restitution for workers plus $100,000 in city fines, and with global snack food company Mondelēz Global LLC, recovering $476,000 in restitution for workers plus $95,000 in fines.

Wage theft

Some city agencies have authority to enforce municipal minimum wage or other wage-related laws. Wage theft68 cases brought by city enforcement agencies include the following.

Seattle’s Office of Labor Standards has been a national leader in enforcement activities in this area. Cases include:

• a $2 million settlement with a Domino’s franchisee in 2022 based on the employer paying workers below the city’s minimum wage and failing to pay overtime when employees’ work at multiple locations led to workweeks in excess of 40 hours; the case also involved fair scheduling violations (Seattle OLS 2022a)
• a 2022 settlement for more than $250,000 with a national traffic control company that paid below the city’s minimum wage, among other things (Seattle OLS 2022b)
• a finding in 2021 that construction contractors and subcontractors were jointly and individually liable for $2 million in underpayment based on a host of violations, including unauthorized deductions from workers’ paychecks, subminimum wages, uncompensated work time, nonpayment of overtime, and failing to provide paid sick and safe time (Seattle OLS 2021g)
• a 2021 settlement for more than $290,000 with a cleaning company for minimum wage paid sick and safe time violations, and retaliating against workers (Seattle OLS 2021i)
• a 2019 settlement for $182,000 with two Hyatt hotels that were paying a lower minimum wage for small employers instead of the applicable higher wage, and a $686,000 settlement, also in 2019, with a staffing company based on similar violations; the office also reached a $120,000 settlement for underpaid home care providers (Seattle OLS 2019d, 2019c, 2019b)
• after finding wage theft and other violations by two painting contractors, the office provided trainings in 2018 to the industry trade association
• the office also recovered more than $40,000 on behalf of workers with disabilities after the city eliminated a previously existing subminimum wage for such workers
• in one 2018 case involving a restaurant that had retained workers’ tips and failed to provide paid sick time, the employer apologized to employees (Seattle OLS 2018c, 2018d, 2018b)

Other local enforcement actions include a 2018 settlement (Minneapolis 2018) for $20,000 with McDonald’s by the Labor Standards Enforcement Division of the Minneapolis Department of Civil Rights, and a 2021 lawsuit (Chicago Dept. BACP 2021c) by the city of Chicago against DoorDash that focused on other legal issues, but also contained allegations that the company illegally retained workers’ tips.

In addition, Denver Labor reported (Denver OA 2021a) multiple successful enforcement actions in 2021 involving cases under the city’s minimum wage law, contractor minimum wage law, and prevailing wage law. Minimum wage cases included investigations involving a local restaurant, home improvement sales workers, a national retailer, a janitorial company, a fast-food chain, and a hair salon; sample prevailing wage cases involved a custodial contractor at the Denver Zoo, a crane contractor on a federal prevailing wage project, and solar power contractors at Denver International Airport.

COVID-19 pandemic-related enforcement

Seattle’s Office of Labor Standards has brought several actions enforcing the city’s gig worker paid sick and safe time law passed in June 2020. These enforcement actions have resulted in a $3.4 million settlement with Uber (Seattle OLS 2021d), a nearly $1 million settlement (Seattle OLS 2021e) with Postmates, and a $160,000 settlement (Seattle OLS 2021f) with DoorDash, all in 2021. In addition, the office recovered (Seattle OLS 2021j) more than $330,000 for 101 wine and alcohol shop workers who did not receive hazard pay as required by city law, as well as more than $100,000 (Seattle OLS n.d.g) for workers for the gig delivery company Go Puff. Los Angeles County also took enforcement (LA County CBA 2021b) actions against a number of employers based on pandemic-specific workplace protections, including a grocery store that failed to pay “hero pay” (also known as premium pay during the pandemic), and a construction company that terminated a worker for requesting indoor use of face coverings. Pursuant to New York City’s Grocery Worker Retention Act, the city’s Department of Consumer and Worker Protection filed a case (NYC DCWP 2020c) against a Bronx supermarket in 2020 and resolved it several months later (NYC DCWP 2021a) with payment of restitution and reinstatement of most of the discharged workers.

Protections for gig workers and freelancers

The broader issue of classification of workers for app-based driving and delivery companies generally has been playing out at the federal and state, and not local, level. The issue has emerged, for example, in relation to state laws on wages, workers’ compensation, and unemployment insurance (NELP 2019).69 However, there have been some instances of localities challenging misclassification of such workers as independent contractors rather than as employees. In other cases, several cities have created municipal-level wage, paid sick leave, or other protections that apply broadly, including for so-called gig workers, and have taken action to enforce those municipal laws in relation to app-based companies.

In addition to the COVID-19-related cases brought by Seattle described above, other cases include a civil lawsuit (SF ODA 2021) against the cleaning company Handy filed in 2021 by the district attorneys of Los Angeles and San Francisco, as well as a 2021 letter inquiry (Fox, Marchese, and Shimko 2021) regarding Handy’s potential misclassification, sent by the Seattle and Chicago Offices of Labor Standards and the Philadelphia Office of Worker Protections. Also, in 2021, the San Francisco city attorney, San Francisco Office of Labor Standards and Enforcement (OLSE) and a city supervisor announced (SF OCA 2021) a $5.3 million settlement with DoorDash, the largest in the OLSE’s history, after an investigation into allegations of violations of San Francisco’s paid sick leave law and a separate health care security ordinance (SF OLSE 2022), which creates an employer spending requirement to fund health care benefits (health insurance, dental, or vision coverage) for employees in the city. In 2020, OLSE reached a settlement of nearly $750,000 with grocery delivery company Instacart (Said 2020).

In addition, New York City agencies have taken action to enforce the city’s Freelance Isn’t Free Act (NYC DCWP n.d.e), which gives freelance workers (NYC DCA 2018c) the legal right to written contracts, timely payment, and freedom from retaliation. In late 2021, the New York City Law Department and Department of Consumer and Worker Protection announced (NYC OM 2021f) a lawsuit (NY Supreme Court 2021) against French global fashion media company L’Officiel, based on a pattern of failing to pay freelancers on time or at all, including writers, editors, photographers, videographers, graphic designers, and illustrators. According to DCWP, the agency has received 2,024 complaints from freelancers since the law’s inception in 2017, and has helped freelancers recover more than $2.1 million in owed compensation for their work.

Fair scheduling laws

Several cities have fair scheduling or fair workweek laws, which require employers in certain industries (usually retail and/or fast-food) to provide workers with their schedules with advance notice. These laws ensure that workers can plan for child care, elder care, education, second jobs, and other responsibilities, without having the insecurity of unstable and unpredictable schedules. In some cases, fair workweek laws also require employers to offer current part-time workers additional hours before hiring new employees, thereby increasing opportunities for full-time employment.

Seattle’s Office of Labor Standards has resolved a number of investigations under its secure scheduling ordinance, including recovery (Seattle OLS n.d.f) in 2020 of nearly $2 million from Macy’s in a case involving more than 800 workers, and recovery (Seattle OLS 2020a) that same year of more than $600,000 from Fred Meyer’s supermarkets in a case involving approximately 750 workers. In 2019, Seattle resolved a secure scheduling case (Seattle OLS 2019a) involving two franchises operating nine Jack in the Box locations and employing more than 500 workers.

New York City’s fair workweek law applies only to fast-food employers, and the Department of Consumer and Worker Protection has brought a number of actions. Most notably, in 2021, the department sued (Scheiber 2021) fast-food chain Chipotle for extensive and ongoing violations at several dozen stores, alleging that workers are owed $150 million as a result. The 2021 filing followed a prior case (NYC OM 2019a) in 2019. New York City also enforced its fair workweek law in cases involving McDonald’s and Pizza Hut (NYC OM 2021a) locations, the owner of 30 KFC stores (NYC DCA 2018b), and multiple other fast-food employers (NYC DCWP 2020a).

Philadelphia’s fair workweek law covers service, retail, and hospitality workers. A 2021 case involved the resolution (Reyes 2021a) of allegations of violations by a local Target.

Additional cases: Just cause termination rights, health care, and consumer protection

In addition to the broad categories described above, offices also have brought cases under other laws to protect workers and consumers. For example, in 2021, the New York City Department of Consumer and Worker Protection announced (NYC DCWP 2021b) the resolution of its first investigation of a termination of two Subway workers in violation of a new city law (NYC OM 2021e) protecting fast-food workers from being fired without just cause or for a bona fide economic reason. And in a consumer-related case, the department settled charges against (NYC DCA 2017) a large New York City parking garage company that began charging monthly customers an additional “living wage fee” after an increase in the city’s minimum wage under state law. The San Francisco city attorney has worked with the Office of Labor Standards in bringing cases under the city’s health care security ordinance, including a 2019 lawsuit (SF OCA 2019) against a tour bus company, and recovery in 2014 of $1.34 million from a janitorial company (SF OCA 2014).

Funded strategic enforcement partnerships with worker organizations

Some local labor agencies have explicitly and formally included worker organizations in aspects of the labor law enforcement process, by contracting with community organizations to support community partnerships that conduct public education and outreach, and refer violations to the enforcement agencies. Such relationships are sometimes referred to, most commonly by worker advocates, as “co-enforcement.”

This model has long existed at the federal level: The Occupational Safety and Health Administration (OSHA)’s Susan Harwood Training Grant Program since 1978 has awarded grants to nongovernmental entities, including worker organizations, “to provide training and education programs for employers and workers on the recognition, avoidance, and prevention of safety and health hazards in their workplaces and to inform workers of their rights and employers of their responsibilities” under the Occupational Safety and Health Act.

Several local agencies in more recent years have created similar formal, funded partnerships with worker organizations, including unions, worker centers, and community-based organizations. Some of these organizations played a role in advocating for what is now the longest-standing local program of this type, in San Francisco (Patel and Fisk 2017). The city was a forerunner in creating its community partners program was established under a 2006 amendment to the city’s minimum wage law, requiring the Office of Labor Standards Enforcement to create a community-based education and outreach program focused on workers in particular industries (San Francisco 2011).

The Office of Labor Standards in Seattle has a Community Outreach and Education Fund that grants money to community organizations focused on workers who experience high rates of workplace violations, including women, workers of color, immigrants and refugee workers, LGBTQ workers, workers with disabilities, veterans, and youth workers. The most recent round of grants was announced (Seattle OLS 2021k) in December 2021; nearly $3 million in funding will be provided over two years to nine organizations that will provide outreach, education, and support to low-wage workers. The office also has a Business Outreach and Education Fund (Seattle OLS n.d.a), which provides assistance and outreach to small businesses owned by low-income and historically disenfranchised communities, in order to increase their compliance with city labor laws. For the two-year period starting in January 2021, the fund committed $1.1 million to five organizational grantees. In 2021, the office also granted $50,000 to an organization to provide outreach to domestic employers about their obligations.

In 2021, the Chicago Office of Labor Standards announced (Chicago Dept. BACP 2021a) a $100,000 grant, funded in part by the city and in part by the Chicago Foundation for Women, to the nonprofit Arise Chicago. The funding is for outreach and education on city labor laws, with additional activities focused on domestic workers: providing trilingual trainings in developing contracts, and offering template contracts in Spanish, Polish, and English, among other things.

A Minneapolis ordinance requires the development and implementation of “a multilingual and culturally specific outreach and community engagement program to educate employees and employers about their rights and obligations under this chapter…[with] media, trainings and materials accessible to the diversity of employees and employers in the city.”70 Accordingly, the Office of Labor Standards has devoted $300,000 annually to contracting with community organizations for these purposes. The Centro de Trabajadores Unidos en La Lucha (CTUL)(CTUL n.d.) is a grantee and also helps administer the contract; in 2021, CTUL subcontracted also to Awood (a worker center serving the East African community) (Awood n.d.) and the local chapter of Restaurant Opportunities Centers United (ROC-United n.d.; Walsh 2021).

Finally, the Santa Clara County Office of Labor Standards Enforcement also provides funding for education and outreach to community-based organizations providing services to workers and businesses in Santa Clara County (SC OLSE n.d.e, n.d.b, and n.d.a).

Localities have created labor standard requirements and consequences for their government contractors, and for applicants/holders of licenses and permits

A considerable number of businesses interact with localities not just as regulated entities, but also as government contractors or vendors, or as holders of local government-issued permits or licenses. These relationships present opportunities for localities to improve working conditions or drive compliance with worker protection laws. Local governments may have more ability or leverage to positively affect employer conduct in these situations, when businesses are actively seeking approval, funding,71 or a contract from the government.

In relation to contractors or vendors, localities may wish to ensure their contracting funds family-supporting employment, not low-road, underpaid, precarious jobs. They may wish to ensure contractors do not win contracts through a race to the bottom on working conditions. They may also be aware of the practical benefits of contracting with companies that employ highly skilled unionized workers, where turnover and job disruptions may be reduced and product quality may be higher. Or they may wish to ensure their contractors—even if they are not high-road employers—at the very least do not have a history of violating basic workplace and other laws. This report provides a general overview of some options, but localities wishing to achieve these goals should consult more comprehensive and informative resources on this topic (Walter and Madland 2015; Walter, Rowell, and Wall 2020; IIIFFC 2017).

Before approving license/permit applications or renewals, localities may wish to ensure that applicants and license/permit holders are financially responsible, and that they are at least in compliance with the basic applicable workplace statutes.

In relation to contracts, permits, and licenses, localities also may wish to have laws and operations in place to allow termination of such relationships in the event of established and unremedied violations.

Accordingly, localities have passed laws and taken other actions in relation to their contractors, as well as license and permit holders.

Localities have imposed requirements related to public projects or projects seeing public approvals

Localities have imposed prevailing wage and living wage requirements on contractors, passed responsible bidder ordinances, and used project labor and community benefits agreements

Prevailing wage

Prevailing wage laws require covered government contractors to pay a wage and benefit rate based on similarly employed workers in a given geographic region (ILEPI n.d.a; Mahalia 2008). Sometimes ordinances also will require payment of prevailing wages by entities like developers and owners that receive local subsidies or tax abatements. These laws can help make sure that public funds support good jobs, and that bidders do not win government contracts through race-to-the-bottom labor practices. The federal prevailing wage laws (the Davis-Bacon and Service Contract Acts) cover federally funded construction and service contracts. Roughly half of U.S. states (USDOL 2022a) have prevailing wage laws. A number of localities do as well; for example, New York City requires payment of prevailing wage on city-contracted construction projects, to service workers (such as security guards) working for city contractors, and to service workers in residential projects that receive more than $1 million in city financial assistance with 120 or more residential units (Wall, Walter, and Madland 2020; NYC DHPD n.d.). In early 2022, San Diego County passed the “Working Families Ordinance,” which requires contractors for construction projects on county land working on projects of more than $1 million to use skilled, trained workers and pay prevailing wages. It also requires employers on county-leased land to provide paid sick leave. (Brennan 2022). Local prevailing wage laws more commonly cover construction of “public works,” or public buildings, roads, and structures, but they also may be enacted to cover service contracts with the locality as well (Walter, Rowell, and Wall 2020). Studies have found that prevailing wage laws have an overall positive economic impact, and also that costs savings were not realized in jurisdictions where such laws were repealed (Manzo IV 2018). The Center for American Progress in 2020 published a how-to guide with information for states and localities wishing to enact or expand prevailing wage laws within their jurisdictions (Walter, Rowell, and Wall 2020).

Living wage

Living wage laws require employers who receive contracts, tax benefits, or government subsidies from a locality to pay their workers a higher-than-minimum wage (PWF n.d.d; Bernstein 2002). These policies are meant to cover the cost of living, and the wage rates are often calculated based on ensuring that a family would be raised to or above the poverty threshold. Living wage policies in some cases establish different wage levels for employers who provide health insurance and those who do not. A 2011 compilation by the National Employment Law Project (NELP 2011) reported there were more than 120 localities with living wage requirements at that time.

As an example, Boston’s living wage law, enacted in the late 1990s, has as its purpose “to assure that employees of vendors who contract with the City of Boston to provide services earn an hourly wage that is sufficient for a family of four (4) to live at or above the Federal poverty level. This Chapter is also designed to maximize access for low- and moderate-income Bostonians to the jobs that are created, maintained or subsidized through service contracts with the City of Boston.”73 It covers city vendors and beneficiaries of city financial assistance. The law defines financial assistance broadly (Boston n.d.a),74 and covers any employer with at least 25 employees who has been awarded a service contract or subcontract with the city (Boston n.d.a).75 The law contains employee notice and employer reporting requirements, and a mechanism for enforcement, with potential penalties and remedies including fines, restitution, suspension of ongoing contracts and subcontract payments, and ineligibility for future city contracts for three years or until all penalties and restitution have been fully paid (Boston n.d.b).76 Companies bidding or negotiating on a service contract must complete an affidavit regarding the living wage (Boston 2022) prior to the awarding of the contract.

A major shortcoming of Boston’s law is that its formula for calculating the living wage can result in a relatively low dollar amount (the 2022 living wage is $15.87 per hour (Boston OWD n.d.), compared with the state’s 2022 minimum wage (Massachusetts n.d.b) of $14.25.

By contrast, the County of Santa Clara for 2021–2022 has a living wage set at $25.31 per hour (SC OCE n.d.) for employers who do not provide health or retirement benefits; employers who provide such benefits may pay a lower rate ($23.31 per hour with either health or retirement benefits; $21.31 per hour with both). In addition, Santa Clara County’s living wage requires77 provision of up to 12 paid days off to be used either as paid sick leave for the worker or for that worker to care for a family member or designated person.

Some city living wage laws incorporate other kinds of requirements, such as worker retention policies (PWF n.d.e). Hoboken, New Jersey, recently enacted a living wage ordinance for building service workers that includes both a monetary wage component and paid leave requirements.78 The city also passed an ordinance requiring contractors or subcontractors with a service contract in the city to ensure that when there is a change in employer, the successor employer must retain building service workers for 90 days.79 In 2022, the Newark (New Jersey) City Council passed an ordinance (TAPinto Staff 2022) to protect subcontracted janitors, security officers, and door attendants from losing their jobs for 90 days when a contract changes hands through no fault of workers.

Responsible contractor requirements

Numerous local governments have passed laws requiring contractors bidding for public projects (above a certain value) to meet certain “responsible contractor” criteria (ILEPI n.d.b). A responsible bidder ordinance is a policy that sets minimal requirements for all contractors bidding on publicly funded projects in a given political jurisdiction.

Criteria may include, for example, previous compliance with worker protection laws (i.e., laws prohibiting wage theft, misclassification. etc.), appropriate insurance coverage (i.e., for workers’ compensation), participation in a registered apprenticeship training program, and appropriate professional licenses (ILEPI n.d.b). While such requirements are based in commonsense and noncontroversial approaches, they do diverge from the frequently taken approach of awarding contracts to the lowest bidder based solely on price alone (IIIFFC n.d.d).

The Indiana, Illinois, Iowa Foundation for Fair Contracting has developed a Responsible Bidder Toolkit (IIIFFC 2017) providing guidance to municipalities wishing to pass such measures; the organization also compiled a list of nearly 50 responsible contractor ordinances in municipalities within those three states (IIIFFC n.d.a, IIIFFC n.d.b; IIIFFC n.d.c). Other localities are considering such requirements. New Orleans, for example, passed (New Orleans MO 2021) a responsible contractor ordinance after the collapse of the Hard Rock Hotel, which was under construction; three workers died in the accident. New Orleans also specified that the primary contractor would be responsible for any subcontractor violations.

Seattle’s minimum wage ordinance contains a provision disallowing employers from bidding on city contracts if they are the subject of a final order and have not paid all money owed; if an employer has been the subject of a final order twice or more within five years, the contractor cannot bid on city contracts for two years.80 Most of the city’s other labor ordinances contain similar language.

San Diego’s municipal code requires city contractors, during the term of a contract, to “comply with all applicable local, state, and federal laws, including health and safety, labor and employment, and licensing laws, that affect the employees, the worksite or performance of the contract.”81

Minneapolis bars the city from contracting with entities included on a list of companies with outstanding violations of the city’s wage theft law (Minneapolis n.d.c). The city of Omaha, Nebraska, sets contractor rules for contracts greater than $500,000. These rules include a “bid incentive” for contractors to use apprenticeship training programs (allowing them to be competitive while submitting slightly higher bids), and also require proof of workers’ compensation insurance, proper classification of workers as employees, and disclosure of subcontractors; penalties for noncompliance include withholding by the city of any payments still owed to the contractor, as well as a year of being debarred from bidding on contracts if there are two violations (Omaha n.d.).

Toledo, Ohio, has a municipal code that requires payment of prevailing wages for contracts of $10,000 or more, and prohibits awards of such contracts to bidders who have been convicted or found liable under the city’s wage-related law in the previous two years. For construction projects of more than $100,000, city law sets criteria, including continuity and experience of the workforce, local hiring, whether there is an apprenticeship program, and whether the employer provides benefits (health insurance and retirement or pension plan), as well as the bidder’s record of compliance with tax, wage and hour, and unemployment laws (Toledo n.d.b).

Other cities that disqualify contractors with a history of wage theft and other labor standards violations from winning city contracts include Cincinnati (Hussein and Coolidge 2016); Columbus, Ohio (Columbus n.d.a, n.d.b); Coralville, Iowa (Zaluska 2021); El Paso, Texas; and Houston.

In 2021, New York City amended its law to include a requirement, currently being challenged in litigation, that human services contractors and subcontractors must agree to labor peace agreements as a condition to being able to win or renew a city service contract with city agencies. Among other things, they must file an attestation that the employer has entered into a labor peace agreement with a labor union, or that no union has sought to represent their workers, and if a union seeks to represent their employees during a contract, they must enter a labor peace agreement within a set period of time (NYC n.d.a).82

Local and targeted hiring policies

Local and targeting hiring programs require or incentivize businesses that receive public dollars to hire workers from the local community, or from targeted populations in the community. Local hiring creates hiring preferences for people who live in a specific geographic area, which can be as large as an entire city or county, or as small as specific zip codes or neighborhoods. Targeted hiring refers to hiring preferences based on a range of worker characteristics, such as veteran status, gender, race or ethnicity (where allowed), residency in a low-income neighborhood, having been formerly incarcerated, having a disability, or being long-term unemployed (Gross and PolicyLink 2019). Local and targeted hiring policies can be implemented by ordinance, as part of responsible contractor standards, or negotiated as part of project labor agreements or community benefits agreements (UCLA Labor Center 2014). Baltimore’s local hire law, for example, requires compliance by vendors, contractors, and subcontractors who do business with the city, and is applicable to city-awarded contracts of more than $300,000, and city-subsidized projects of more than $5 million. The law requires businesses and all of their subcontractors to post new jobs with the mayor’s Office of Economic Development exclusively for a period of seven days, that 51% of all new hires are Baltimore residents, and for businesses and subcontractors to submit monthly reports (Baltimore OED n.d.).

Project labor and community benefits agreements

Project labor agreements (PLAs) are used primarily in the construction industry to establish the terms of employment for all workers on a project. Generally, PLAs specify workers’ wages and benefits, and may include provisions requiring contractors to hire workers through union hiring halls, otherwise establish a unionized workforce, or develop procedures for resolving employment disputes. PLA terms often also prevent workers from striking, and employers from locking workers out, during the project (Mangundayao, McNicholas, and Poydock 2022). PLAs can help eliminate costly delays caused by labor conflicts or shortages of skilled workers. While many states have policies that promote PLA use in state-funded projects, some states restrict or disallow them (Brubeck 2018; FC and SLC 2018; Von Wilpert 2017). Local governments such as those in Boston, Los Angeles, and New York City have successfully used PLAs for years; more localities could use PLAs on major projects.

Community benefits agreements are made between developers of a commercial and/or residential project and representatives of community groups where the project is being developed (PWF n.d.a). Communities can stipulate certain requirements for the projects, such as hiring from the local community, or guaranteed financial or social benefit from the project; in return, the developer receives the community’s support for the project (Island Institute 2021). Major development often occurs on city land, receives public funding or tax breaks that can accrue value to the developer, and in almost all cases require land use approvals that require the support of local government officials (PWF and LP 2019). Consequently, local governments are sometimes parties to community benefits agreements directly, may have a separate agreement with developers that is also part of negotiations, or may otherwise leverage their land use or funding powers as a part of these community benefits agreement negotiations.

Some examples of community benefits and labor peace agreements are as follows:

• In 2012, a community coalition and the city of Oakland negotiated a community benefits agreement that included requirements for local and targeted hire, living wages, fair chance hiring, limitations on the use of temporary workers, and community oversight and enforcement (PWF n.d.c).
• In 2018, the city of Nashville supported a community coalition in winning a community benefits agreement that included requirements for local hire, a $15.50/hour minimum wage, mandatory worker safety training for construction workers and supervisors, and workforce development (Porterfield 2021).
• A 2008 community benefits agreement regarding the development of the Bayview-Hunters Point neighborhood of San Francisco included a labor peace agreement in key industries related to the project (PWF n.d.c).
• Pittsburgh also has an ordinance from 1999 that requires hotel contractors and employers to sign labor peace agreements when city financing has been involved in the development of the hotel (Pittsburgh 1999).

Some localities created compliance requirements to obtain, retain, or renew permits or licenses; however, limited enforcement lessens deterrence

The licensing and permitting process can be used to drive improved labor standards and conditions; accordingly, some localities have incorporated labor-related requirements into these processes (Madland and Rowell 2017). This can take the form of requiring disclosures or evidence of compliance as part of the application or renewal process, or imposing potential permitting or licensing consequences in the event of certain established violations.

One caveat regarding the numerous laws that have been passed in this area: lack of media reports suggests very limited exercise of these powers by localities that have passed them. As with any law, the effectiveness of these provisions depends in large part on enforcement. Economists have observed that “employers will not comply with the law if the expected penalties are small either because it is easy to escape detection or because assessed penalties are small” (Ashenfelter and Smith 1979). Licensing and permitting consequences change both parts of the equation—the ease of escaping detection, and the scale of the assessed penalties. In addition, as discussed in Section 9 below, media coverage of these consequences would likely significantly drive deterrence.

Localities face several challenges in operationalizing these requirements. First, there is the need for at least some dedicated staff time on the local level to make the program work. There is also the logistical challenge of ensuring that local licensing or permitting agencies learn about serious violations, which will require proactive outreach and research. In addition, unless they are given very clear direction or mandates from the ordinance and/or from their chain of command, licensing or permitting agencies may be reluctant or resistant to imposing consequences based on workplace violations (even those that are proven and unremedied), seeing these issues as outside of their substantive purview.

There also may be concerns about revocation of a license or permit possibly leaving workers out of jobs. However, licensing and permitting provisions generally provide ample opportunities to cure, as well as a range of consequences—not only the most severe—including a period of temporary suspension for a license or permit, or a probationary period. In addition, the existence of licensing or permitting consequences could permit an agency to reach a negotiated settlement with terms to ensure future compliance, such as requiring an employer to engage an independent monitor. Such negotiated settlements or less punitive measures could in many cases be preferential to revocation.

In addition, it is likely that even one or two well-selected, well-publicized uses of these powers would achieve much of the desired deterrence in a given industry or neighborhood. Further, the limited available examples suggest that these consequences work: as described below, the Santa Clara County Office of Labor Standards Enforcement has operationalized food permit consequences for restaurants with unpaid wage-related determinations from the state labor commissioner. In response, almost all employers involved have paid what they owed in order to avoid further consequences.

In short, this tool appears to be underutilized despite its apparent untapped potential in terms of deterring violations. Localities without these laws might consider passing them, along with required annual reports on activities. Localities with such laws might wish to systematically enforce them through leveraging the license application and renewal process, and through scheduled routine checks with local, state, and federal labor enforcers, and routine searches of court filings.

Sample legislative language

Even without language specifically addressing wage theft or other labor conditions, licensing or permitting laws may contain general language with catch-all provisions that may be used for the purposes of ensuring licensees or permit holders comply with workplace laws. The Minneapolis Code (Minneapolis n.d.d) section on business license holders provides several examples of this:

• It requires license holders to“maintain and operate the business in compliance with all applicable laws and ordinances, including the zoning, fire, environmental health, environmental management, license, food, liquor, housing and building codes” (emphasis added).83 The “all applicable laws and ordinances” provides a basis for taking adverse action against a licensee based on proven violations of wage or other workplace laws.
• It requires license holders to “pay all delinquent court judgments arising out of their business and business operations.”84 This provision could provide a basis for adverse action in a situation where a judgment related to wage, discrimination, or other workplace violations remains unsatisfied.
• Finally, the code states, “The provisions of this section are not exclusive. Adverse license action, inclusive of, but not limited to, revocation, may be based upon good cause at any time upon proper notice and hearing. This section shall not preclude the enforcement of any other provisions of this Code or state and federal laws and regulations.”85 This broad “good cause” language again provides an opening for action based on workplace practices, such as persistent ongoing violations or egregious infractions.

In addition to potential use of this type of general language, some city laws specifically reference working conditions and labor violations in relation to issuance or revocation of permits and licenses.

For example, Philadelphia’s city code allows the city to “deny, suspend, or revoke any license or permit issued or pending” for a period of up to one year if the applicant or licensee was found guilty, liable, or responsible for violating the city’s anti-wage theft ordinance. In addition, all applicants for a commercial or business license must certify that they have not been found guilty, liable, or responsible for violating wage theft laws within the past three years (Philadelphia n.d.b). Similarly, Jersey City, New Jersey’s wage theft prevention law prohibits issuance or renewal of a license or permit to an applicant or entity that has been found liable for wage theft and has not come into compliance within 90 days of any final judgment. It also requires disclosure of wage theft cases within the two years prior to license or permit application, and requires the city to make an annual request to the state labor department for any wage claims (and associated documents) filed against licensees in the past two years (Jersey City n.d.).

Permits

Some localities have used the permitting process to drive labor compliance. Prior to issuance of a permit for construction of a building above a threshold size, the city of Milpitas, California, requires applicants to sign a form (Milpitas n.d.) acknowledging responsibility for complying with certain state and local labor laws. They must also sign a form certifying compliance before a certificate of occupancy will be issued for the project (Milpitas n.d.). For issuance of a special construction permit under the Quincy, Massachusetts, city code, all levels of entities involved in the project (construction manager, lead contractor, contractor, subcontractor, etc.) must comply with wage payment-related laws; if not, the city’s measures to achieve compliance include issuance of a stop-work order until there is compliance.86

Michigan City, Indiana, creates requirements for issuance of building permits for construction projects of more than $250,000, including that in the past three years, the contractor must not have been barred from bidding on public work because of, or been found to have committed, legal violations pertaining to wages, taxes, workers’ compensation, or misclassification. It also requires contractors who receive permits to comply with these laws as well, and requires the property owner applying for a building permit to use their best efforts to require all contractors to comply with these obligations. The law contains serious potential consequences, including suspension of the permit (requiring stoppage of work), or even revocation (Indiana n.d.).

The Better Builder Program in Austin, Texas, uses a carrot instead of a stick. The program, in partnership with the Workers Defense Project (WDP n.d.), provides an innovative example of creating permit-related incentives for employers willing to commit to higher labor standards. In the program, construction companies willing to ensure certain protections for construction workers on commercial projects may receive expedited handling of their permits (Austin n.d., Hasan 2017; Anderson 2017).

Licenses

A number of localities incorporate wage theft and labor compliance into their business licensing laws and practices. For example, the city of Toledo prohibits issuance of a license to any applicant who has found liable or been convicted pursuant to the city’s anti-wage theft laws or any other wage-related provisions of local, state, or federal law within the previous two years.87 The Seattle municipal code empowers the Department of Finance and Administrative Services to deny, refuse to renew, or revoke an employer’s business license, if requested to do so by the Office of Labor Standards as a result of an unsatisfied settlement or order.88

In Boston, a 2017 executive order allows the city’s licensing board to take into consideration whether a licensee has been found to have violated state or federal wage laws in determining whether to reissue, modify, suspend, or revoke a license (Boston MO 2017). A number of localities in Massachusetts have similar provisions. In Northampton, the License Commission has authority over issuance and administration of licenses for a range of types of businesses: service and sale of alcoholic beverages; operation of restaurants, hotels, inns, and lodging houses; indoor and outdoor entertainment for licensed and nonlicensed premises; car dealers; and more. When issuing a new license or a renewal, the License Commission requires completion of a Fair Wage Compliance Certificate (NLC n.d.), attesting that the business is not subject to a judgment or final determination resulting from a violation of state or federal wage protection laws. If they do not certify as such, they may be required to provide a wage bond for the time period covered by the license (Northampton n.d.). The media reported on a case in which this wage bond requirement could potentially be triggered, based on citations issued by the Massachusetts attorney general’s office (Fieldman 2021).

The Santa Clara County (California) Office of Labor Standards Enforcement is an agency that has begun to meaningfully operationalize permitting consequences for violators of labor standards laws. Data from the California Division of Labor Standards Enforcement showed that Santa Clara County workers filed the highest number of wage theft claims in the state: over a nearly five-year period, retail food vendors were found to owe nearly $5 million in back wages, an estimated $2,900 per employee. In addition, worker advocates reported on (Gleeson, Taube, and Noss 2014) the high incidence of wage theft and highlighted potential responses by local government. Accordingly, the county established a food permit enforcement program (SC OLSE n.d.d) to encourage payment of existing judgments by conditioning the issuance, renewal, or retention of food facility permits on compliance with labor standards.

If a retail food vendor is determined to be in violation of a judgment for nonpayment, the county may elect to temporarily suspend or revoke the vendor’s food health permit. The program, which is being rolled out gradually to all zip codes in the county, contains graduated measures to encourage payment of outstanding wages: the county sends three notices (a notice of outstanding judgment, notice to comply, and notice of violation, with 15 days to respond to each), and ultimately, continued nonresponsiveness or noncompliance will lead to a food permit suspension of at least five days (with notice provided to the public regarding the reason for the suspension). The county created a flow chart to explain the process, contained in Figure A. One noteworthy aspect of this process that may increase its likelihood of success and effectiveness is its focus on only one industry (restaurants), and its gradual rollout plan, based on zip codes. This kind of approach—targeting a problem industry and gradual implementation—could readily be replicated elsewhere. The county also added ongoing wage theft violation information to its “SCCDineOut” app, which allows county diners to view restaurants’ food safety records on their smartphones (Ochavillo 2019).

Figure A

Retail food vendors may have food health permit suspended or revoked for noncompliance. In addition, in 2010, the San Francisco Department of Public Health, recognizing the socioeconomic determinants of health and the poor health outcomes resulting from labor violations, incorporated certain labor elements into its restaurant permit review process, including requiring proof of workers’ compensation insurance by all applicants, as well as successfully leveraging the permitting process in relation to unremedied serious labor violations by several employers (Bhatia et al. 2013).

Localities can support workers through exercise of public leadership: education and outreach, issuing reports, holding hearings, and general advocacy

Localities have leveraged their soft powers to support workers’ rights and organizing. Local agencies devoted to protecting workers’ rights have used a range of tools to educate workers about their rights, inform employers about their obligations, and share information with the broader community about issues affecting workers. They have issued reports, conducted extensive public education and outreach, made materials available on their websites, garnered media coverage, and more. Localities without dedicated labor agencies can also use these soft powers to promote public and worker education. Moreover, local elected officials—whether individually or collectively alongside other officials and community labor groups—can use their public platforms and convening authority to provide public education and support workers, including those who are actively forming and joining unions.

Strategic communications, including use of media, is particularly important in educating workers about their rights and deterring violations. Media coverage increases employers’ knowledge about their legal obligations; it also increases their perceptions about the likelihood and cost of detection of violations. A recent study showed that press releases about OSHA enforcement of workplace safety violations deterred other workplace safety violations, an effect likely applicable to other labor standards laws as well (Johnson 2020). In addition, many workers, especially low-wage workers, have limited knowledge about the laws that affect them (Rankin and Lew 2018; Miller and Tankersley 2020). There are numerous communications tools that localities can use to reach the public (Gerstein and Goldman 2020).

Many local labor agencies have issued reports on worker issues or on their activities supporting workers

Several local agencies have issued regular reports on their activities or on the state of workers’ rights within their jurisdiction. Annual reports generally provide a comprehensive overview of an office’s work. In some jurisdictions, such as Chicago, Duluth, and St. Paul, annual reports are required by statute, a beneficial requirement that ensures transparency and continued focus on the labor offices’ work (Chicago n.d.c; Duluth n.d.; St. Paul n.d.c). In other jurisdictions, such as New York and Seattle, there are not annual report requirements per se, but other mandates for regular report-backs; Seattle’s ordinance requires an annual report regarding required funding for the Office of Labor Standards (Seattle n.d.a) (which necessarily requires an accounting of the past year’s activities), and individual laws in New York City have their own specific reporting requirements (NYC n.d.b).

Here’s a look at some local reports:

• The Chicago Office of Labor Standards issued annual reports covering its activities in 2019 (Chicago OLS 2019), 2020 (Chicago OLS 2020), and 2021 (Chicago OLS n.d.).
• The Denver auditor issues an annual report (Denver OA 2021a), and the 2021 version has a section (Denver OA 2021b) on wage-related enforcement.
• The city of Los Angeles issued a milestone report (LA City OWS 2022) in January 2022, detailing its activities and accomplishments since 2016.
• The Minneapolis Labor Standards Enforcement Division has a running dashboard (Minneapolis n.d.a) on its website, with data about the division’s activities, and issues an annual report (Minneapolis 2020).
• St. Paul includes labor enforcement data in the annual report (St. Paul 2020) of the Department of Human Rights and Equal Opportunity.
• The New York City Department of Consumer and Worker Protection has issued annual reports (NYC n.d.d) on the state of workers’ rights since 2017. The department in 2018 issued a report (NYC 2018) specifically on paid care workers.
• The Philadelphia Department of Labor issued annual labor policy and compliance reports (Philadelphia OLS & OWP n.d.) in 2019, 2020, and 2021. In addition, the department issued a report (Cox 2020) in 2020 on the Philadelphia Worker Relief Fund, which provided foundation and city-funded cash assistance to workers excluded from unemployment insurance and pandemic-related stimulus, through distributions via 14 community-based organizations.
• The San Francisco Office of Labor Standards has issued three annual reports (SF OLSE n.d.a).
• The Santa Clara County Office of Labor Standards Enforcement has issued several reports, including an annual report (SC OLSE 2020) in 2020.
• The Seattle Office of Labor Standards has an extremely detailed interactive dashboard (Seattle OLS n.d.b).

Local labor agencies have launched campaigns to educate communities about workers’ rights

Many local labor offices are extremely active in reaching out to the public and educating workers about their rights as workers. The New York City Department of Consumer and Worker Protection has engaged in a number of targeted campaigns, including educating the public about the city’s paid sick leave law when it first took effect, introducing the agency’s new name (NYC 2019c) to include the word “worker,” and reaching out to nail salon workers (NYC 2019b). During the early months of the COVID-19 pandemic, the department set up a hot line (NYC 2020a) for workers with questions about the city’s reopening.

The Minneapolis Labor Standards Enforcement Division held a workshop to help employers plan for a minimum wage increase, (Minneapolis 2018), as well as a workshop on paid sick and safe time for immigrant-owned small businesses (Minneapolis 2017). The Philadelphia Department of Labor has extensive know-your-rights resources on its web page (Philadelphia DOL n.d.), including access to a video (Philadelphia 2021a) about city worker protections during the COVID-19 pandemic.

The Chicago Office of Labor Standards and Denver Labor are both relatively new offices that have taken considerable action to educate the public in their cities. In Chicago, the Department of Business Affairs and Consumer Protection, within which the Office of Labor Standards is located, has its own YouTube channel, and the Office of Labor Standards has posted numerous webinars there on a wide range of labor-related topics (Chicago Dept. BACP n.d.; Chicago n.d.b). The office also created a “Your Home is Someone’s Workplace” campaign focused on domestic workers, and has a web page specifically focused on this workforce, as shown in Figure B (Chicago n.d.a). 

Figure B

The Chicago Office of Labor Standards also engaged in an outreach campaign about a new law giving domestic workers the right to a written contract from their employer (Chicago n.d.a; Chicago Dept. BACP 2021b). Some outreach took place in conjunction with the nonprofit worker organization Arise Chicago, which provided trilingual (English, Spanish, and Polish) sample contracts for employers’ use (Arise Chicago n.d.).

Los Angeles County announced a similar “Your Home is Someone’s Workplace” campaign to educate employers about domestic workers’ rights, and the Philadelphia Labor Department conducted a fair workweek survey in English and Spanish (LA County CBA 2021a; Chewning 2021b, 2021a).

Denver Labor has an extensive outreach and public education function. The office holds “Wages Wednesday” live on Wednesdays on the Denver Labor Facebook page, including programs in English and Spanish (Denver 2022b, n.d.a). The office held nearly 50 live Facebook trainings in 2021, and had bilingual (English and Spanish) staff available to answer questions (Denver OA n.d.a). The office web page highlights restitution stories, and contains online resources for small businesses about compliance (Denver n.d.b, n.d.c). It also contains tools for workers and employers: a regional address finder to assess whether work performed was in the relevant local boundaries, and a minimum wage and tip calculator, among other things. Also, the office launched an “Earned It, Deserved It” campaign to raise awareness of the city’s minimum wage ordinance, with bilingual ads at regional bus stops, and on radio, television, and social media platforms (Denver OA 2021a, p. 16).

Local labor agencies have highlighted worker issues in their jurisdictions through advocacy, hearings, and convenings

Several city labor agencies have gotten involved in various worker advocacy efforts.

In 2021, officials from several local enforcement agencies, including Chicago, New York City, Philadelphia, Seattle, and the district attorneys of Suffolk County, Massachusetts, and Washtenaw County, Michigan, all signed a joint letter (NYC DCWP 2021), along with 11 state attorneys general, to the U.S. Department of Homeland Security (DHS) supporting the agency’s plan to change its approach to worksite enforcement to support labor rights, and recommending changes to DHS policies and practices to facilitate the ability of state and local labor officials to enforce workplace laws. The letter was in response to a recent DHS memorandum (USDHS 2021) to Immigration and Customs Enforcement (ICE), Customs and Border Protection (CBP), and U.S. Citizenship and Immigration Services (USCIS), directing them to adopt practices and policies to deliver more severe consequences to exploitative employers, and increase workers’ willingness to report violations of worker protection laws.

In March 2020, agency officials in four cities (Chicago, New York, Philadelphia, and Seattle) called on (NYC 2020b) FedEx, UPS, and XPO to improve their policies in response to the then-new pandemic, particularly in relation to paid sick leave. Also in 2020, four localities (Chicago, New York, Philadelphia, and Pittsburgh) joined (NY AG 2020) a coalition of 24 state attorneys general in submitting a comment letter (NY AG et al. 2020) to the U.S. Department of Labor opposing a proposed regulation that would make it easier for employers to classify workers as independent contractors instead of as employees.

Finally, the New York City Department of Consumer and Worker Protection has held a number of hearings and convenings. For example, in 2017, it held a public hearing (NYC 2017) on the state of workers’ rights in the city, along with the Mayor’s Office of Immigrant Affairs and the New York City Commission on Human Rights, and in 2019, the same three agencies, along with partner organizations, held a convening (NYC 2019a) focused on immigrant workers.

Making know-your-rights resources, labor law posters, and other materials widely available, including in multiple languages

Some local agencies have been particularly aware of the need to reach the broad range of workers within their jurisdictions, and have translated materials into multiple languages. Cities and counties operate on the ground serving diverse communities, and may sometimes be more attentive to language access concerns than agencies at other levels of government.

The New York City Department of Consumer and Worker Protection has produced workers’ bill of rights booklets in 15 languages and audio files in five indigenous languages (Garifuna, K’iche, Kichwa, Mixteco, and Nahuatl), as well as an animated video. The animated video and audio files also enhance access for people with varying literacy levels. The Philadelphia Department of Labor web page (Philadelphia DOL n.d.) contains workers’ rights resources in 12 languages. Los Angeles City has minimum wage and paid sick leave posters available in 13 languages (LA City OWS n.d.a). Santa Clara County’s Office of Labor Standards’ web page provides information (SC OLSE n.d.f) in five languages. Even smaller jurisdictions, like Emeryville, California, with a 2020 population (U.S. Census Bureau 2022e) of less than 13,000, offers minimum wage and paid sick leave notices and posters (Emeryville n.d.) in six languages.

Local labor agencies have generated media coverage about worker issues

In addition to issuing press releases and reports, some offices have been effective in helping to catalyze coverage of workers’ rights issues in the local press. The Philadelphia Department of Labor has been especially effective in this regard, helping place news stories about workers’ rights under the city’s fair workweek law when it was first enacted, about its issuance of an annual report that would shame employers with records of violations, and about the Philadelphia Worker Relief Fund for workers excluded from other public assistance during the pandemic (Dorfman 2021; Reyes 2021b, 2020; Marin 2020).

The Santa Clara County Office of Labor Standards received coverage (Reese 2021) on a county contracts enforcement pilot program, in which the office reviews judgments and orders from state and federal labor authorities to determine whether a contractor should be disqualified from working with the county. The office also received coverage (Telemundo n.d.) on Telemundo about its enforcement program related to county food permits.

Finally, workers themselves can catalyze coverage of enforcement actions by local labor enforcement agencies, as when a worker whose case was handled by the San Francisco Office of Labor Standards gave a TEDx Talk (Winner 2019) and was featured in a PBS NewsHour program (Nawaz and Carlson 2021) about the city’s fair chance ordinance, which requires employers to consider mitigating circumstances and rehabilitation evidence for job applicants with a criminal record.

Local elected officials have used their public platforms and convening authority to support workers

Local elected officials have used their public platforms to demonstrate their support for working people in many ways. Such officials have shown up at rallies, events, and actions (including strikes (Aponte 2021) and walking workers back to work after days of action). Local elected officials have also written opinion pieces (op-eds) in support of worker advocacy and to bring attention to harms and challenges experienced by workers (Rosenthal 2021), and have written and signed letters to employers expressing concerns about worker treatment. Moreover, local elected officials can hold hearings, which allow workers an opportunity to share about their experiences and for officials to ask employers relevant questions.

Local elected officials can also show support for ongoing worker organizing campaigns. For example, in 2022, New York City Comptroller Brad Lander, as a public pension fund trustee, led a shareholder effort to address high injury rates and turnover at Amazon warehouses (Newman 2022). Also in 2022, the Seattle and Philadelphia city councils both passed resolutions supporting Starbucks workers seeking to unionize (Taylor 2022b; Valentine 2022). A Local Progress website provides additional ideas and resources for local elected officials wishing to show support for the Starbucks worker organizing campaign (Local Progress, n.d.b.).  

Conclusion: Localities throughout the country can adopt supporting workers’ rights as among the core functions they perform for their communities

There is a wealth of possibilities for localities that wish to get involved in expanding and enforcing workers’ rights. While some recent local action emerged in response to the Trump administration’s hostility to workers’ interests, much of cities’ work in this area pre-dated 2016. Accordingly, the local role in protecting working people continues to be relevant and critically important, even in the context of a worker-friendly federal administration.

Localities have been key innovators on labor matters, piloting new laws on such issues as paid sick leave and fair workweek; with proof of concept at the local level, such laws are later adopted at the state level (and perhaps eventually at the federal level as well). Creation of worker boards, strategic community enforcement partnerships, and using permits to drive compliance are also local innovations that help move the field forward. In addition, expansion and robust enforcement of workers’ rights at the local level serves as a hedge in our federal system, helping ensure at least some continued protection of workers in times when federal or state government is unfriendly to workers or insufficiently effective in protecting them. Moreover, public enforcement of workers’ rights is of even greater urgency when skyrocketing use of forced arbitration blocks workers from bringing their cases in court.

Localities in states without preemption of local laws may undertake any and all of the actions described above. However, even localities facing serious legal, political, or financial constraints in relation to their involvement in worker issues still can take action that will have a meaningful impact on workers’ lives.

Specifically, even in states with preemption:

• Localities can offer high-road standards to their own workforces, including enabling or facilitating collective bargaining where permitted, as well as sufficient minimum wage and paid sick/family leave for municipal employees.
• Localities can consider enacting laws that may not be preempted, such as those that do not set labor standards. These might include anti-wage theft ordinances that do not set a local minimum wage, but simply enforce existing rates; responsible bidder ordinances; ordinances concerning licensing or permitting consequences or incentives; or laws on salary transparency, for example. Local leaders can examine their state’s preemption law to assess the realistic possibilities.
• Localities can assess whether there is authority to require increased labor standards at the local airport.
• Localities can establish a worker advisory board to create a vehicle for open lines of communication and opportunities for worker leaders to raise newly emerging issues that the locality may be able to help address.
• Localities can establish a dedicated labor office or at the very least, a dedicated labor liaison at the local level. Even in a state with strong preemption, such an office could likely do some or all of the following:
  • Conduct outreach and public education on workers’ rights. Create a workers’ rights landing page on the locality website (in languages commonly used in the locality), with information about federal, state, and local workers’ rights applicable within the jurisdiction, (however expansive or limited they may be), as well as hyperlinks to relevant government agencies and other worker-oriented resources. Conduct outreach and include basic workers’ rights information in community outreach by existing local officials (such as by Fair Employment Practices Agencies, where they exist).
  • Review contracting, licensing, permitting standards, especially in industries with high rates of violation. Consider whether new laws are needed in order to impose compliance prerequisites or consequences for violations of labor laws. If so, try to enact them. In either case, routinely review labor compliance records of recipients of local government contracts, permits, or licenses, and consider whether action can be taken by contracting, licensing, or permitting agencies.
  • Review forms used for contracting, permitting, and licensing. Incorporate workplace law information about employer responsibilities on application forms and require signed certification by bidders or applicants that they will comply with these laws.
  • Research working conditions within the locality (possibly in conjunction with local or state academics), and issue and publicize reports on findings
  • Hold convenings or hearings to uncover and highlight problems facing workers, and to generate media coverage of these issues.
  • Create a comprehensive complaint form for workers and become a one-stop shop for reporting violations, serving as a gateway to help workers navigate other agencies and resources.
  • Publish enforcement data and stories to demonstrate effectiveness and deter violations.
  • Enlist and/or organize local resources, such as law school clinics or the local bar, to address worker issues. For example, the Massachusetts attorney general’s office holds a monthly wage theft clinic for cases it cannot handle, with nonprofit organizations, pro bono lawyers, legal services offices, lawyers who can take contingency cases, etc. (Massachusetts n.d.a). Along similar lines but addressing a problem unrelated to labor, the California Attorney General’s office in 2015 convened a roundtable of law firms and immigrants’ rights advocates about the legal needs of unaccompanied minors fleeing Central America; these efforts led to the legal representation of more children in immigration cases (CA DOJ 2015).

Localities in states without preemption, in locales more friendly to workers’ rights, can consider enacting any and all of the above measures. In addition, they have even more leeway to act, since they can:

• enact higher labor standards for all workers within their jurisdiction
  • minimum wage, overtime, paid sick and safe leave, fair workweek, expansive anti-discrimination laws, strong anti-retaliation protections
  • protections needed in particular industries: domestic workers, hotel, retail, fast-food, car wash workers, freelancers, etc.
  • cutting-edge worker protections such as just cause termination, gig worker pay or termination standards, salary transparency, and more
• meet with local worker organizations to learn what issues they identify as pressing
• create, fund, and empower a robust local office of labor standards with
  • enforcement power, including subpoena power
  • the ability to inform the administration and legislators on policy matters
  • a strategic enforcement approach
  • a funded community partnership model
• enact and enforce job quality standards (prevailing wage, living wage) and responsible bidder ordinances for local government contractors
• enact and fully operationalize workplace law compliance prerequisites and consequences for applicants and holders of locally issued permits and licenses.

In all localities—those in states hostile to workers, friendly to workers, and in between—there are opportunities to stand up for working people and take action.

Acknowledgments

The authors would like to thank Daniel Perez and Katherine DeCourcy, who provided excellent research assistance.

About the authors

Terri Gerstein is the director of the State and Local Enforcement Project at the Harvard Law School Labor and Worklife Program and a senior fellow at the Economic Policy Institute. She was recently an Open Society Foundations Leadership in Government Fellow. Previously, Terri was the labor bureau chief in the New York State Attorney General’s Office and a deputy commissioner in the New York State Department of Labor. Before her government service, Gerstein was a nonprofit lawyer in Miami, Florida, where she represented immigrant workers and co-hosted a Spanish language radio show on workers’ rights. She was a law clerk for Judge Mary Johnson Lowe of the U.S. District Court for the Southern District of New York. Her writing on workers’ rights issues has appeared in numerous outlets, including the New York Times, Washington Post, NBC News Think, The American Prospect, Politico, Slate, The Nation, and more; a complete listing is available at www.terrigerstein.com. She is a graduate of Harvard College and Harvard Law School.

LiJia Gong is the policy and legal director at Local Progress. She leads the development of Local Progress’ policy and research capacity to support members, and drives the development and growth of national program areas. Gong is an attorney with more than a decade of experience in policy, litigation, and political strategy. Prior to joining Local Progress, she served as counsel at Public Rights Project, an organization that empowers local and state governments to advance civil rights, worker and consumer rights, and environmental justice. At Public Rights Project, she launched a partnership with Local Solutions Support Center to fight abusive state preemption of local policymaking. Gong worked on the 2018 campaign to re-elect Sen. Elizabeth Warren of Massachusetts and served as a law clerk for Judge Kiyo Matsumoto of the U.S. District Court for the Eastern District of New York. Prior to becoming a lawyer, Gong worked as a research assistant at the Federal Reserve Board of Governors. LiJia earned her J.D. from Georgetown University Law Center and her B.S.F.S. from Georgetown University.

Endnotes

1. New State Ice Co. v. Liebmann, 285 U.S. 262, 311 (1932) (Brandeis, J, dissenting).

2. New State Ice Co. v. Liebmann, 285 U.S. 262, 311 (1932) (Brandeis, J., dissenting).

3. This report uses the terms “localities” and “local governments” as an umbrella term for political subdivisions of a state that include, for example, counties, cities, townships, villages, and school districts. Local government decision-making structures and authorities vary significantly–in some localities the executive has far more authority than the legislative body (often referred to as “strong mayor” systems as applied to cities), while in some localities significant control rests with appointed offices like a city manager. Localities also vary tremendously in terms of size–some towns have only a few hundred or thousand residents, whereas Los Angeles County has more than 10 million residents. Accordingly, the capacity for policymaking and enforcement among localities also varies greatly. Due to this diversity across localities, this report uses “localities” and “local governments” generally to refer to powers that may belong to the local executive, legislature, administrative agencies, or some combination thereof in a given jurisdiction.

4. Diller argues that cities’ smaller scale, concentrated political preferences, and streamlined lawmaking processes facilitate public health innovation.

5. Many localities have longstanding agencies that enforce human rights, civil rights, or other anti-discrimination laws; this report touches on the work of such agencies, but they are not the focus. 

6. Because in its employment-related lawmaking and enforcement, Washington, D.C., operates more akin to a state than a city, it is not included in this report. For more information for enforcement actions taken by D.C.’s attorney general, please see Gerstein 2020.

7. The federal government sets the federal minimum wage; that rate serves as a national floor. Under the federal minimum wage law, the Fair Labor Standards Act, states and localities may pass minimum wages that are higher. Many, but not all states, also allow localities to require pay higher than the state minimum wage.

8. The advocacy group “A Better Balance” has an option on its website that enables filtered searches of enforcement agencies handling paid sick day enforcement (A Better Balance n.d.b). Several localities assign this function to their offices of community relations or of human rights (Boulder 2022; Montgomery n.d.; Pinellas OHR). In Duluth, Minnesota, the city clerk has authority to enforce the law (Duluth 2022b). In Miami-Dade County, a consumer mediation center handles wage disputes (Miami-Dade WTP). This list is illustrative but not exhaustive.

9. UC Berkeley 2022; Boston OWD n.d.; Chicago OLS 2022; Denver 2022a; Duluth 2022a; Emeryville 2022; Flagstaff 2022; LA City OWS n.d.a; LA City BCA n.d.; Minneapolis n.d.b; NYC OLPS n.d.b; Philadelphia n.d.a; SF OLSE n.d.c; Santa Clara n.d.a; SJ 2022; Seattle OLS n.d.d; St. Paul n.d.b; Tacoma n.d.

10. Brennan 2021; San Diego 2022.

11. Kelty 2022; Ludden 2021.

12. Miami-Dade WTP n.d.; Pinellas OHR n.d.; Broward OPSHR n.d.; Broward OIAPS 2022.

13. In re: Palm Beach County Wage Dispute Docket and Creation of “WD” Division, Administrative Order No. 3.907-3/15, March 9, 2015. Fifteenth Judicial Circuit Court in and for Palm Beach County, Florida. See Palm Beach 2015.

14. Bloomington n.d.

15. Bloomington 2022.

16. In March 2022, a Washington state bill was signed into law that will preempt Seattle’s local regulations of TNCs HB 2076, 2021–22 House of Rep., Reg. Sess. (Wash. 2022). See Washington 2022.

17. Res. 32038, 2021 City Council, Seattle (Seattle 2021). See Seattle CC 2021.

18. For an in-depth analysis of privatization generally, see Cohen and Mikaelian 2021.

19. Brief for the States of New York, Alaska, Connecticut, Delaware, Hawaii, Iowa, Kentucky, Maine, Maryland, Massachusetts, Minnesota, New Jersey, New Mexico, North Carolina, Oregon, Pennsylvania, Rhode Island, Vermont, Virginia and Washington, and the District of Columbia as Amici Curiae in Support of Respondents, Janus v. American Federation of State, County and Municipal Employees, Council 31, et al., 138 S. Ct. 2448 (2018); see also Brief for the City of New York as Amicus Curiae in Support of Respondents, Janus v. American Federation of State, County and Municipal Employees, Council 31, et al., 138 S. Ct. 2448 (2018); Brief of Mayor Eric Garcetti, County Executive Dow Constantine, Mayor Jenny Durkan, Mayor Rahm Emmanuel, Mayor James Kenney, and Mayor Bill de Blasio as Amici Curiae in Support of Respondents, Janus v. American Federation of State, County and Municipal Employees, Council 31, et al., 138 S. Ct. 2448 (2018).

20. See, e.g., Louisiana (Louisiana Revised Statute 44:67.1(a), Davis v. Henry, 555 So.2d 457, 459 (La., 1990).

21. See, e.g., North Carolina (N.C. Gen. Stat. Ann. § 95–9).

22. Res. 2017–259 2017, Adams County Board of County Commissioners (Colo. 2017). See Adams Cty. BOC 2017.

23. Janus v. American Federation of State, County, and Municipal Employees, Council 31, et al., 138 S. Ct. 2448 (2018).

24. This authority typically derives from the “police power”—as in the power to promote the health, safety, welfare, and morals of the community—among the powers delegated to local governments. See, for example, Utah Const. art. XI, § 5 (delegating “the authority to adopt, and enforce within its limits, local police, sanitary, and similar regulations”).

25. Before 2012—the beginning of the Fight for 15 movement—only five local governments had minimum wage laws (UC Berkeley Labor Center 2022).

26. Birmingham, Alabama; Johnson, Lee, Linn, Polk, and Wapello counties, Iowa; Kansas City, Missouri; Louisville and Lexington, Kentucky; Miami Beach, Florida; and St. Louis, Missouri, passed local minimum wages that were higher than the state minimums, but they were subsequently preempted by state legislation, thereby rendering the local ordinances ineffective (UC Berkeley Labor Center 2022).

27. Dependency on tips often makes workers more vulnerable to sexual harassment.

28. Council Bill 18–008, 2018, Las Cruces City Cncl. (N.M. 2018). See Las Cruces 2018.

29. Oakland’s hotel minimum wage is higher than the citywide minimum wage for hotel workers who do not receive employer benefits.

30. Res. No. 20220127–053, 2022, Austin City Cncl. (Texas 2022). See Austin 2022.

31. There is a distinction between paid sick leave, and paid family and medical leave laws. Paid sick day laws require employers to pay workers for a modest number of days out of work for the short-term health needs of themselves and their families, while paid family and medical leave laws establish social insurance programs, typically funded by employer contributions and employee payroll deductions, to be used for longer-term medical issues, care for a new child, or care for a family member who is ill. This discussion addresses paid sick leave. Paid family and medical leave has been generally addressed in the United States at the state level, although some local governments do provide paid family and medical leave for their own employees. See Onuma 2015.

32. Austin, Dallas, and San Antonio passed paid sick leave laws that subsequently were found to be preempted in litigation. The laws were challenged by business groups arguing that the local ordinances were preempted by a Texas law that prohibits localities from enacting a minimum wage higher than the state’s. As a result, workers in these three cities lack the legal right to paid sick time. See A Better Balance 2021.

33. The state law in New Jersey mooted and preempted the numerous local paid sick leave laws.

34. Law 2018/150, 2018, New York City Cncl. (N.Y. 2018). See NY City Council 2018.

35. Law 2021/aa5, 2021, New York City Cncl. (N.Y. 2021). See NY City Council 2021.

36. Seattle’s local regulations of transportation network companies will be preempted pursuant to a state law passed in March 2022. See Washington 2022.

37. These localities include Albany County (New York), Atlanta, Chicago, Cincinnati, Columbia (South Carolina), Jackson (Mississippi), Kansas City (Missouri), Louisville, Montgomery County (Maryland), New Orleans, New York City, Philadelphia, Pittsburgh, Richland County (South Carolina), Salt Lake City, San Francisco, St. Louis, Suffolk County (New York), Toledo, and Westchester County (New York).

38. Colorado had passed a similar law in 2021. S.B. 19-085, 2019 Gen. Assemb., Reg. Sess.

39. Law 2022/031, 2022, New York City Cncl. (N.Y. 2022). See NY City Council 2022.

40. N.Y.C. Admin. Code § 20–1271 et seq.

41. Rest. Law Ctr. v. City of New York, 2022 U.S. Dist. LEXIS 24268, __ F. Supp. 3d __, 2022 WL 409190.

42. Rest. Law Ctr. v. City of New York, 2022 U.S. Dist. LEXIS 24268, __ F. Supp. 3d __, 2022 WL 409190.

43. N.Y.C. Admin. Code § 20–1301 et seq.

44. City of Los Angeles Municipal Code Chapter XVIII § 181.00 et seq.; San Francisco Police Code Article 33D.

45. A 2003 survey conducted by Airports Council International-North America concluded that city ownership accounts for 38%, followed by regional airports at 25%, single county at 17%, and multijurisdictional at 9%.

46. 8 Phila. Code § 18–201(8); Miami-Dade Cty. Res. No. R–148–07 (Feb. 6, 2007); Rules and Regulations, San Francisco Airport, Rule 12.1.

47. By using a state’s grant of local emergency authority, local governments might plausibly be able to adopt temporary emergency policies even when state law preempts such policies under normal circumstances (Haddow, Davidson, and Huizar 2020).

48. See discussion in Section 4.

49. These local governments include Chicago; Cook County, Ilinois; Duluth, Minnesota; Emeryville, California; Los Angeles; Minneapolis; Montgomery County, Maryland; New York City; Philadelphia; Pittsburgh; San Diego; San Francisco; Seattle; St. Paul, Minnesota; Tacoma, Washington; and Westchester County, New York. In general, this clarification of existing paid leave laws was permanent.

50. Many of these ordinances are no longer in effect, and the remainder that are still in effect are set to sunset on a specified date or after the conclusion of the relevant COVID-19 emergency order.

51. Bill No. 200303, 2020, Philadelphia City Cncl., (Pa., 2020). See Philadelphia CC 2020a.

52. CB 119793, 2020, Seattle City Cncl., (Wash., 2020).

53. Bill No. 200328, 2020, Philadelphia City Cncl. (Pa., 2020) See Philadelphia CC 2020b.

54. Coronavirus State and Local Fiscal Recovery Funds [rule], 87 Fed. Reg. 4338–4454 (January 27, 2022).

55. Minneapolis n.d.e.

56. The nonprofit organization Good Jobs First has lamented the lack of transparency in relation to state use of ARPA funds; it is likely that similar concerns exist in relation to local decision-making. See Furtado 2021.

57. Building & Construction Trades Council v. Associated Builders & Contractors of Massachusetts/Rhode Island, Inc., 507 U.S. 218 (1993).

58. Gade v. National Solid Wastes Management Association, 505 U.S. 88, 99–100 (1992).

59. Steel Inst. of New York v. City of New York, 716 F.3d 31, 34 (2d Cir. 2013).

60. In addition, five state plans cover only local and state government workers.

61. 29 USC § 218 (“No provision of this [Act] shall excuse noncompliance with any Federal or State law or municipal ordinance establishing a minimum wage higher than the minimum wage established under this [Act] or a maximum work week lower than the maximum workweek established under this chapter.”)

62. Wyeth v. Levine, 555 U.S. 555 (2009).

63. Also referred to as the “new preemption” or “abusive preemption” by some legal scholars.

64. HB 2076, 2021–22 House of Rep., Reg. Sess. (Wash. 2022). See Washington 2022.

65. For example, many state consumer protection and public nuisance laws empower city, county, and district attorneys to bring actions to enforce those laws. See, e.g., N.C. Gen. Stat. §§ 160A–193, 153A–140 (providing cities and counties with authority to abate public nuisances); Cal. Bus. & Prof. Code § 17204 (2019) (providing city and county attorneys in local jurisdictions with more than 750,000 residents the authority to bring unfair competition claims).

66. The Oakland city attorney’s office brought a case alleging wage and hour violations alongside a civil legal services organization to vindicate the rights of hotel cleaners (Oakland OCA 2018). In 2019, the San Diego city attorney’s office brought suit against Instacart alleging misclassification of its shoppers who obtain and deliver groceries and obtained an injunction, which was rendered inoperative by the passage of Proposition 22 in 2020 (Allsup and Mulvaney 2021).

67. In Alabama, California, Colorado, Florida, Kansas, Kentucky, Michigan, Minnesota, Missouri, and Montana, district attorneys have civil authority to enforce the state unfair deceptive acts and practices (UDAP) law. Ala. Code § 8–19–4, 8–19–8 (2019); Cal. Bus. & Prof. Code § 17204 (2019); Colo. Rev. Stat. § 6–1–103 (2018); Fla. Stat. § 501.203, 501.207 (2019); Kan. Stat. Ann. § 50–626(a)–632(a)(3) (2018); Ky. Rev. Stat. Ann. § 367.300 (West 2019); Wayne Cty. Prosecutor v. Wayne Cty. Bd. of Comm’rs, 93 Mich. App. 114, 127 (1979); Minn. Stat. § 325F.67, 325F.70 (2019); Mo. Rev. Stat. § 407.020 (2018); Mont. Code Ann. § 30—14–121 (2019).

68. Wage theft is the practice of employers failing to pay workers the full wages to which they are legally entitled. It includes situations in which employers refuse to pay promised wages, pay less than legally mandated minimums, fail to pay for all hours worked, keep worker tips or deductions intended for worker benefits, or do not pay overtime. In some states, the term “wage theft” is defined in the law, but more commonly it is used as a colloquial and descriptive term to refer to a set of practices. See Rosado Marzán 2020 for a detailed description of wage theft.

69. See also, In re Vega, 2020 N.Y. Slip Op. 02094 (N.Y. Court of Appeals March 26, 2020).

70. Minneapolis Code 40.110.

71. Localities also may provide conditions on grants to improve worker standards. For example, Boston funded a pilot program to support small restaurants and their workers during the COVID-19 pandemic. The grants were conditioned on the small businesses paying workers $12.75 an hour, as compared with the $5.55 tipped minimum wage under Massachusetts law (Edwards n.d.).

72. Somerville Code of Ordinances, Chapter 9, Article III, Division 2. See Somerville n.d.

73. City of Boston Municipal Code Chapter 24. See Boston n.d.a, n.d.b.

74. “Assistance shall mean any grant, loan, tax incentive, bond financing, subsidy, or other form of assistance of one hundred thousand ($100,000.00) dollars or more realized by or through the authority or approval of the City of Boston, including, but not limited to industrial development bonds, Community Development Block Grant (CDBG) loans and Federal Enhanced Enterprise Community designations awarded after the effective date of this Chapter. The forgiveness of a loan shall be regarded as financial assistance. A loan shall be regarded as financial assistance to the extent of any differential between the amount of the loan and the present value of the payments thereunder, discounted over the life of the loan by the applicable Federal rate as used in 26 U.S.C., Section 1274(d) 7872(f). A recipient of assistance shall not be deemed to include leases and subleases.” City of Boston Municipal Code Chapter 24 § 24-2(a).

75. City of Boston Municipal Code Chapter 24 § 24-2(e). See Boston n.d.a.

76. City of Boston Municipal Code Chapter 24 § 24-11(a). See Boston n.d.b.

77. Res. BOS-2016-196, 2016 Board of Supervisors, Santa Clara County (Santa Clara 2016). See Santa Clara n.d.c.

78. Hoboken Municipal Code Chapter 23. See Hoboken n.d.a.

79. Hoboken Municipal Code Chapter 199. See Hoboken n.d.b.

80. Seattle Municipal Code § 14.19.080 (I). See Seattle n.d.b.

81. San Diego Municipal Code Article 2 Division 30 § 22.3004(c). See San Diego n.d.

82. Social service agencies have filed a lawsuit challenging this law. See Blau 2022. 

83. Minneapolis City Code § 259.250 (2). See Minneapolis n.d.d.

84. Minneapolis City Code § 259.250 (5). See Minneapolis n.d.d.

85. Minneapolis City Code § 259.250 (5). See Minneapolis n.d.d.

86. City of Quincy, Massachusetts, Code § 9.4.9-9.4.10. See Quincy n.d.

87. City of Toledo, Ohio, Municipal Code § 701.04 (b). See Toledo n.d.a.

88. Seattle Municipal Code 14.19.100 (A) (4). See Seattle n.d.b.

References

Court Decisions and Orders

Building & Construction Trades Council v. Associated Builders & Contractors of Massachusetts/Rhode Island, Inc., 507 U.S. 218 (1993).

Florida, Palm Beach County, Fifteenth Judicial Circuit Court, Administrative Order No. 3.907-3/15.

Gade v. National Solid Wastes Management Association, 505 U.S. 88, 99–100 (1992).

New State Ice Co. v. Liebmann. 285 U.S. 262, 311 (1932).

Restaurant Law Center v. City of New York, U.S. District Court, S.D.N.Y., Case 1:21-cv-04801-DLC, Document 68, Filed 02/10/11, Opinion and Order.

Steel Inst. of New York v. City of New York, 716 F.3d 31, 34 (2d Cir. 2013).

Wyeth v. Levine, 555 U.S. 555 (2009).

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U.S. Department of the Treasury (Treasury). 2021. “Allocation of American Rescue Plan Act Funds for Counties” (web page). May 10, 2021.

U.S. Department of the Treasury (Treasury). n.d. “Allocation of American Rescue Plan Act Funds for Metropolitan Cities” (web page). Accessed March 24, 2022.

Valentine, Brittany. 2022. “City Council Supports Philly Starbucks Workers’ Union Efforts.” Al Día. March 4, 2022.

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Introduction and key findings: New data on H-1B abuse and why it matters

For nearly a decade and a half, news reports, research, investigations, and congressional hearings have detailed the abuses of the H-1B visa program by some of the biggest information technology companies.1 The H-1B program is a temporary work visa program that allows U.S. companies to recruit and hire college-educated migrant workers. It is one of the few work visa programs that can provide temporary migrant workers with the possibility of a path to permanent residency and citizenship, although that path is controlled by and at the discretion of H-1B employers. The original intent of the program was to attract skilled and talented workers to the United States to fill labor shortages in professional fields.2

Since the creation of the program, the abuses of the program have been many, included vastly underpaying workers, laying off U.S. workers and replacing them with much lower-paid H-1B workers, forcing U.S. workers to train their H-1B replacements as a condition of receiving severance and unemployment insurance, and cheating the H-1B lottery to acquire additional visas. There are provisions in the H-1B law that are supposed to work together to prevent employers from underpaying H-1B workers or replacing their incumbent U.S. worker employees (i.e., U.S. citizens or permanent residents) with H-1B workers who are paid much less to do the same job. But employers are getting around those provisions by contracting with IT outsourcing firms, enabled by the U.S Department of Labor’s (DOL) flawed interpretation that puts outsourced H-1B workers in a different comparison pool than U.S. workers who are hired directly by the employer (see text box, ”How companies contract with H-1B outsourcing firms to evade H-1B visa rules that protect wages and working conditions,” later in the report). As a result, clear abuses that contradict the original intention of the H-1B program have largely not turned into what DOL considers actionable violations leading to sanctions.

One widely reported example from the last decade illustrates the issue. The IT outsourcing firms Infosys and Tata Consultancy Services contracted with Southern California Edison (SCE), an energy provider, to replace hundreds of SCE employees with H-1B workers who were paid less to do the same jobs, with the U.S. workers being required to first train their H-1B replacements.3 When filing an H-1B application, one of the things that employers must attest to is that the filings do not adversely impact the wages and working conditions of similarly employed U.S. workers. But DOL investigated the case and found no wrongdoing: The outsourcing firms were the ones who had to attest to meeting certain provisions in the visa applications, and the SCE workers who were replaced were not considered part of the “similarly employed U.S. workers” whose wages and working conditions the outsourcing firms had to vouch not to adversely impact.4

In sum, DOL has determined it is acceptable for an employer to underpay an H-1B worker, even if U.S. workers are obviously being harmed, as long as the H-1B worker is hired through a contractor. This seemingly irrational DOL interpretation is the main reason why the dozens of news reports chronicling thousands of U.S. workers training their H-1B replacements—at Disney, the University of California, New York Life, Mass Mutual, Southern California Edison, etc.—have never resulted in a single penalty or any change in business behavior. In every reported case, the lower-paid H-1B worker was hired and employed by an outsourcing firm. 

There have been calls to close the outsourcing loophole but thus far the Department of Labor has not committed to doing so. In fact the department issued and then abandoned policy guidance that would have closed the loophole (as discussed later on in the report).

Now thanks to a federal whistleblower lawsuit brought against outsourcing firm HCL Technologies (HCL),5 we don’t need to wait for DOL to close the outsourcing loophole to achieve some justice for the workers affected by abuses of the H-1B program. As a result of the lawsuit, we have new insights into what appear to be clear violations of another element of the H-1B statute, one which requires employers to pay their H-1B employees no less than they pay their U.S. employees who are citizens or permanent residents (referred to in this report as “U.S. workers”). These violations call for immediate federal action. In this case, the alleged violations cannot be waved off via the outsourcing loophole because HCL itself appears to be paying its own H-1B employees less than it pays its own U.S. worker employees.

HCL, India’s third-largest IT outsourcing firm, is a familiar name in the tech world. It earned notoriety about six years ago when Disney made headlines for forcing its workers to train their replacements who were migrant guestworkers employed through the H-1B visa program (and supplied to Disney by HCL). HCL is now the defendant in a lawsuit brought under the False Claims Act for the firm’s alleged “egregious and widespread fraud against the United States in applying for and securing visas.”6 The most significant of the alleged violations is rampant wage theft by HCL via paying H-1B workers less than they are statutorily required to be paid, estimated in this report to likely exceed $95 million annually. A document related to the case that recently became public exposes details that show how underpaying H-1B workers is an intentional corporate strategy. 

Specifically, an internal HCL presentation of its strategy for filing H-1B visa applications7 shows how it hires migrant workers employed through work visas to fill jobs in key business lines and job roles to maximize wage savings compared with hiring U.S. citizens and permanent residents. This strategy document provides details on the wages paid to HCL employees in the United States on H-1B visas and HCL employees who are U.S. citizens and permanent residents. Wages of the former are far lower than wages of the latter. 

The HCL document is significant beyond the case itself because most of the biggest users of H-1B visas are companies that have outsourcing business models like HCL’s.8 And the jobs that these companies are outsourcing—in IT services and software development—are the relatively high-wage but entry- to mid-level technology jobs that for years served as a bridge to the American middle class.9 Some of these IT jobs are especially important to women and workers of color. For example, computer systems analyst is one of the few IT occupations with a reasonable share of women employed, and African Americans are better represented in this occupation than in other major computer occupations.10 

The document is our first inside look at an outsourcing firm’s playbook for abusing work visa programs—abuse that appears to not comport with either the letter or intent of the law. It also raises serious questions about efforts by the U.S. Department of Labor to enforce the sections of the H-1B statute and regulations intended to protect the wages and working conditions of both U.S. workers and migrant workers. These revelations serve as a compelling justification for a sweeping investigation by DOL into whether companies are systematically underpaying H-1B workers in violation of the law, and for immediate action by Congress and the Biden administration to protect labor standards. 

Key findings

Following are key takeaways from the report:

• The IT outsourcing firm at the center of the whistleblower case alleging fraud of the H-1B temporary work visa program is one of the largest H-1B employers. A lawsuit brought under the False Claims Act alleges that that HCL Technologies (HCL) committed fraud when acquiring H-1B visas, which are visas for highly skilled workers. HCL earned nearly $7 billion from its U.S. operations in 2020, ranked eighth in total H-1B approvals with more than 4,000 in 2020, and has received more than 31,000 visas since 2009. It is India’s third-largest IT outsourcing firm, earning 63% of its $11 billion in revenue in 2020 from the United States. It maximizes profit by finding H-1B workers who are significantly less expensive to employ than already-employed U.S. workers.
• According to an internal document from HCL, the firm appears to craft its H-1B workforce composition based on job roles where it can save the most on labor costs compared with what it pays U.S. employees for the same position. One of HCL’s internal corporate documents—a presentation containing details about HCL’s corporate strategy, as well as detailed information about the composition of HCL’s workforce, disaggregated by immigration status, occupation, and salary—was made public in the lawsuit. HCL’s actions are inconsistent with what the H-1B law explicitly requires, and also violates the spirit of the law, which is intended to protect wages and labor standards for both migrant workers and U.S. workers. 
• HCL pays its H-1B workers less than the U.S. workers it employs with similar skills as a key competitive strategy, allowing it to expand its business and increase profits. The data from the company’s internal document suggest the firm underpays H-1B workers in virtually all jobs across all business lines.
• HCL itself disclosed its apparent underpayments to H-1B employees, underpayments which would violate the requirement that employers pay their H-1B employees no less than they pay their U.S. worker employees. According to HCL’s own calculations in its internal document, the firm systematically pays H-1B workers much less than its U.S. citizen employees, contravening HCL’s attestations in its visa applications to the U.S. Department of Labor that it will pay H-1B workers the higher of the prevailing wage (in layman’s terms, what most workers engaged in similar work in the same geographic area earn according to a DOL methodology) or the “actual wage” paid to its employees who are U.S. citizens or lawful permanent residents and doing the same work at the company. 
• HCL’s apparent wage theft from H-1B workers amounts to approximately $95 million annually, according to our estimate based on information revealed in the presentation.
• The HCL document reveals clear violations of the H-1B statute that the U.S. government has failed to enforce. Much attention has been paid to the legal ways that employers underpay their H-1B workers—by opting (with no government oversight) to comply with the prevailing wage requirement by paying entry- and junior-level prevailing wages that are actually much lower than what workers of similar education and experience elsewhere are actually paid. While those prevailing wage levels should be raised, the DOL should also focus on the other part of the “wage requirement” section of the H-1B law that requires employers to pay their H-1B workers at least the same actual wage as their similarly employed U.S. workers. We have not found evidence that DOL has ever investigated or enforced this rule for any firm.
• HCL’s actions are tantamount to U.S. immigration policy being used to subsidize the outsourcing and offshoring of decent, high-paying U.S. jobs. Allowing employers to pay their H-1B workers less than the market rate for their labor—both legally through the flawed prevailing wage rule and unlawfully due to a lack of enforcement of the actual wage rule—in tandem with DOL’s flawed interpretation of the law, DOL has made the H-1B the “outsourcing visa.” In other words this interpretation is accelerating the fissuring—the outsourcing of jobs to lower-paid contract workers that degrades wages and job quality more broadly—of the IT labor market and its destructive effects.
• The abuse revealed by the HCL presentation is the proverbial tip of the iceberg: it points to widespread, systemic H-1B abuse. HCL did not invent nor pioneer the exploitation of H-1B program; its exploitation of the H-1B program is standard industry practice, not an outlier.
  • Fourteen years ago, Sens. Dick Durbin (D-Ill.) and Chuck Grassley (R-Iowa) revealed for the first time that outsourcing firms, like HCL, were the biggest users of the H-1B program. Outsourcing firms have consistently dominated the program since then. Outsourcing firms mimic one another’s business practices, including techniques to exploit the H-1B program.
  • The top seven H-1B employers in fiscal year 2015—the year the HCL document reflects—were outsourcing firms and direct competitors of HCL. They all pay their H-1B workers at wage rates that are similar or lower than what HCL pays, and all the outsourcing firms paid relatively lower wages than what the biggest H-1B employers that directly employed their H-1B workers paid in that year. 
• Congress and the Biden administration should take immediate action to fix the H-1B program’s flaws.
  • The relevant federal agencies, including the Departments of Labor, Homeland Security, and Justice, should launch investigations into H-1B wage theft.
  • The Department of Labor’s Wage and Hour Division (WHD) and Employment and Training Administration (ETA) should require and conduct better and effective oversight going forward and seek to raise prevailing wage standards in the H-1B program via regulation, and the Department of Homeland Security’s United States Citizenship and Immigration Services (USCIS), should also conduct better oversight and improve the visa allocation process in the H-1B program, also via regulation.
  • The Department of Justice’s (DOJ) Civil Division, in conjunction with USCIS and DOL, should vigorously prosecute visa fraud under the False Claims Act, consistent with a recent federal court decision applying the False Claims Act to H-1B visa fraud.
  • Congress should act by passing lasting legislative reforms to fix the H-1B program and stem abuses, and to increase protections for both H-1B workers and U.S. workers.

H-1B wage requirement: Intended to protect both H-1B and U.S. workers

The H-1B visa program is the largest U.S. temporary work visa program for high-skilled workers, with approximately 600,000 visa holders currently in the United States.11 The H-1B visa authorizes firms to employ foreign college-educated workers under specific conditions. Because these “guestworker” visas are highly vulnerable to abuse—often because the visa application and status is controlled by employers, which restricts labor market mobility for migrant workers—Congress included provisions in the visa’s requirements to protect wages and labor standards for both U.S. workers and migrant workers on H-1B visas. The principal protection is the wage requirement—which is intended to ensure that H-1B workers are paid a market rate according to local standards; i.e., the same wage an equivalent U.S. worker (defined as a U.S. citizen or lawful permanent resident) would earn in a similar occupation and in the same local area—and that H-1B workers are paid no less than U.S. workers who are coworkers doing similar jobs for the same employer. This ensures that H-1B workers are paid a fair wage and are not being cheated, and that wages and conditions for U.S. workers are not undercut by firms underpaying their H-1B employees. In sum, the wage requirement is intended to remove the financial incentive employers might have to prefer an H-1B worker over a U.S. worker because the H-1B worker can be paid less.

The statute that establishes the H-1B program requires the hiring firm to file a labor condition application (LCA) to the secretary of labor, attesting it will adhere to the H-1B wage requirement.12 The text box includes the relevant language from 8 U.S.C. §1182(n):

In short, the law requires that an H-1B worker must be paid the greater of the actual wage or the prevailing wage. The “actual” wage is determined by the wages paid to U.S. workers who are already employed by the firm and tasked with similar duties. The “prevailing” wage is, in layman’s terms, what most workers engaged in similar work in the same geographic area earn. It is typically set according to DOL survey data that corresponds to the local area and occupation, and is divided into four levels that purport to correspond to education and skill levels.13

Much policy discussion about the wage requirement has focused on raising the low prevailing wage levels set by DOL, something we have published on extensively—and which all major H-1B employers take advantage of to legally underpay H-1B workers, not just outsourcing firms.14 Numerous bills have been introduced in prior Congresses to substantially raise the prevailing wage level, most of them bipartisan.15 In addition to congressional efforts, there have been recent executive branch proposals to reform the calculations used to set the prevailing wage levels, in order to make them better reflect true market wages—a change DOL has clear authority to undertake.16 Nevertheless, DOL delayed, until November 2022, the effective date of a final rule it had issued previously that would have raised H-1B prevailing wages, and that was supported by worker advocates.17 By its own calculations, DOL’s decision to delay the effective date is costing H-1B workers tens of billions of dollars in wages.18 In its most recent regulatory agenda, DOL indicated that the rule would undergo another round of rulemaking in November 2021, likely meaning it would replace the final rule with an updated one.19 

Precious little focus, however, has been placed on the other wage requirement stipulation, which requires H-1B employers to pay its H-1B workers at least the same “actual wage” that each employer pays to the U.S. workers it also employs in similar occupations. (U.S. workers in this case means U.S. citizens and lawful permanent residents.) The rule states plainly and clearly that an H-1B employer must pay its H-1B employees “wages that are at least…the actual wage level paid by the employer to all other individuals with similar experience and qualifications for the specific employment in question.”20

The HCL presentation shines a spotlight on how government enforcement of the H-1B actual wage requirement has been negligent—and as far as we know, DOL has never investigated nor enforced this rule—and now we have new insight into how HCL appears to be flouting it with total impunity.

HCL presentation is evidence the company is likely violating the ‘actual wage’ requirement of the H-1B law by paying virtually all its H-1B employees far less than U.S. citizens in same roles 

The HCL presentation details the company’s strategy for determining the number of H-1B applications (referred to as “nominations” in the document) to be filed, for which lines of business (LoBs), and for which job roles. 

HCL segregates its workforce into four status categories to conduct its analysis for constructing its H-1B workforce: 

• Citizen: U.S. citizens and permanent residents employed by HCL
• Landed–Visa Dependent: H-1B workers hired abroad, almost exclusively in India, by HCL and sponsored by HCL to come to the United States
• Local–Visa Dependent: H-1B workers who already were present in the United States working for other employers when they were hired by HCL and subsequently transferred their visas to HCL
• TP or Third Party: Workers hired through contractor firms

In the presentation, HCL lists each status in columns along with head counts, abbreviated as “HC,” as well as “ARC,” meaning additional resource cost, which represents wages for the citizen, landed, and local categories, but costs to the company for the third party category. (See the Appendix for more information on the document and the terms used in the document.) The presentation also, importantly, calculates the cost difference between each status. For example, Citizen vs. Landed ARC is the percentage premium HCL pays its workers who are U.S. citizens relative to the H-1B employees that it hired from India, for each job role. The formula is as follows:

Citizen vs. Landed ARC = (Citizen ARC−Landed ARC) ÷ Landed ARC

According to table after table in the document, H-1B workers both hired in India and in the U.S. are shown to be vastly underpaid compared with their U.S. citizen and permanent resident counterparts not hired with H-1B visas (referred to in this report as “U.S. workers”). According to HCL’s own calculations, the firm systematically pays H-1B workers much less than its U.S. workers—as much as 47%—contravening HCL’s attestations in its visa applications where it promises to pay the actual wage if it is higher than the prevailing wage.21

Paying H-1B workers less than U.S. workers is a competitive strategy HCL appears to have perfected. According to its own document, HCL underpays H-1B workers in virtually all jobs across all business lines, and it carefully manages and tracks wage differentials. For example, see Figure A, which is an image of one of HCL’s tables, along with our annotations. The column labeled “Citizen Vs Landed ARC,” which is circled, shows that citizens are paid more than landed H-1B workers for all jobs. In each case throughout HCL’s presentation, the percentage difference that U.S. citizens are paid more is very large, ranging from 13% to 87%.

Figure A

While violations for underpaying Local-Visa Dependent H-1B workers exist, our examples here focus on the pay differential between HCL’s U.S. and Landed-Visa Dependent workers because the presentation is the company’s strategy for hiring new H-1B workers from India;22 i.e., new Landed-Visa Dependent workers. 

Table 1 highlights the final listed occupation in the image: HCL’s employees with expertise with Oracle databases. As the table shows, HCL pays its Oracle database experts who are U.S. citizens $140,240 per year, but the H-1B employees hired in India in the same job, in the same line of business, and with the same skills, just $85,459, a difference of nearly $55,000. Put another way, HCL pays its U.S. Citizen Oracle database experts 64% more than its Landed-Visa Dependent H-1B workers doing the exact same job (HCL calculates this in the Figure A column titled “Citizen Vs Landed ARC”). According to the plain language of the H-1B statute, HCL is required to pay its H-1B Oracle database experts with H-1B visas $140,240, because that is the “actual wage” it pays its U.S. citizen employees in the same job. Further, HCL’s notes in the document reveal that it applies for more H-1B workers for Oracle database job roles precisely because the cost differences between H-1B and U.S. workers are so great. 

Table 1

Another part of the document, shown in Figure B (see text we have highlighted in yellow), illustrates how HCL organizes its H-1B application pool around specific guidelines. HCL says its H-1B nominations (i.e., applications), have been “carefully constructed” to favor submitting applications for H-1B workers in job roles with the highest wage gap between U.S. and H-1B workers, demonstrating a clear intent to maximize profits by abusing the H-1B program to illegally underpay migrant workers. HCL’s H-1B criteria include: “Cost of local [U.S. citizen] hiring significantly higher than landed [H-1B visa worker hired in India].” 

Figure B

Throughout the presentation, HCL targets H-1B applications for job roles where hiring local (i.e., U.S. citizens or permanent residents; Local-Visa Dependent; and, Third Party) is more expensive than “landed” H-1B visa holders who were recruited in India. In its analysis of every line of business throughout the presentation, HCL states explicitly that the large wage differential between hiring local and these H-1B workers from India is the critical factor in determining which jobs HCL wishes to fill with these H-1B workers. For example, it notes on page 7 that “Local hiring is ~30% more expensive than landed,” on page 8 that “local hiring is 36% more expensive than landed,” and on page 9, that “local hiring ARC is 58% more expensive compared to landed ARC.” On page 11, HCL notes that “70% of nominations [for H-1B] are across 6 skill groups, which have an average of 62% fulfillment and where local hiring is 70% more expensive than landed [H-1B].”23 All of these excerpts illustrate how the significant cost savings HCL gains from hiring much-lower-paid H-1B workers is central to the firm’s H-1B hiring strategy through all of its lines of business.

HCL is also affirming here that its H-1B and U.S. worker employees are “similarly employed” by directly comparing wages of H-1B workers with U.S. workers within job roles. “Citizen Vs Landed [H-1B] ARC” wage savings, as shown in Figure A, is the key variable in the firm’s analysis. Further, HCL repeatedly states that “Local Hiring is [X]% more expensive than Landed [H-1B],” with the goal of targeting new H-1B applications in those job roles where the wage differential is greatest. This demonstrates that HCL has determined that H-1B workers can take on the same positions—in other words are substitutes for—currently employed U.S. workers in those job roles, i.e., they are similarly employed, as envisioned in the statute cited in the text box “Section of H-1B law that requires employers to pay the higher of the actual or prevailing wage,” 8 U.S.C. § 1182(n). 

HCL appears to be stealing at least $95 million per year in wages from its H-1B employees

So, what do all of HCL’s strategies and policies on H-1B hiring amount to in terms of wage savings on labor costs for HCL? By taking the number of all H-1B workers, landed and local, who appear to be illegally underpaid from the HCL document, and the amounts that each appear to be underpaid by, compared with their U.S. citizen and permanent resident co-workers who are doing the same jobs—we estimate that HCL is saving at least $95 million per year by illegally underpaying its H-1B employees. That’s $95 million in stolen wages from H-1B workers every year—white-collar wage theft on a grand scale—which has been facilitated by negligent labor standards enforcement in the H-1B program. (See Appendix for a detailed explanation of our methodology.) 

HCL is a top H-1B recipient and large player in the tech industry—and has been involved in recent H-1B abuse scandals 

HCL is not a small outsourcing firm. It is India’s third-largest IT outsourcing firm, generating 63% of its $11 billion in revenue in the United States.24 HCL is a staffing firm that outplaces nearly all its H-1B workers at hundreds of customer sites for well-known corporations, including USAA, Merck, Google, T-Mobile, Boeing, Keurig Dr Pepper, FedEx, Intel, Deutsche Bank, Pentagon Federal Credit Union, Cisco, Disney, University of California, and Microsoft.25 

Despite being a major player in the industry and working closely with most of the household names headquartered in Silicon Valley, HCL has been at the center of multiple H-1B program-related scandals that have made headlines and the front pages in recent years. The most notable were at Disney and the University of California, where U.S. workers were laid off, but first forced to train their H-1B replacements supplied by HCL, who were paid tens of thousands of dollars less per year.26

Nevertheless, the scale and magnitude of HCL’s apparent abuse and legal violations of the H-1B program suggested by their internal document is stunning, especially considering the number of H-1B workers HCL has employed over the years. Last year, HCL ranked eighth in total H-1B approvals with more than 4,000: 1,405 new visas and 2,801 visa renewals. Over the past dozen years, HCL consistently has been one of the largest H-1B employers, receiving a total of 31,000 H-1B visa approvals from USCIS since 2009.27

Lack of enforcement invites outsourcing employers like HCL to underpay migrant workers

The Department of Labor’s flawed legal reasoning, lax application requirements, and negligent enforcement have opened the door for outsourcing firms like HCL to underpay migrant workers with impunity and to create an entire business model around it. For many years, outsourcing firms have exploited a loophole created by DOL’s flawed interpretation of the H-1B statute. The statute requires U.S. employers to attest that their use of the H-1B program “will not adversely affect the wages and working conditions of workers in the United States similarly employed.”28 Customers like Disney, seeking to save money by replacing their U.S. workers with H-1B employees who are paid substantially less, dodge the wage and working condition requirements by simply outsourcing the H-1B hiring to a contractor like HCL. By doing so, HCL, not Disney, is directly hiring the lower-paid H-1B worker, and the U.S. worker being replaced is employed by Disney, not HCL. DOL has wrongly interpreted the H-1B statute to mean it is only violated in cases where an employer adversely affects the conditions of the employer’s own, direct employees (HCL in the Disney example). By doing so, DOL is incentivizing and subsidizing the outsourcing of jobs to lower-paid contract workers in the technology labor market—a fissuring that degrades the wages and working conditions of H-1B workers and U.S. workers alike.

In sum, DOL has determined it is acceptable for an employer to underpay an H-1B worker, even if U.S. workers are obviously being harmed (they are being laid off and replaced, after all), as long as the H-1B worker is hired through a contractor like HCL. This DOL interpretation appears to be irrational and unjustified, and is the main reason why the dozens of news reports chronicling thousands of U.S. workers training their H-1B replacements—at Disney, the University of California, New York Life, Mass Mutual, Southern California Edison, etc.—have never resulted in a single penalty or any change in business behavior.29 In every reported case, the lower-paid H-1B worker was hired and employed by an outsourcing firm. DOL can easily close the outsourcing loophole it created (more on that later), but the HCL presentation reveals a type of abuse that even the DOL cannot ignore.

The presentation shows HCL pays its own H-1B employees less than its own directly employed U.S. workers, which appears to be a clear violation of the H-1B “actual wage” requirement, even under DOL’s current interpretation. The DOL, the Department of Homeland Security, and Department of Justice should investigate this large-scale malfeasance.30 If violations are found, the government should levy a punishment sufficient to change behavior and deter future violations by HCL and other employers, as well as order HCL to pay back wages to affected H-1B workers. Further, government agencies should restructure their oversight of the H-1B program to ensure compliance, protecting H-1B workers from wage theft and U.S. workers from being undercut now and in the future. 

Violating the actual wage requirement is likely an industrywide practice 

More than 14 years ago, Sens. Richard Durbin (D-Ill.) and Charles Grassley (R-Iowa) uncovered that outsourcing firms rather than traditional technology ones were the largest H-1B employers.31 Outsourcing firms like HCL have continued to dominate the H-1B program ever since. The outsourcing business model relies on supplying labor services to clients, and the ability to secure lower-cost workers is a significant comparative advantage. Exploiting the vulnerabilities in the H-1B program—vulnerabilities created both by statute and governance—is fundamental to the viability of these companies. As a result, the revelations uncovered in the HCL document, combined with available data on the H-1B program, suggest that violating the actual wage requirement is likely an industrywide practice among outsourcing firms.

In order to still reap a profit for themselves as middlemen, the outsourcing firms have to offer clients a way to cut costs. Since IT services is a labor-intensive business—more than 75% of overall costs are for labor—the only way to cut costs for the client and at the same time earn a profit is by finding workers who are significantly less expensive to employ than the U.S. workers already employed by the client.32 The outsourcing firms derive these savings by offshoring as much work as possible to low-cost countries like India, where salaries are often 90% lower than U.S. salaries, coupled with recruiting and hiring H-1B workers at salaries much lower than the salaries paid to U.S. workers.33

To illustrate, Table 2 below shows the top 10 H-1B employers in fiscal year (FY) 2015, according to government data available from USCIS. (FY15 was selected because it corresponds with the timeframe of HCL’s planning document.) It shows the top eight H-1B employers in that period were firms with the same outsourcing business model as HCL. They all pay similarly low average salaries for IT jobs, ranging from $69,000 to $82,000 (HCL is at $81,000, a salary consistent with the salaries listed in the slides of their presentation). This is not surprising, since HCL competes head to head with these same firms, and it is common knowledge that firms within an industry mimic the most profitable practices within a sector. In the IT outsourcing sector, the most profitable practice is exploiting the H-1B program. In contrast, Microsoft and Google—which are not outsourcing firms—ranked 9th and 10th in terms of the most H-1B approvals, respectively, and pay substantially more in salary to their H-1B workers: $121,000 and $131,000. In Google’s case, it paid 89% more to its H-1B employees in 2015 than Tata Consultancy Services(TCS)—a major outsourcing firm like HCL—paid its H-1B workers. 

Table 2

In Figure C, which comes from HCL’s presentation, HCL underscores its competitors’ dependence on H-1B visas. Those competitors—Infosys, TCS, Wipro, and CTS (Cognizant Technology Solutions)—were the top four recipients of H-1B approvals in FY15 (as shown in Table 2). 

Figure C

All of this suggests that HCL’s approach to exploiting the H-1B program is the norm, and not an exception or an outlier. The data show that all firms with an outsourcing business model pay similarly low wages to their H-1B workers, which suggests these firms within the IT industry are mimicking one another’s competitive advantage of exploiting the H-1B program. The new information we have about HCL, in tandem with existing information about other outsourcing firms, strongly suggests that all of the biggest H-1B outsourcing firms likely are violating the H-1B program’s actual wage requirement, especially considering that we know now that they all employ significant numbers of U.S. workers (as shown in Figure C, under “US headcount” and “% on Visas”).34

DOL should close the H-1B outsourcing loophole created by its flawed statutory interpretation 

Some additional discussion about how the H-1B outsourcing loophole operates is warranted. In previous cases that DOL has investigated, including at Disney, DOL asserted that HCL’s practice of paying H-1B workers tens of thousands of dollars less in wages than what the client company—Disney—was paying its own workers was perfectly legal because the H-1B actual wage requirement does not apply when compared with U.S. workers employed by a customer’s company. Of course, such an interpretation is wrong and flies in the face of the intent of Congress to protect both H-1B and U.S. workers. Through this flawed interpretation, DOL invites firms to abuse the H-1B visa, and the subsequent abuse has turned the H-1B into what some have dubbed the “outsourcing visa.”35

DOL’s flawed interpretation also has incentivized the widespread fissuring of the IT services industry. As documented by scholars such as David Weil, replacing employees with contract workers leads to lower-quality jobs, lower wages and benefits, greater job insecurity, and a shift of risk from employer to worker without concomitant reward.36 Disney and every other major employer has enormous financial incentive to outsource jobs to firms like HCL, and these firms in turn exploit the H-1B program because it allows them to pay lower wages and offer fewer benefits and poorer working conditions to migrant workers who are tied to temporary visas and have very little bargaining power. DOL should be working to limit unwarranted fissuring, but instead the agency is incentivizing and accelerating widespread fissuring in the IT services labor market, thereby degrading wages and working conditions for U.S. and migrant workers alike.37

Through this loophole, DOL is also incentivizing and accelerating offshoring, the movement of high-wage jobs from the United States to lower-cost countries. Outsourcing and offshoring are only viable as a business model when they are done in conjunction. HCL’s business model is to replace the customer’s U.S. workers with a blend of workers who are located offshore (India in HCL’s case), and onsite in the United States. Not all jobs and tasks can be sent offshore, however. Some significant share of jobs, due to the nature of their tasks, are geographically sticky and require physical presence in the United States. The typical offshore to onsite labor ratio in the industry is 70:30; i.e., 70% of the workers are located offshore and 30% of the workers are onsite in the United States.38 Firms like HCL reap substantial cost savings by moving work and tasks to its employees in low-cost countries like India, where wages are 90% less than U.S. wages. But those cost savings alone are not sufficient to make it worthwhile for the customer to outsource to HCL. Outsourcers must find additional cost savings from its workers onsite in the United States. The ability to hire H-1B workers at lower costs than similarly skilled U.S. workers is the linchpin for making the outsourcing-offshoring business proposition attractive to customers. Customers expect to cut labor costs sufficiently to counterbalance the additional risk they take on by outsourcing, loss of managerial control, and negative publicity from outsourcing and offshoring. If underpaying H-1B workers was off the table, as it should be, HCL could not offer sufficient overall savings to customers like Disney, who in turn would be much less likely to outsource and offshore their in-house workforce. 

DOL issued policy guidance this year to fix the outsourcing loophole it has de facto created. Under the proposed guidance,

…when a primary employer places an H-1B worker with a secondary employer that is a common law employer of the H-1B worker, such as when a staffing agency places a software engineer with certain technology firms, the secondary employer, in addition to the primary employer, must file a petition and an LCA.39

In the HCL example, this proposed change would have required secondary employers like Disney to file LCAs for H-1B workers placed at its worksites, attesting that it will not adversely affect the wages and working conditions of workers at either company. This would be a major leap forward in stamping out abuse, because the ability of outsourcing firms to place lower-paid H-1B workers at client sites—in these secondary employer arrangements—has been the most common way the H-1B program has been used for at least the past 15 years. Yet, DOL subsequently abandoned the policy guidance, providing no explanation and offering no indication of the future of the policy.40

The Labor Department has the legal authority to investigate H-1B wage theft

In recent cases of H-1B abuses, including those cited here, DOL’s Wage and Hour Division (WHD)—which is “responsible for ensuring that workers are receiving the wages promised on the LCA and are working in the occupation and at the location specified”41—has appeared reluctant to use its authority to investigate what have appeared to be blatant violations of the H-1B wage requirements. And even when the department has investigated, as noted earlier, its flawed interpretation of the law has resulted in no penalties against employers nor any change in behavior among outsourcing firms and the client firms that contract with them. Nevertheless, even with the current flawed legal interpretation with respect to the outsourcing loophole, WHD has significant authority to investigate the types of abuses we have described in this report, in terms of the H-1B actual wage requirement. 

WHD’s own fact sheet lists four circumstances under which it is authorized to initiate an investigation related to the H-1B program:

• • WH [Wage and Hour Division] receives a complaint from an aggrieved person or organization;
  • WH receives specific credible information from a reliable source (other than a complainant) that the employer has failed to meet certain LCA conditions, has engaged in a pattern or practice of failures to meet such conditions, or has committed a substantial failure to meet such conditions that affects multiple employees;
  • The Secretary of Labor has found, on a case-by-case basis, that an employer (within the last five years) has committed a willful failure to meet a condition specified in the LCA or willfully misrepresented a material fact in the LCA. In such cases, a random investigation may be conducted; or
  • The Secretary of Labor has reasonable cause to believe that the employer is not in compliance. In such cases, the Secretary may certify that an investigation be conducted.42 

With respect to the bullet points above, the relevant details are provided in the H-1B statute at 8 U.S.C. 1182(n)(2)(G).43 Subsection (i) clearly states that the secretary of labor may investigate an H-1B employer if the secretary “has reasonable cause to believe that the employer is not in compliance.” Subsection (ii) is also straightforward, giving the secretary authority to investigate when he or she has received credible information from a source:

If the Secretary of Labor receives specific credible information from a source, who is likely to have knowledge of an employer’s practices or employment conditions, or an employer’s compliance with the employer’s labor condition application under paragraph (1), and whose identity is known to the Secretary of Labor, and such information provides reasonable cause to believe that the employer has committed a willful failure to meet a condition of paragraph (1)(A), (1)(B), (1)(C), (1)(E), (1)(F), or (1)(G)(i)(I), has engaged in a pattern or practice of failures to meet such a condition, or has committed a substantial failure to meet such a condition that affects multiple employees, the Secretary of Labor may conduct an investigation into the alleged failure or failures. The Secretary of Labor may withhold the identity of the source from the employer, and the source’s identity shall not be subject to disclosure under section 552 of title 5, United States Code.

HCL’s own internal document that has been made public through litigation, as well as the claims made by the whistleblowers involved in the False Claims Act lawsuit against HCL, are credible sources of specific information that, under current law, should trigger a DOL investigation of HCL’s H-1B program practices. There is perhaps no more credible source than the employer itself, HCL, and in addition, the federal district court that has admitted HCL’s presentation into the official record is another obviously credible source. 

The labor secretary’s authority to investigate HCL’s failures to pay the correct wage rates to their H-1B employees in past years (HCL’s internal document lists salaries from 2015) may be temporally limited, however, by 8 U.S.C. 1182(n)(2)(G)(vi). That section of the statute provides that the secretary must receive the information that could be the basis for an investigation related to an H-1B labor condition application (LCA) “not later than 12 months after the date of the alleged failure” of an employer to comply with the attestations in the LCA. However, the corresponding regulation at Section 5 of 20 C.F.R. §655.806(a)44 further defines how the 12-month statute of limitations operates: 

(5) A complaint must be filed not later than 12 months after the latest date on which the alleged violation(s) were committed, which would be the date on which the employer allegedly failed to perform an action or fulfill a condition specified in the LCA.

In practical terms, this means that if an employer did not pay the correct wage six months ago—even if the corresponding LCA was filed six years ago—then a complaint could still be filed validly according to the 12-month rule.45

In addition, according to case law from DOL’s Administrative Review Board, complaints about H-1B violations can be equitably tolled, meaning that an exemption from the 12-month limitation could apply if the plaintiff (for example, an aggrieved H-1B worker) could not have reasonably discovered the legal violation until after the 12-month period had expired.46 Equitable tolling would be warranted if a complainant was misled by their employer, prevented from asserting rights due to extraordinary circumstances, or the complainant raised the correct claim but mistakenly filed it in the wrong forum.47 

Furthermore, Section 5 of 20 C.F.R. §655.806(a) also clearly states that WHD may assess remedies and back wages that are owed from more than 12 months prior, as long as they are related to a complaint that was validly filed within the 12-month jurisdictional limit in the statute:

This jurisdictional bar does not affect the scope of the remedies which may be assessed by the Administrator. Where, for example, a complaint is timely filed, back wages may be assessed for a period prior to one year before the filing of a complaint.

In addition, because H-1B visas are valid for up to six years, and often for longer when applications for permanent residence are filed for an H-1B worker, many of HCL’s current H-1B employees may have been hired in the years prior to or during fiscal year 2015. As a result, the secretary of labor, through WHD, would be justified in initiating an investigation, because the apparent wage theft and LCA violations uncovered in the HCL document likely are still ongoing (meaning they would fall within the 12-month limitation). 

In any case, even if HCL cannot be penalized for providing false information on LCAs in previous years, due to the 12-month limit, the information presented here and in the whistleblower lawsuit is evidence of an ongoing pattern and practice by HCL—which justifies the initiation of an investigation into HCL’s current practices. HCL’s internal document suggests that the firm is likely to still be carrying out its strategy and explicit policy to systematically and unlawfully underpay its H-1B employees compared with similarly employed U.S. workers, in violation of the H-1B actual wage requirement. WHD therefore should investigate HCL and other outsourcing firms with the aim of making as many H-1B workers whole as it possibly can—through repayment of back wages that are owed, under its existing authority—and levy any other fines and penalties that can serve as a deterrent against future violations, including debarring HCL or other outsourcing firms from hiring through the H-1B program. 

Finally, it should be noted that, as WHD’s fact sheet shows, H-1B enforcement is largely based on the receipt of complaints about an employer’s specific wrongdoing. However, complaints from H-1B workers themselves to DOL are unlikely since it would require an H-1B worker to blow the whistle on their own employer, the same employer that controls the H-1B worker’s immigration status and ability to remain in the United States. That’s another compelling reason why WHD should be more proactive and take action to enforce the law and protect H-1B workers from wage theft based on the existing evidence that has been made public through revelations in the HCL litigation. 

Conclusion and recommendations 

HCL Technologies, India’s third-largest IT outsourcing firm and the eighth-largest employer of college-educated migrant workers with H-1B visas in the United States, appears to be violating U.S. law by vastly underpaying migrant workers and lying on forms it submits to the U.S. Department of Labor to obtain visas for its workers. Specifically, corporate documents suggest that the firm is not—as it attests on those forms—paying H-1B migrant workers the greater of the prevailing wage or the actual wage paid to U.S. workers it employs in the same job roles. Rather, the documents show HCL is paying its H-1B workers tens of thousands of dollars less than it is paying U.S. citizens in those same jobs, in violation of the actual wage requirement. If true, the magnitude of the lawbreaking is stunning, with violations numbering in the tens of thousands. As noted above, based on the number of workers and average levels of underpayment at HCL, we estimate that the company is stealing roughly $95 million from H-1B workers every year. This wage theft is also degrading wages and labor standards for all workers in similar occupations, and the IT industry at large. Further, it allows HCL to offer its contract workers to such U.S. employers as Cisco, Disney, Google, and other firms at a much lower cost than the workers that competitor outsourcing firms can reasonably offer. In effect, U.S. immigration policy is being used to subsidize the outsourcing and offshoring of decent and high-paying U.S. jobs. 

The cumulative loss of wages to workers in the United States—including both migrant workers and workers who are U.S. citizens—likely totals in the billions of dollars, just from the abuses of the H-1B program by one company. In 2020, 17 of the top 30 H-1B employers were outsourcing firms with business models similar to HCL’s, which means that the potential wage theft being facilitated similarly by other outsourcing firms through the H-1B program is at least an order of magnitude larger. 

Immediate action should be taken to stop the apparent wage theft and abuse of the H-1B program by HCL that undercuts labor standards—as well as to stop abuses by other companies that might be violating the actual wage requirement—and to make H-1B workers whole. To help remedy this situation, we recommend that:

• Congress hold hearings to investigate visa program vulnerabilities uncovered by the HCL document.
• The Department of Labor’s Wage and Hour Division recover the full amount of back wages for all H-1B workers who have been the victims of HCL’s apparent violation of the H-1B actual wage requirement.
• The Department of Justice’s (DOJ) Civil Division, in conjunction with United States Citizenship and Immigration Services and DOL, vigorously prosecute visa fraud under the False Claims Act, consistent with a recent federal court decision applying the False Claims Act to H-1B visa fraud, as well as other visas used for skilled occupations, like the L-1 and B-1.48
• Congress request the Government Accountability Office and the Office of Inspector General at both the Department of Homeland Security and DOL, investigate the types of H-1B visa abuse that have been uncovered, along with other forms of abuse.
• The Equal Employment Opportunity Commission and DOJ Office of Special Counsel investigate HCL’s compliance with anti-discrimination laws given its overt preference for H-1B workers over workers who are U.S. citizens and lawful permanent residents.
• The Department of Labor’s Office of Federal Contract Compliance Programs audit HCL and its clients (because many are federal contractors).

The Departments of Labor and Homeland Security should also take immediate action—using existing legal authority—to improve other aspects of the H-1B program and thereby protect labor standards. We urge that:

• DOL vigorously enforce the attestations made by H-1B employers on their applications, including the wage and working conditions requirements.
  • The secretary of labor has the statutory authority to initiate an investigation and should use it. HCL’s own document, the whistleblowers in the False Claims Act lawsuits, and the federal district court that is acting as the forum for the litigation are all credible sources that justify the initiation of an investigation.
• DOL fix the outsourcing loophole by issuing policy guidance requiring secondary employers of H-1B workers (the companies that hire firms like HCL to provide contract workers) to file labor condition applications. This would help stop DOL from artificially creating huge financial incentives leading to the fissuring of the IT labor market (the replacement of employees with contract workers with lower wages and fewer protections).
• DOL promulgate a regulation to increase the required minimum prevailing wage levels for H-1B jobs to reflect true market wages.
• DHS promulgate a regulation to allocate H-1Bs based on applications offering to pay the highest wages.
• DHS provide deferred action and employment authorization to any H-1B workers who are victims of employers found to have violated labor, employment, or immigration laws—including visa fraud.
• DHS and DOL permit and facilitate H-1B workers to become eligible to receive U visas (for victims of crime who assist law enforcement) if they come forward as whistleblowers and/or assist authorities in prosecuting lawbreaking employers.

Finally, Congress should pass legislation that implements lasting and much-needed reforms in the H-1B visa program and to stem abuses. We recommend that such legislation:

• Increase the H-1B wage requirements to reflect true market wages and allocate H-1Bs based on applications offering to pay the highest wages.
• Establish a labor market test that requires employers to prove a labor shortage exists before they can hire through the H-1B program.
• Allow H-1B workers to self-petition for permanent residence (i.e., ending employer sponsorship for green cards).
• Improve and enhance portability between employers for H-1B workers.
• Establish a robust post-entry auditing system to ensure employers are held accountable when they underpay H-1B workers and violate other labor and employment protections.

Appendix: Methodology for estimating annual underpayment and wage theft of H-1B workers

To estimate annual underpayment of HCL’s H-1B visa workers, we use data provided in the HCL document, “Guidelines for H1 nominations,” which is an exhibit in the recent False Claims Act whistleblower case filed against the company by former HCL employees in September 2021 (United States of America, ex rel. Ralph Billington, Michael Aceves, and Sharon Dorman (Plaintiffs) v. HCL Technologies LTD. and HCL America, INC.). The HCL presentation is a planning document for its fiscal year 2016 H-1B visa allotment, which the U.S. government opened April 1, 2015. Thus the document was likely created in late 2014 or early 2015. It used data on the company’s existing workforce to outline how the company would determine which positions it would seek to fill by applying for an H-1B visa for that position. The presentation includes detailed tables analyzing the additional resource costs (ARC) for each type of worker by worker-status for the three lines of business (LoB) in which most of HCL’s H-1B workforce is employed. The three LoBs are:

1. Engineering and R&D services (ERS)
2. Application development and systems integration (APPS & SI)
3. IT Infrastructure management services and solutions (INFRA)

HCL segregates its workers into four status categories to perform its H-1B application analysis:

• Citizen: U.S. citizens and permanent residents employed by HCL
• Landed–Visa Dependent: H-1B workers hired in India and sponsored by HCL to come to the U.S.
• Local–Visa Dependent: H-1B workers who were already present in the United States working for other employers but who were hired by/transferred their visas to HCL
• TP or Third Party: workers hired through contractor firms

For each of the three LoBs, HCL tables show headcounts (#) and compare the ARC for workers in the four status categories. 

While the presentation does not define ARC, we infer from other evidence that ARC represents the average wage paid to the workers, not the average total cost of compensation, benefits, and taxes HCL incurs for its workers.

First, according to USCIS data, in fiscal year 2015 HCL paid its H-1B workers $81,317 (See Table 2 earlier in our report). This is wage-only data and is consistent with data in the HCL presentation.

Were the ARC to reflect all costs of compensation, the wages reflected would be implausibly low. The rule of thumb for employers is to add 27% to the direct cost of an employee to account for benefits (health care, leave, etc.). This is called the worker’s loaded cost. 

So, the straight wage of someone with a loaded cost of $76,200 would be $60,000 ($76,200= 1.27 X $60,000). There are statutory policy constraints that create a de facto absolute wage floor of $60,000 for certain H-1B employers like HCL. The presentation says that the average wage for the Landed–Visa Dependent workers such as Sr. Mechanical Designer was $68,328. If that were the loaded rate then the wages for that position would be $53,802 (=$68,328/1.27), which would place HCL at significant legal risk. 

Note that from a policy standpoint, whether the ARC is wages-only or loaded cost is immaterial since the H-1B workers must be paid wages and benefits at least as much as the firm’s similarly employed U.S. workers. Landed H-1B workers are receiving a substantially lower ARC than similarly employed U.S. citizens whether ARC is measuring wages-only or some combination of wages and benefits.

Within a specific LoB, multiple views of ARC differentials are presented by: project category, skill, or job role.

HCL tables for job role were used to estimate the wages because they provide the most disaggregated view and play a critical role in HCL’s H-1B application strategy to exploit H-1B-to-citizen wage gaps. 

HCL’s underpayment is calculated for both its Landed–Visa Dependent and Local–Visa Dependent workers and then summed.

Appendix Table 1 shows how H-1B wage savings are estimated. The columns labeled “Savings from Landed H-1B” and “Savings from Local H-1B” show the calculations):

For each Job Role (Skill):

Landed H1B Savings=(Citizen ARC−Landed ARC) × Number of Landed

Local H1B Savings=(Citizen ARC−Local ARC) × Number of Local

Total Wage Savings is the sum of Landed + Local Savings for all job roles. 

Appendix Table 1

Additional notes regarding our calculations:

• Job roles where the H-1B ARC is greater than the Citizen ARC are left out of the calculation because those workers cannot be identified as being underpaid the actual wage requirement.
• Workers listed as “Third Party” are not relevant for these calculations and were therefore not included because those workers are employed by another firm, not HCL.
• The detailed tables in HCL’s presentation include the vast majority, though not all, of HCL’s H-1B workers in those business lines. HCL presents the job roles with the most H-1B applications for each business line. For example, the ERS table shows only the subset of job roles that account for the most H-1B workers and applications. Further, some business lines that have H-1B workers are not included in HCL’s analysis. As a result, our estimates likely understate the cumulative underpayment to H-1B workers. 

The cumulative wage savings for each of HCL’s major lines of business are:

• ERS = $18,380,591
• APPS & SI = $68,220,782
• INFRA = $8,053,730

The resulting total amount by which H-1B workers appear to be illegally underpaid by is: 
$94,655,103

Endnotes

1. EPI has published reports detailing H-1B abuses dating back to 2007. See, for example, Ron Hira, Outsourcing America’s Technology and Knowledge Jobs: High-Skill Guest Worker Visas Are Currently Hurting Rather Than Helping Keep Jobs at Home, Economic Policy Institute, May 16, 2007; Ron Hira, Bridge to Immigration or Cheap Temporary Labor? The H-1B & L-1 Visa Programs Are a Source of Both, Economic Policy Institute, February 17, 2010. The New York Times published an investigative series in 2015, which included the following article: Julia Preston, “Large Companies Game H-1B Visa Program, Costing the U.S. Jobs,” New York Times, November 10, 2015. The CBS News show “60 Minutes” profiled H-1B abuses in 1993 (“North of the Border; American Businesses Are Importing Foreign Computer Programmers While American Programmers Are Unemployed,” March 19, 1993) and again in 2017 (“You’re Fired,” March 19, 2017.)

2. The H-1B visa program was created to fill labor shortages in high-skilled fields that require at least a college degree. While it has increasingly been dominated by employers in STEM fields, specifically IT, there are H-1Bs approved for a very wide variety of white-collar jobs including journalism, accounting, marketing, and in the medical field, etc. The key eligibility criterion is that a bachelor’s degree is typically the base-level educational attainment required to enter the occupation.

3. Patrick Thibodeau, “Southern California Edison IT Workers ‘Beyond Furious’ over H-1B Replacements,” Computerworld, February 4, 2015.

4. Harichandan Arakali, “India’s Infosys Cleared In Southern California Edison Department of Labor Probe,” International Business Times, September 8, 2015.

5. HCL Technologies was formerly known as Hindustan Computers Limited. Its subsidiary HCL America operates in the United States.

6. United States of America, ex rel. Ralph Billington, Michael Aceves, and Sharon Dorman (Plaintiff) v. HCL Technologies LTD. and HCL America, INC. (Defendants). Fourth Amended Complaint for Violations of the False Claims Act. United States District Court for the District of Connecticut. Civil Action No. 3:19-CV-1185 (MPS).

7. HCL. “Guidelines for H1 nominations.” Exhibit 57. Case 3:19-cv-01185-MPS Document 48-57, filed September 7, 2021.

8. Ron Hira and Daniel Costa, “The H-1B Visa Program Remains the “Outsourcing Visa”: More than Half of the Top 30 H-1B Employers Were Outsourcing Firms,” Working Economics Blog (Economic Policy Institute), March 31, 2021.

9. For example, see Sam Harnett, “Outsourced: In a Twist, Some San Francisco IT Jobs Are Moving to India,” MPR News, December 28, 2016. Harnett profiles Hank Nguyen who had to train his H-1B replacement when the University of California outsourced his work to HCL: “Nguyen says he escaped to America in 1981 … taught himself about computers so he could get a job in the tech world … the surest way for him to have a stable middle-class life.” Additionally, government data show that only one-fourth of computer systems analysts (Standard Occupation Code #15-1211), one of the most common H-1B occupations, have a master’s degree or more education. A higher share of computer systems analysts have educational attainment that is less than a bachelor’s degree. See Bureau of Labor Statistics, “Table 5.3 Educational Attainment Distribution for Workers 25 Years and Older by Detailed Occupation, 2018-19,” last modified September 8, 2021 [accessed November 2021]. The classic book by Robert Zussman, Mechanics of the Middle Class (University of California, 1985) describes how many from working class backgrounds entered engineering and technology occupations because they were attracted by the possibility of improving their economic status and class.

10. Women account for 36% of computer systems analysts, a much higher share than their share of software developers, at 19%. African Americans account for 10% of computer systems analysts, higher than their 6% share of software developers. See Bureau of Labor Statistics, “Labor Force Statistics from the Current Population Survey, Table 11. Employed Persons by Detailed Occupation, Sex, Race, and Hispanic or Latino Ethnicity,” last modified January 22, 2021 [accessed November 2021].

11. USCIS Office of Policy & Strategy, Policy Research Division, H-1B Authorized-to-Work Population Estimate, U.S. Department of Homeland Security, June 2020.

12. Inadmissible aliens, 8 U.S.C. §1182(n); see also U.S. Department of Labor, Fact Sheet #62G: Must an H-1B Worker Be Paid a Guaranteed Wage? (fact sheet), revised July 2008.

13. As an EPI fact sheet explains, while “corporate lobbyists and other H-1B proponents claim that H-1B workers cannot be paid less than U.S. workers because employers must pay H-1B workers no less than the ‘prevailing wage,’” employers often choose the lower “entry-level” or Level 2 wage, and the government doesn’t check to verify that the workers earning those wages are indeed at the low end of the experience and education spectrum. See Daniel Costa, “H-1B Visa Needs Reform to Make It Fairer to Migrant and American Workers” (fact sheet), Economic Policy Institute, April 5, 2017. Instead of using the DOL wage survey, employers also can opt for an independent wage survey or request a prevailing wage determination from the DOL to set the prevailing wage. In 2019, 9% of H-1B jobs had a prevailing wage that was certified by DOL according to an independent wage survey; see Daniel Costa and Ron Hira, H-1B Visas and Prevailing Wage Levels: A Majority of H-1B Employers—Including Major U.S. Tech Firms—Use the Program to Pay Migrant Workers Well Below Market Wages, Economic Policy Institute, May 2020.

14. Daniel Costa and Ron Hira, H-1B Visas and Prevailing Wage Levels: A Majority of H-1B Employers—Including Major U.S. Tech Firms—Use the Program to Pay Migrant Workers Well Below Market Wages, Economic Policy Institute, May 2020.

15. See, for example, the press release announcing the introduction of the H-1B and L-1 Visa Reform Act in both chambers in the 116th Congress: Office of Sen. Dick Durbin, “Durbin, Grassley, Pascrell, Gosar Lead Overhaul to H-1B, L-1 Visa Programs: Bipartisan, Bicameral Reforms Will Protect American Workers and Improve Fairness for Skilled Labor Applicants” (press release), May 26, 2020. Similar bipartisan legislation has been introduced in every Congress for more than a decade.

16. Daniel Costa and Ron Hira, H-1B Visas and Prevailing Wage Levels: A Majority of H-1B Employers—Including Major U.S. Tech Firms—Use the Program to Pay Migrant Workers Well Below Market Wages, Economic Policy Institute, May 2020.

17. Strengthening Wage Protections for the Temporary and Permanent Employment of Certain Immigrants and Non-Immigrants in the United States: Delay of Effective and Transition Dates [final rule], 86 Fed. Reg. 26164 (May 13, 2021).

18. Delaying the effective date and transition dates of the updated H-1B prevailing wage rule in the final rule by 18 months, as DOL proposed and finalized, will cost H-1B workers $35.48 billion in wages over 10 years, according to the DOL’s own calculations, or in discounted terms, “The Department estimates the total reduction of transfer payments over the 10-year period is $32.05 billion and $28.19 billion at discount rates of 3 and 7 percent, respectively.” Employment and Training Administration, “Strengthening Wage Protections for the Temporary and Permanent Employment of Certain Immigrants and Non-Immigrants in the United States,” U.S. Department of Labor: Proposed Delay of Effective and Transition Dates, 86 Fed. Reg. 15154 (March 22, 2021), see text and “Exhibit 3 – Total Transfer Payments of the NPRM.”

19. U.S. Department of Labor, “Strengthening Wage Protections for the Temporary and Permanent Employment of Certain Aliens in the United States,” listed on regulations.gov from the Office of Information and Regulatory Affairs, Office of Management and Budget (RIN-1205-AC00).

20. 8 U.S.C. § 1182(n) Labor condition application. For more discussion in the current Code of Federal Regulations, see “What Is the First LCA Requirement, Regarding Wages?,” 20 C.F.R. § 655.731 (2020).

21. Employers attest on Form ETA-9035 they will pay H-1B workers the same as their U.S. workers, which means they will pay H-1B workers at least as much as the actual wage they are paying their U.S. workers in similar occupations. The statute requiring payment of the actual wage can be found at 8 U.S.C. § 1182(n) Labor condition application. For more discussion in the current Code of Federal Regulations and a description of the “actual wage” requirement, see “What Is the First LCA Requirement, Regarding Wages?, (a) Establishing the Wage Requirement,” 20 C.F.R. § 655.731 (2020).

22. The authors reviewed available H-1B petition approvals for HCL from USCIS data for fiscal years 2008–2013, 2018, and 2019. The data show that in each year, 97% to 99% of HCL’s H-1B workers hailed from India. As a result, we refer to HCL’s “landed” H-1B workers as being of Indian origin.

23. HCL, “Guidelines for H1 nominations,” Exhibit 57. Case 3:19-cv-01185-MPS Document 48-57, filed September 7, 2021, at pages 7–9, and 11. From United States of America, ex rel. Ralph Billington, Michael Aceves, and Sharon Dorman (Plaintiffs) v. HCL Technologies LTD. and HCL America, INC. (Defendants). Fourth Amended Complaint for Violations of the False Claims Act. United States District Court for the District of Connecticut. Civil Action No. 3:19-CV-1185 (MPS).

24. HCL Technologies, “Unaudited Financial Results for the Quarter Ended June 30, 2021,” Quarterly Reports—Full Financial Results, published July 29, 2021.

25. Authors’ analysis of U.S. Department of Labor, Employment and Training Administration, Office of Foreign Labor Certification, “Disclosure data” for labor condition applications from fiscal year 2020 [accessed October 2021]. The named firms are secondary entities HCL lists on its H-1B applications.

26. See, for example, Julia Preston, “Pink Slips at Disney. But First, Training Foreign Replacements,” New York Times, June 3, 2015; see also, Michael Hiltzik, “How the University of California Exploited a Visa Loophole to Move Tech Jobs to India,” Los Angeles Times, January 6, 2017.

27. Authors’ analysis of U.S. Department of Homeland Security, U.S. Citizenship and Immigration Services, H-1B Employer Data Hub [accessed October 26,2021].

28. “Inadmissible Aliens, Labor Condition Application,” 8 U.S.C. § 1182(n)(A)(ii).

29. See, for example, Sarah N. Lynch, “Infosys Says Cleared in U.S. Visa Probe by Labor Department,” Reuters, September 8, 2015; see also, Julia Preston, “Lawsuits Claim Disney Colluded to Replace U.S. Workers With Immigrants,” New York Times, January 25, 2016.

30. The three federal agencies play different roles with respect to enforcement in the H-1B program. For example DOL enforces the rules regarding the wages and working conditions of H-1B and U.S. workers and the attestations made by employers on DOL forms. Enforcement by DHS is related to claims on USCIS petitions, which may also include information about employment and wages, but DHS looks to ensure that information provided on petitions is not fraudulent. DOJ looks at other related issues, for example whether employers have discriminated against workers based on citizenship or nationality.

31. Office of Sen. Chuck Grassley, “Grassley, Durbin Ask for Details on Companies’ Use of H-1B Visas: Top Nine Foreign Based Companies Use Nearly 20,000 H-1B Visas” (press release), May 14, 2007.

32. Infosys, a direct competitor of HCL and the No. 2 India-based outsourcing firm, details its costs in its financial reporting to the U.S. Securities and Exchange Commission, allowing us to estimate the labor cost share. In 2021, Infosys reported $10.2 billion in cost of sales plus operating expenses, of which $7.6 billion came from employee costs plus subcontractors (i.e., labor costs for delivering services to customers). So, workers delivering services to clients accounted for 74.5% of Infosys’ overall costs. Authors’ analysis of Infosys, Form 20-F Annual Report, Fiscal Year ending March 31, 2021.

33. For example, the job website Indeed.com reported annual salaries for software engineers in India at $8,349 per year, which is 92% less than its reporting of $109,552 for software engineers in Washington, D.C. Authors’ analysis of data retrieved from Indeed.com on October 24, 2021. Currency conversion of 75 rupees per one dollar according to Morningstar.com.

34. It is important to note that many of the U.S. workers employed by outsourcing firms were likely “rebadged” from client firms. Outsourcers like HCL will approach a client to take over a large IT department, typically numbering in the hundreds. As part of the outsourcing deal, some direct employees of the client will be transferred to HCL, which is known as rebadging, e.g., some direct employees of Disney will transfer to become employees of HCL. This is done to ensure continuity in operations, enable smooth transfers of knowledge to the outsourcer, and to soften any negative public relations a client might face in the wake of mass layoffs. Those rebadged workers overwhelmingly are U.S. workers. In most cases, those U.S. workers will be terminated by the outsourcer after 12 to 18 months because U.S. workers are more expensive compared with their lower-paid H-1B counterparts, who are hired to replace them. Such practices—terminating U.S. workers while hiring lower-paid H-1B employees who are similarly employed—are violations of both the actual wage and adverse effects attestations the H-1B employers sign. DOL has never enforced these laws.

35. Ron Hira and Daniel Costa, “The H-1B Visa Program Remains the ‘Outsourcing Visa’: More Than Half of the Top 30 H-1B Employers Were Outsourcing Firms,” Working Economics Blog (Economic Policy Institute), March 31, 2021.

36. David Weil, The Fissured Workplace: Why Work Became so Bad for so Many and What Can Be Done to Improve It (Cambridge, Mass.: Harvard University Press, 2017).

37. EPI’s Lawrence Mishel and Josh Bivens identify fissuring and domestic outsourcing as a major factor in wage suppression and wage inequality. See Identifying the Policy Levers Generating Wage Suppression and Wage Inequality, Economic Policy Institute, May 13, 2021. A number of studies show a wage penalty for subcontracted/outsourced workers. For example, see Arindrajit Dube and Ethan Kaplan, “Does Outsourcing Reduce Wages in the Low-Wage Service Occupations? Evidence from Janitors and Guards,” ILR Review, Cornell University. January 1, 2010, https://doi.org/10.1177/001979391006300206, and Deborah Goldschmidt and Johannes Schmieder, “The Rise of Domestic Outsourcing and the Evolution of the German Wage Structure,” Quarterly Journal of Economics, Oxford University Press, vol. 132, no. 3 (2017), 1165–1217.

38. Infosys, HCL’s close competitor, reports to the U.S. Securities and Exchange Commission its onsite personnel’s share of billable hours are 26%, while offshore personnel’s share are 74%, in Infosys, Form 20-F Annual Report, Fiscal Year Ending March 31, 2021, (Revenues section).

39. U.S. Department of Labor, “U.S. Department of Labor Revises Interpretation, Issues New Guidance Clarifying Filing, Compliance Requirements in H-1B Visa Program” (press release), January 15, 2021.

40. On January 20, 2021, the Department of Labor’s Employment and Training Administration announced it withdrew the policy guidance requiring secondary employers to file LCAs. See “January 20, 2021. U.S. Department of Labor Withdraws Program Bulletin Announcing Revised Interpretation and New Guidance under the H-1B Visa Program for Review,” available at https://www.dol.gov/agencies/eta/foreign-labor/news.

41. U.S. Department of Labor Wage and Hour Division, Fact Sheet #62U: What Is the Wage and Hour Division’s Enforcement Authority Under the H-1B Program? (fact sheet), revised November 2016.

42. U.S. Department of Labor, Wage and Hour Division, Fact Sheet #62U: What Is the Wage and Hour Division’s Enforcement Authority Under the H-1B Program? (fact sheet), revised November 2016.

43. U.S. Department of Labor, Wage and Hour Division, H-1B Labor Condition Application; H-1B Visa Reform Act, 2004 Amendments, INA § 212(n), 8 U.S.C. § 1182(n) (2004).

44. Who May File a Complaint and How Is It Processed?, 20 C.F.R. § 655.806 (2000).

45. See also Jain v. Empower IT, Inc. d/b/a Infobahn Technologies, No. 08-08 (ARB Oct. 30, 2009) [noting that the 12-month clock is measured from the date of the last violation].

46. See, for example, Merriam-Webster dictionary, definition of equitable tolling.

47. Ndiaye v. CVS Store No. 6081, 04-LCA-36 (ARB Nov. 29, 2006), at 7.

48. Jean-Claude Franchitti v. Cognizant Technology Solutions Corporation et al., Memorandum and Order. August 17, 2021.

TABLE OF CONTENTS

Reforming Unemployment Insurance

• Foreword
• Executive summary
• Introduction
• Primer
• Statement of the problem
• Section 1. Universal standards
• Section 2. Financing
• Section 3. Eligibility
• Section 4. Benefit Duration
• Section 5. Benefit levels
• Appendix

Key proposals

• Federal financing: Address chronic underfunding and incentives to reduce outlays at the expense of workers by paying for all regular and extended UI benefits with federal dollars. Absent a switch to a wholly federally financed system, reform tax rate calculations and state trust fund targets to strengthen support for workers and stabilize the system.
• Taxable wage base: To make UI’s finances fairer and more efficient, broaden the taxable wage base for unemployment insurance to be equal to the wage base for Social Security.
• Tax rate: In a federally financed system, reduce employer incentives to block worker claims by reforming “experience rating” to determine the employer tax rate based on changes in hours employees work, not unemployment insurance claims. In a federal–state financing system, reconsider “experience rating” and base state trust fund targets on industry-adjusted per capita targets, not “high cost multiple” systems that encourage states to slash awards to replenish trust fund accounts.
• Recessions: In a federally financed system, acknowledge the economy-boosting benefits of unemployment insurance benefits during recessions by paying for them with general revenue. In a federal–state financing system, use automatic triggers to provide federal financial assistance to states.
• Classification of workers: Require states to implement “ABC” tests that prevent employers from circumventing taxes by reclassifying employees as contractors, and require large businesses that use a lot of contractors to pay unemployment insurance tax on their contractors.

Introduction

The problem

States and the federal government jointly finance unemployment insurance (UI) in the United States through state and federal taxes imposed on wages and paid by employers, with a portion of those taxes likely passed through to workers in the form of lower pay. During normal economic times, states pay for the benefits their workers receive, and the federal government provides grants to pay for the cost of administering the program. The federal government also finances 50% of the Extended Benefits (EB) program.1 In recent recessions, it has paid 100% of EB costs as well as the costs for additional non-EB benefit extensions.

The way we pay for unemployment insurance benefits explains many of the program’s problems today. The desire to attract businesses and jobs puts pressure on states to keep their tax rates low. To do so, they limit benefits recipiency (the share of unemployed workers receiving benefits), decrease the amount of benefits workers receive, or both. Employers also have an incentive to make it harder for workers to claim benefits—for example, by filing challenges and appeals to worker claims—because the UI taxes firms pay rise when their workers collect UI benefits, a structure known as “experience rating.”

For both employers and states, pressure to reduce the benefits flowing to workers is especially intense when benefits are needed most: during and just after major recessions. When profit margins are slim, employers may be more likely to try to save money by keeping their UI tax rate as low as possible.

Federal law requires states to save their UI funds in a trust fund account and encourages them to keep adequate funds in it. During past recessions, these accounts have run empty in a number of states. To refill their accounts and get back into balance, many states slash benefits. In the wake of the Great Recession, for example, nine states cut the number of weeks individuals could get benefits from the traditional 26 to as few as 12 (Leachman 2015).2 As of April 2021, state legislators in at least three states (Iowa, Louisiana, and Tennessee) had proposed cutting the benefit duration to 12 weeks in response to low trust fund balances following the economic crisis caused by the COVID-19 pandemic (Golshan and Delaney 2021). The consequences of inadequate program financing fall squarely on the most disadvantaged workers, disproportionately affecting communities of color, as described in Section 3, covering eligibility.

The solution

Current financing of the UI system incentivizes employers and states to obstruct the delivery of UI benefits. Redesigning the way benefits are financed could create a system that would more effectively deliver UI.

Implementation

Financing UI benefits at the federal, rather than the state, level is the most logical way to ensure adequate funding for and the equitable distribution of UI benefits. If policymakers choose to leave benefit financing primarily to the states, however, significant improvements could still be made.

Federal policymakers could approximate “first-best” reforms by (a) raising the federal taxable wage base (which would require states to raise their own taxable wage bases), (b) reforming experience rating, (c) making federal financial assistance to states for funding UI benefits more predictable by tying it to automatic triggers, (d) ensuring that firms do not have incentives to outsource or misclassify workers as contractors, and (e) basing state trust fund targets on industry-adjusted per capita targets, not the current “high cost multiple” system, which encourages tax and benefit cuts.

Funding unemployment benefits with federal financing

In normal economic times, state UI benefits are the only support available to unemployed workers; during economic crises, they are often the only support preventing workers from falling into distress. But rather than ensure that these benefits are adequate, states compete in a race to the bottom, in an effort to attract firms. Employers shift production and workers to low-tax states (Guo 2020). They are especially likely to exploit differences across states in the taxation of part-time workers (U.S. GAO 1993). These moves hurt women, who are disproportionately likely to work part time, and people of color, who are disproportionately likely to work part time but want full-time work (Golden and Kim 2020).

Cutting taxes requires cutting benefits, making the race to the bottom evident in every aspect of the UI system (Galle 2019). After the 2009 recession, 10 states dramatically cut the duration of their UI benefits, and others failed to adjust the maximum benefit level for inflation for more than a decade, eroding benefits (CRS 2019; Smith, Wilson, and Bivens 2014). States that have most aggressively courted business by cutting benefits the most are also those states granting UI benefits to lower shares of separated workers (Desilver 2020; U.S. DOL-ETA 2021a; U.S. Census Bureau 2019). Indeed, historical data on the recipiency rate suggest that states tightening requirements in times of economic distress have contributed to subsequent declines in recipiency rates that have never ascended back to mid-last century highs exceeding 50%, and hover around 28% today (as of 2019) (U.S. DOL-ETA 2021b). By capitulating to employer threats to move jobs out of state, local officials may see themselves as winning a competition with their neighbors. But the result is a less effective automatic stabilizer to assist displaced workers during recessions, leaving the federal government holding the bag to pay for other safety-net programs.

Policy proposal: Fund regular unemployment benefits and the full cost of extended benefits with federal financing

No solution short of federal financing will fully overcome these problems; if states can compete with one another to lower taxes, they will. If their revenue is lower, they will find new ways to reduce recipiency rates. Following the Great Recession, for example, when federal law temporarily constrained states from reducing benefit amounts, they cut the duration of benefits (CRS 2019; Smith, Wilson, and Bivens 2014). Some states also erected new administrative barriers (Wentworth 2017). For example, a new online system in Massachusetts increased one form of benefit denial by 950%, and delayed claims processing by more than six weeks on average. Florida increased one category of procedural denials by 180%, and another by 400%.

Financing at least the cost of the minimum regular UI benefits we have described with federal money—building on the existing federal financing of program administration and extended benefits—could eliminate this race to the bottom.3 Removing this competition would remove the greatest barrier to adequate benefit financing.4 A federally financed regular UI benefit could be financed in several ways, as shown below.

Increasing the taxable wage base

Currently, states and the federal government finance UI almost exclusively through taxes on employers. The total tax an employer owes is based on the product of its tax rate and the taxable wage base, the portion of each employee’s salary that is considered when calculating the tax owed. For the current federal UI tax—the Federal Unemployment Tax Act (FUTA) tax—the federal government taxes only the first $7,000 of each employee’s wages. State wage bases cannot be lower than the federal wage base; they currently range from $7,000 to about $53,000, with most of them less than $15,000 (U.S. DOL-ETA 2020c). The taxable maximums for UI wage bases are far lower than the taxable maximum wage bases for other programs. For example, the wage cap for the Social Security portion of the Federal Insurance Contributions Act (FICA) for 2021 was $142,800. The UI federal wage base has failed to keep up with inflation; it was $3,000 in 1939, or more than $55,000 in 2021 dollars, almost eight times its current value of $7,000 (Gould-Werth 2020a).

Policy proposal: Set the taxable wage base for unemployment insurance equal to the wage base for Social Security

We propose increasing the federal UI taxable wage base to a level equal to the current Social Security taxable wage base and indexing it to inflation. Raising the wage base threshold would allow for much lower rates, which would be more economically efficient, because they would reduce the incentive to attempt to avoid the tax. If UI financing were shifted to the federal level and the taxable federal wage base broadened, revenues could increase without an accompanying rate hike.

A higher wage base cap would also better align the constituencies that pay the tax and draw benefits from it. For example, a worker in Vermont who earns $10,000 a year has taxes levied on 100% of her wages and has 100% of her wages considered when setting benefits, whereas a worker who earns $50,000 has taxes levied on only 28% of her earnings, but has 92% of her wages used when determining her benefit level (U.S. DOL-ETA 2020b; Vermont DOL 2021). Such a system thus imposes a greater relative burden on the lower-wage worker.

Raising the wage cap would also reduce the incentive to prefer a small number of high-earning workers over a large number of low earners. With a low cap, an employer incurs greater tax liability if she hires two $20,000 earners than if she hires one $40,000 earner. For instance, in Vermont, where there is a 2021 cap of $14,100, an employer with a 1% rate would pay $141 in state UI tax for the $40,000 earner, but $282 for the two $20,000 earners. The system thus disincentivizes employers to employ low-wage workers.5

Under the current federal–state UI system, state wage bases cannot be lower than the federal wage base by law. Raising the federal UI cap to the Social Security cap would therefore also raise all state caps, generating all of the benefits described above.6

Changing the tax rate formulation

Average UI tax rates are low in the United States. The federal rate is 0.6%,7 and most state rates average 1%–2% (U.S. DOL-ETA 2020a). Employers pay the federal government $42 a year for each full-time, year-round employee (0.6% times the $7,000 federal wage base). In Missouri, a fairly low-tax state, the average employer would pay another 1% tax on the state wage base of $11,500, for a state-tax total of $115 per worker. Nationwide, the total average tax was about $267 per worker in 2020; the average over several recent years was a bit higher, at $350 (U.S. DOL-OUI 2021; Pavosevich 2020).

Within a state, different employers face different tax rates, depending on the employer’s experience with unemployment—a method of setting the tax rate known as “experience rating.” In all U.S. jurisdictions except Alaska, the rate is based on the UI benefits collected by separated workers. Every benefit recipient must be traced back to one (or more) previous employers. Employers with a higher ratio of benefits awarded to payroll pay higher rates than others up to a cap.8 In Alaska, employers instead pay a higher tax when they cut payroll, regardless of whether their employees successfully claim benefits.

The basic logic of experience rating is similar to the rationale for adjusting auto or home insurance rates upward after the insured files a claim. Layoffs impose costs on society, including the expense of providing UI benefits. Without experience rating, employers would not take account of these costs, leading to excessive job turnover (Alessie and Bloemen 2004; Karni 1999). There is strong evidence that experience rating reduces layoffs as well as seasonal employment (Albertini and Fairise 2018; Anderson and Meyer 2000; Baicker, Goldin, and Katz 1998; Ratner 2013; Woodbury 2004).

As currently designed, though, experience rating also encourages employers to prevent their employees from receiving adequate benefits. Benefit denials increased by 50%–66% in Washington state after it adopted experience rating (Anderson and Meyer 2000). Employer tactics include failing to provide information about benefits; encouraging employees not to file; challenging employee claims;9 or structuring their workforce to reduce eligibility, such as by using part-time workers or contractors, and shifting job sites to states where taxes are lower and benefits less generous (Anderson and Meyer 2000; de Raaf, Motte, and Vincent 2005; Gould-Werth 2016; Hyatt and Kralj 1995; Thomason and Pozzebon 2002; Vroman et al. 2017).

Grocery worker fired for taking health leave is initially denied benefits

Justin Grevencamp, Maine

I worked at an organic grocery-cafe in Brewer for two years. It was a beloved, locally owned small business. I developed new recipes and handled important catering orders. I took a two-week unpaid leave to deal with health issues, and when I returned I was told there was no more work for me. When I filed for UI, the store owners told the agency I had quit. At the appeal, one owner was upset that their taxes would go up because I had claimed UI. I received my benefits, but I was stunned that people I considered friends had tried to block me from receiving them.

Policy proposal: In a federally financed system, base the unemployment insurance tax rate on changes in hours employees work, not unemployment insurance claims

Because the U.S. lacks the employment protections common in most other developed economies, there is a strong case for a system that still imposes costs on employers when they terminate workers but does not encourage employers to prevent their workers from obtaining unemployment benefits. We suggest removing incentives to prevent UI claims for separated workers by using the full-time equivalent (“FTE”) or “hours-worked variation” experience rating method, similar to the method used in Alaska.10 In the FTE method, employers are rated based on how much the hours their employees worked changed, on a quarterly basis, over a three-year period. Increases in hours are not given as much weight as decreases.

Because employers are charged based on changes to payroll rather than benefit claims, these methods should make employers indifferent about whether their separated workers obtain benefits.11 Notably, until the tenure of its latest governor, Alaska’s recipiency rate was among the highest in the country (as of 2020, it had declined to around the national mean).

To calculate their tax rate in a given quarter under the FTE method, employers compute the average of the total hours worked in each of the 12 preceding quarters. They then calculate the change from each of these quarters to the next, dividing this change by the average quarterly total hours over the 12-quarter measuring period.12 For increases, the resulting product is discounted by a special weighting factor. The taxpayer’s final rating factor is the average of these 12 changes over the three-year rating period.13 Employers are then ranked and tax rates assigned as in existing experience rating systems. For more details, refer to the text box, “Calculating the tax rate under the FTE method.” Under federal financing, employers should be ranked regionally (by state or Metropolitan Statistical Area, for example), rather than nationally, to account for local variations in industry, seasonality, and other economic conditions.

Using hours worked as the base unit of measure offers a few modest advantages over Alaska’s method (based on payroll) or one based on the number of employees. Using the number of employees on the payroll cannot account for reduction in hours. It either weights full- and part-time employees equally or discounts employees who work part time, allowing employers to game the system by reducing work hours. Payroll-based systems may favor high-wage over low-wage workers, rewarding business models with a small number of highly skilled employees (Vroman et al. 2017). Such a system could result in lower levels of employment for less-educated workers.

Many states do not presently collect hours-worked data, but former U.S. Department of Labor officials have described this as only a minor obstacle (Miller and Pavosevich 2019). As explained later, expanding state collection of hours data would have other advantages as well, such as improving the data available through the Quarterly Census of Employment and Wages, and allowing for implementation of our proposal to base worker eligibility on hours, not wages.

Policy proposal: In an experience rating system, penalize employers who consistently remain at the tax rate cap

In contemporary experience rating systems, some firms are indifferent to additional layoffs because the tax rate is capped—that is, the rate they pay for UI will not rise if additional workers are laid off. We recommend adopting the suggestion of Vroman et al. (2017) of imposing a penalty on firms that persistently remain at the cap (for three years or more, for example).

Policy proposal: In a federal–state financing system, base state trust fund targets on industry-adjusted per capita targets

In a system with significant state financial contributions, state savings targets should be reformed to be based on industry-adjusted per-capita targets, not the current “high cost multiple” system that favors cutting benefits rather than raising revenues when trust fund balances are depleted. Currently, in good times, states deposit excess UI revenues in a trust fund account, to be drawn on during recessions. Regulations encourage states to maintain an adequate balance, based on a calculation known as the “average high cost multiple” (AHCM). Because the AHCM is based on expected benefit awards, states can achieve their fiscal targets by slashing awards instead of adding revenue (ACUC 1996).14

Thus, in a system with significant state contributions, the AHCM should be replaced with a system in which state savings targets are based on industry-adjusted per capita targets. That is, state trust fund adequacy would be calculated using nationwide projected benefit costs per capita multiplied by the state population (see Galle 2019 for a complete description). This figure could then be modified to reflect each state’s mix of local industries and those industries’ historic nationwide turnover rates.

It may also be desirable to eliminate experience rating in a system that is mostly state financed. Although a portion of UI taxes are passed along to workers in the form of lower wages, in a competitive industry an employer cannot offer lower wages than its rivals, so that with experience rating higher-taxed businesses must bear the costs themselves (Gruber 1997; Anderson and Meyer 2000). This encourages business owners to seek out lower rates, contributing to the race to the bottom that federalizing the financing system would avoid.

Paying for unemployment benefits during recessions

UI payouts during recessions provide large positive spillovers to the economy, including to workers and businesses that do not draw on UI (Elmendorf 2011). The cost of financing this economic stimulus should therefore be widely shared, though the method for doing so may vary depending on whether UI is wholly federally financed or is partly left to states.

Policy proposal: In a federally financed system, pay for benefits with general revenue during recessions

If funding for UI is made wholly federal, we recommend that benefits be paid out of general federal revenues during recessions, as they have been in recent episodes. As with Social Security, there are economic and political advantages to “benefit taxation,” in which taxes are explicitly linked to a particular social insurance product. In recessions, however, the UI system should be able to borrow from general Treasury funds without having to repay its borrowing via higher UI taxes later.

Policy proposal: In a federal–state financing system, use automatic triggers to provide federal financial assistance to states for unemployment insurance

Even if states are left to bear some of the costs of standard UI during normal times, the federal government should pay all of the cost during recessions. Federal dollars already pay for half of extended benefits, and in recent recessions that has been expanded to 100%, so extending federal support to base-period UI is not a dramatic shift and is economically justified. Recessions hit some regions harder than others; national financing allows states to share risk. States also face structural obstacles to countercyclical spending (Galle 2019). For example, it is politically difficult to maintain reserve funds at the state level, because today’s taxpayers may be living or doing business elsewhere when the rainy day arrives.

Federal financing for base-period UI can be expanded without major changes to the current structure. Following the Great Recession, Congress eventually granted states significant financial relief. Under current law, states accessing federal financing must risk the possibility that they will face swift repayment obligations as well as significant interest and added charges before Congress eventually provides them with relief. To eliminate this risk, we recommend that when EB is triggered (as described in Section 5, benefits duration), states become automatically eligible for low-interest or interest-free financing for base-period UI as well, repayable over a period that does not coincide with the state’s recovery from its downturn. Even greater federal support is possible; for example, severe downturns could trigger automatic loan forgiveness. That would in effect offer federal reinsurance to state trust funds, relieving some of the financial pressure on them to compete over low benefits.

Including self-employed and misclassified workers

State and federal UI taxes apply only to the wages of employees. To circumvent the tax, many employers therefore claim that their workers are contractors, not employees. Legal tests to distinguish genuine employees from contractors are usually complicated and thus costly and time-consuming to enforce. Other employers respond to UI incentives through actual (not merely nominal) changes in their workforce, shifting traditional full-time employees into more-precarious, less-rewarding contract work. The rise of large digital platform-based businesses, such as Airbnb and Uber, has drawn a growing attention to the plight of workers in these types of positions (Ravenelle 2019).

Policy proposal: Require states to implement the “ABC” test

To ensure that enterprises pay their fair share of UI taxes, rather than shift their burdens to others, federal law should make it more difficult for employers to recharacterize taxable wages as untaxed contractor payments. An important starting point is to require states to implement a version of the “ABC” test. Under this legal rule, a service provider to a business is presumed to be an employee unless the individual (a) is free from the direction and control of the business, (b) provides labor outside the usual course of the business, and (c) is customarily engaged in their own independently established business. A few states already apply versions of the ABC test, at least for select industries (Doroghazi 2019). It should be a national gold standard. Alternative legal approaches, such as the 20-factor balancing test applied by the IRS, have proven to be unpredictable, highly manipulable, and expensive and burdensome to administer.

Policy proposal: Require large 1099 payers to pay unemployment insurance tax on their contractors

As an additional disincentive to misclassification and efforts to replace the security and benefits of a steady job with the uncertainty of contractor status, we recommend taxing contractor payments at the same rate as employee hours. Imposing UI taxes on contractor payments would also bring in contributions from a self-employed population that, under our proposal in the benefits chapter, would receive greatly expanded benefits under the jobseeker’s allowance (See Section 3, on eligibility, in this report).

To reduce the administrative burden on small businesses and households, only relatively large businesses would be subject to the UI tax, and even they would be required to pay it on the wages of only some workers. Individuals who receive only very small payments from a given payer or who provide services only for the nonbusiness purposes of the payer would be exempt. The UI tax would be imposed only on payments to individuals for whom the payer is obligated to issue a Form 1099 (currently contractors paid at least $600 a year for the payer’s business purpose). For simplicity, only large firms, such as companies with more than $1 million in annual payroll or profits, might be required to pay the UI tax on contractors. If this threshold is considered too low, an additional threshold of 50 total combined employees and contractors could be applied. Both of these measures could be phased in, with the UI tax on 1099 earners starting at 10% of the full tax rate and stepping up 10% for each additional $1 million in payroll/profits to a cap of 100%. If a worker threshold is also used, the rate could step up by 10% per 25 workers, with the actual tax rate imposed being the greater of the payroll/profit- or worker-determined rate. Whichever threshold is used, related entities such as companies that share the same owners would be counted together when determining whether the firm crosses the threshold, to prevent gaming the system.

Endnotes

1. According to the U.S. Department of Labor, “Extended Benefits are available to workers who have exhausted regular unemployment insurance benefits during periods of high unemployment. The basic Extended Benefits program provides up to 13 additional weeks of benefits when a State is experiencing high unemployment. Some States have also enacted a voluntary program to pay up to seven additional weeks (20 weeks maximum) of Extended Benefits during periods of extremely high unemployment. Extended Benefits may start after an individual exhausts other unemployment insurance benefits (not including Disaster Unemployment Assistance or Trade Readjustment Allowances). Not everyone who qualified for regular benefits qualifies for Extended Benefits…. The weekly benefit amount of Extended Benefits is the same as the individual received for regular unemployment compensation. The total amount of Extended Benefits that an individual could receive may be fewer than 13 weeks (or fewer than 20 weeks).” U.S. DOL-ETA 2021c.

2. The states were Arkansas, Florida, Georgia, Illinois, Kansas, Michigan, Missouri, North Carolina, and South Carolina.

3. We do not mean to rule out the possibility that states would voluntarily impose their own taxes to pay for benefits more expansive than those we propose. Added benefits might also be fully or partially federally funded.

4. If the taxable wage base were raised, workers in high-wage states would cost their employers more in UI taxes than workers in low-wage states. But equal tax rates would ensure that this difference was driven by labor costs, not taxes. The marginal dollar of salary would cost the same no matter what state it was paid in.

5. The other side of this argument is that raising the cap could discourage pay raises and potentially full-time work. In many jurisdictions, the cap is now so low that it is effectively a fixed tax per employee, leaving employers indifferent to wage levels. (For a summary of the evidence that rated taxes affect only the “extensive,” or hiring, margin, see Guo and Johnston 2020.) With a higher cap, pay raises potentially lead to a UI tax increase. Depending on other UI rules, this principle can also translate into a preference for part-time employees: Once it is no longer advantageous to hire one $40,000 salary worker instead of two $20,000 salary workers, an employer might split a single position into two, perhaps to take advantage of other provisions that turn on full-time versus part-time status (Guo and Johnston 2020).

6. If states continue to pay UI benefits through state trust funds, expanding the wage base could help strengthen state finances (ACUC 1996; Vroman et al. 2017). Although states could cut rates in response to an expansion of their wage base, analysts predict that many states would still bring in additional revenue on net (CBO 2012).

7. The full federal rate is 6%, but it is reduced to 0.6% in states that are in compliance with federal law. The Department of Labor has never found a state to be so out of compliance, so the 6% rate has never been triggered.

8. Most states still use an antiquated variant (the “reserve ratio” method), in which long-standing employers can become insensitive at the margin to further changes in employment. Under this system, high-turnover firms are strongly incentivized to outsource work to contractors (Pavosevich 2020).

9. It does not appear that there are any strong reasons to encourage employers to challenge employee benefits. McLeod and Malcolmson (1989) argue that if employers are not rated based on their employees’ benefits, they will not be incentivized to share with government officials information that could indicate a fraudulent claim. We could not identify any evidence that this is the case. Moreover, fraud reduction is small compared with the direct impacts of experience rating. For example, recipiency rates vary dramatically between high- and low-recipiency states, with workers in high-recipiency states receiving benefits more than twice as often as workers in low- recipiency states (Desilver 2020). It is unlikely that differences in fraud detection explain a meaningful portion of these differences.

10. Our proposal builds on work by Vroman et al. (2017) and Miller and Pavosevich (2019). Miller and Pavosevich (2019) propose alternative systems modeled on Alaska’s payroll decline method. Vroman et al. (2017) conclude that none of the alternatives they modeled was clearly superior to the best options now in practice, but they did not consider the refinements Miller and Pavosevich propose, such as the use of the “average quarterly hours” measure we describe below.

11. Municipal and nonprofit employers often are not formally experience rated, but instead may opt to “self-insure,” which means that they pay into the system only when their employees claim benefits. Our proposal would therefore leave these employers with strong incentives to prefer lower benefits and to contest claims. It is likely all employers should be taxed by the same rules.

12. Although the use of average quarterly total hours—as Miller and Pavosevich (2019) propose—adds some complexity, it solves a key problem Vroman et al. (2017) identify. Consider a 10-worker firm that lays off all 10 workers in Q1 and rehires them in Q3. There is a 100% decline from Q1 to Q2 and an infinite percentage increase between Q2 and Q3. If the firm lays off and rehires only nine workers, there is a 90% reduction between Q1 and Q2 and a 900% increase between Q2 and Q3. Both these scenarios would produce highly inaccurate results for the rehiring employers. Using average total hours smooths these changes, so that in the second scenario, for instance, there is about a 130% reduction (9/[(10+1+10)]/3)) in the number of employees followed by a 130% increase. Applying the discount factor, W, to the increase would result in a net reduction in hours, reflecting the fact that the firm made some use of the UI system.

13. For small employers, the quarterly components could be weighted by the quarter’s total hours, a step that would tend to reduce the volatility of the measure (Vroman et al. 2017).

14. For example, suppose a state is projected to average $1 billion in UI spending during high-cost periods but it has only $750 million in its trust fund. A target AHCM of 90% would require the state to hold at least $900 million in its trust fund. If the state cuts benefits, its projected spending might fall to $800 million, allowing the target trust fund balance to be only $720 million. The state has cut its way to its target.

References

Advisory Council on Unemployment Compensation (ACUC). 1996. Collected Findings and Recommendations: 1994–1996. Washington, D.C.: Advisory Council on Unemployment Compensation.

Albertini, Julien, and Xavier Fairise. 2018. “Layoffs, Recalls and Experience Rating.” TEPP Working Paper 2018-10.

Alessie, Rob, and Hans Bloemen. 2004. “Premium Differentiation in the Unemployment Insurance System and the Demand for Labor.” Journal of Population Economics 17, no. 4 (December): 729–765.

Anderson, Patricia M., and Bruce D. Meyer. 2000. “The Effects of Unemployment Insurance Payroll Taxes on Wages, Employment, Claims and Denials.” Journal of Public Economics 78, nos. 1–2 (October): 81–106 .

Baicker, Katherine, Claudia Goldin, and Lawrence Katz. 1998. “A Distinctive System: Origins and Impact of U.S. Unemployment Compensation.” In The Defining Moment: The Great Depression and the American Economy in the Twentieth Century, edited by Michael D. Bordo, Claudia Goldin, and Eugene N. University of Chicago Press.

Congressional Budget Office (CBO). 2012. Unemployment Insurance in the Wake of the Recent Recession. Publication no. 4525, November 2012.

Congressional Research Service (CRS). 2019. Unemployment Insurance: Consequences of Changes in State Unemployment Compensation Laws. R41859, updated October 23, 2019.

Elmendorf, Douglas W. 2011. “Policies for Increasing Economic Growth in 2012 and 2013.” Testimony of Douglas W. Elmendorf, Director, Congressional Budget Office, before the Committee on the Budget, United States Senate, November 15, 2011.

de Raaf, Shawn, Anne Motte, and Carole Vincent. 2005. “A Literature Review of Experience-Rating Employment Insurance in Canada.” SDRC Working Paper Series No. 05–03, May 2005.

Desilver, Drew. 2020. “Not All Unemployed People Get Unemployment Benefits; In Some States, Very Few Do.” FactTank Blog (Pew Research Center), April 24, 2020.

Doroghazi, Lauren. 2019. Beyond California AB 5 – States Address Independent Contractors. MultiState, November 2019.

Galle, Brian. 2019. “How to Save Unemployment Insurance.” Arizona State Law Journal 50: 1009–1064.

Golden, Lonnie, and Jaeseung Kim. 2020. Underemployment Just Isn’t Working for U.S. Part-Time Workers. CLASP, May 2020.

Golshan, Tara, and Arthur Delaney. 2021. “The Looming Showdown Over Unemployment Benefits.” HuffPost, April 12, 2021.

Gould-Werth, Alix. 2016. “Workplace Experiences and Unemployment Insurance Claims: How Personal Relationships and the Structure of Work Shape Access to Public Benefits.” Social Service Review 90, no. 3 (June): 305–352.

Gould-Werth, Alix. 2020a. “Fool Me Once: Investing in Unemployment Insurance Systems to Avoid the Mistakes of the Great Recession During COVID-19.” Washington Center for Equitable Growth, April 30, 2020.

Gould-Werth, Alix. 2020b. The Long-Run Implications of Extending Unemployment Benefits in the United States for Workers, Firms, and the Economy. Washington Center for Equitable Growth, December 2020.

Gruber, Jonathan. 1997. “The Incidence of Payroll Taxation: Evidence from Chile.” Journal of Labor Economics 15, no. 53 (July): S72–S101.

Guo, Audrey, 2020. The Effects of Unemployment Insurance Taxation on Multi-Establishment Firms. MPRA Paper 97919, University Library of Munich, Germany.

Guo, Audrey, and Andrew C. Johnston. 2020. “The Finance of Unemployment Compensation and Its Consequence.” IZA Discussion Papers 13330, Institute of Labor Economics (IZA). June 2020.

Hyatt, Douglas E., and Boris Kralj. 1995. “The Impact of Workers’ Compensation Experience Rating on Employer Appeals Activity.” Industrial Relations 34, no 1 (January): 95–106. https://doi.org/10.1111/j.1468-232X.1995.tb00362.x.

Karni, Edi. 1999. “Optimal Unemployment Insurance: A Survey.” Southern Economic Journal 66, no. 2 (October): 442–465.

Leachman, Michael. 2015. “States Cutting Jobless Benefits Hadn’t Adequately Prepared for Recession.” Off the Charts Blog (Center on Budget and Policy Priorities), May 28, 2015.

McLeod, W. Bentley, and James M. Malcolmson. 1989. “Implicit Contracts, Incentive Compatability, and Involuntary Unemployment,” Econometrica 57: 447–480.

Miller, Michael, and Robert Pavosevich. 2019. “Alternative Methods of Experience Rating Unemployment Insurance Taxes.” Public Budgeting & Finance 39, no. 4 (Winter): 28–47.

Organisation for Economic Co-Operation and Development (OECD). 2019. The OECD Tax-Benefit Model for Canada: Description of Policy Rules for 2019.

Pavosevich, Robert. 2020. “The Cost of Layoffs in Unemployment Insurance Taxes.” BLS Monthly Labor Review, April 2020.

Ratner, David D. 2013. “Unemployment Insurance Experience Rating and Labor Market Dynamics.” Board of Governors of the Federal Reserve System Finance and Economics Discussion Series No. 2013-86, December 2013.

Ravenelle, Alexandrea J. 2019. Hustle and Gig: Struggling and Surviving in the Sharing Economy. Oakland: University of California Press.

Smith, Joshua, Valerie Wilson, and Josh Bivens. 2014. State Cuts to Jobless Benefits Did Not Help Workers or Taxpayers. Economic Policy Institute Briefing Paper #380, July 2014.

Thomason, Terry, and Silvanna Pozzebon. 2002. “Determinants of Firm Workplace Health and Safety and Claims Management Practices.” Industrial and Labor Relations Review 55, no. 2 (January): 286–307.

U.S. Census Bureau. 2019. “Table DP05. 2019 American Community Survey 1-Year Estimates Selected Population Profiles.” Accessed June 2021.

U.S. Department of Labor Employment and Training Administration (U.S. DOL-ETA). 2020a. “Estimated Employer Contribution Rates Calendar Year 2020” (data table). September 2020.

U.S. Department of Labor Employment and Training Administration (U.S. DOL-ETA). 2020b. “Monetary Entitlement” in Comparison of State Unemployment Laws 2020.

U.S. Department of Labor Employment and Training Administration (U.S. DOL-ETA). 2020c. “Significant Provisions of State Unemployment Insurance Laws,” January 2020.

U.S. Department of Labor Employment and Training Administration (U.S. DOL-ETA). 2021a. UI Replacement Rates Report (online database). Accessed June 8, 2021.

U.S. Department of Labor Employment and Training Administration (U.S. DOL-ETA). 2021b. Unemployment Insurance Chartbook (online database), “Category 12 Regular Program Insured Unemployment as a Percent of Total Unemployment.” Accessed June 2, 2021.

U.S. Department of Labor Employment and Training Administration (U.S. DOL-ETA). 2021c. “Unemployment Insurance Extended Benefits” (web page), accessed May 14, 2021.

U.S. Department of Labor Office of Unemployment Insurance Division of Fiscal and Actuarial Services (U.S. DOL-OUI). 2021. State Unemployment Insurance Tax Measures Report 2020. April 2021.

U.S. General Accounting Office (U.S. GAO). 1993. GAO/HRD-93-107, Unemployment Insurance: Program’s Ability to Meet Objectives Jeopardized. Report to the Chairman, Senate Committee on Finance, U.S. Senate, September 1993.

Vermont Department of Labor (Vermont DOL). 2021. Quarterly Reporting & Taxable Wage Information (online database). Accessed May 21, 2021.

Vroman, Wayne, Elaine Maag, Christopher O’Leary, and Stephen Woodbury. 2017. A Comparative Analysis of Unemployment Insurance Financing Methods. Washington, D.C. Department of Labor, Chief Evaluation Office, prepared by the Urban Institute, December 2017.

Wentworth, George. 2017. Closing Doors on the Unemployed: Why Most Jobless Workers Are Not Receiving Unemployment Insurance and What States Can Do About It. National Employment Law Project, December 2017.

Woodbury, Stephen A. 2004. Layoffs and Experience Rating of the Unemployment Insurance Payroll Tax: Panel Data Analysis of Employers in Three States. October 2004.

TABLE OF CONTENTS

Reforming Unemployment Insurance

• Foreword
• Executive summary
• Introduction
• Primer
• Statement of the problem
• Section 1. Universal standards
• Section 2. Financing
• Section 3. Eligibility
• Section 4. Benefit Duration
• Section 5. Benefit levels
• Appendix

By Rebecca Dixon and William Spriggs

The unemployment insurance system is the country’s only automatic income support program for individuals who have lost work. It kicks in automatically when job losses start—without the delays and political and policy wrangling about if, when, or how to respond. The program serves as a key stabilizer during economic downturns by buttressing consumer spending, demand, and sentiment—preventing people’s fears of job loss from constricting private demand for spending on goods and services faster than the initial job losses.

As we saw these past 15 months, however, when so many businesses had to shut down to help stop the spread of COVID-19, the unemployment insurance program has big holes in who normally gets benefits. Faced with massive job losses, the program would have proven an insufficient automatic stabilizer because of its huge gaps in coverage. Thankfully, Congress acted quickly to plug (albeit temporarily) some of those holes, and unemployment insurance served as the primary vehicle to help people who lost work and were left with no income. Since the start of the pandemic, the program has injected hundreds of billions of dollars into the U.S. economy, keeping millions of families in their homes and out of poverty.1

Because unemployment insurance is a federal–state hybrid program, states have broad flexibility to determine eligibility and benefit levels. This has led to notable coverage variations across states. For example, southern states with large Black populations have among the lowest benefit payments.

The UI program’s shortcomings, laid bare by the pandemic, meant that the injection of income support was not automatic for the millions of workers locked out of the program by outdated eligibility rules; it was not automatic for people caught in their state’s “race to the bottom” to slash benefits. But when the scale of the pandemic’s unemployment crisis became clear, Congress had to step in, to supplement benefit amounts and expand the program temporarily to cover workers not normally eligible for benefits due to their nonemployee status or because they worked part time or for low wages.

In the wake of lessons learned from the pandemic, unemployed workers and their advocates are speaking up, organizing, and demanding long-term reforms to fundamentally transform the unemployment system. This report provides a brief history of race- and gender-based exclusions and analyzes the program’s coverage, performance, and revenue base, pinpointing gaps and offering a vision of a revamped UI system with minimum federal standards that will more effectively and expansively provide income support to unemployed workers while stabilizing the macroeconomy.

The unemployment insurance system was conceived during the Great Depression in the 1930s by Labor Secretary Frances Perkins as part of President Franklin D. Roosevelt’s New Deal. As the program was created in the context of a broader system of patriarchy and racial hierarchy, Congress made compromises in its design that were laser-focused on protecting the earnings of white male breadwinners in manufacturing. Congress also compromised to give states huge discretion in implementing the program so they could have control to mirror their practices of racial exclusion. The program’s architects designed a system that attempted to reconcile opposing goals: to support the intended workers while excluding enough other workers to get it across the finish line in Congress. Federal unemployment insurance law has never meaningfully addressed those exclusions.

The composition of the U.S. workforce has shifted enormously since the 1930s. In just the past two decades, the United States lost about 4 million manufacturing jobs while gaining about 4 million food service jobs. In February 2020, there were roughly the same number of manufacturing workers as restaurant workers. But the unemployment insurance system, designed for full-time, higher-wage manufacturing workers, was never amended or adapted to industries where many workers are part time and are paid poverty wages. The almost 6 million payroll positions lost in March and April 2020 in food services was greater than the entire nondurable manufacturing workforce in February 2020 (BLS-CES 2021).

Clearly, the rules about who has access to unemployment insurance need to catch up to our racial and gender equity values and to the realities of working people and families today.

On the revenue side, the financing of the unemployment insurance system no longer matches the source of labor market collapses. In the 1930s, the state unemployment insurance systems on which the federal program was modeled taxed companies with an eye to swings in inventories. Manufacturers would hire workers when the economy expanded, guess wrong on the strength of growth, and then, when inventories piled up from weak sales, lay workers off.

Today, the companies that create excessive churn in the labor market (relying on low wages and high labor turnover rates) often do not pay more into the system, because workers under this style of low-road management—temporary, contract staffing, part-time, and low-paid workers—too often do not qualify for unemployment insurance. Since the 1980s, recessions have been more related to financial markets than inventory cycles, and they have been more severe than state unemployment trust funds were designed to handle. The disruptions are greater, causing more permanent job losses than cyclical temporary layoffs. The average duration of unemployment is trending upward, and it takes longer to return to previous peak employment levels (Freeman 2013). For Black workers who face systemic employment discrimination, the recovery is always longer.

Unfortunately, the system has no protection for workers in this “race to the bottom.” Women and Black, Latinx, Indigenous, and immigrant workers will bear the brunt of the pain unless we transform the system. Black and Latinx workers have lower recipiency rates than white workers, despite facing higher unemployment rates. Women have a lower recipiency rate than men, because they are more likely to work in low-paid, part-time dominated industries (Nichols and Simms 2012). Every severe downturn mars the early earnings history of young people, disrupts women’s labor force participation, and makes it harder to return to the labor market.2 Race, gender, and intergenerational equity fault lines in the unemployment insurance program must be addressed.

The politics around unemployment insurance are another nagging problem. Since 1980, with each new downturn drawing down state unemployment trust fund balances, conservative state lawmakers and policymakers have responded not by replenishing funds but by slashing eligibility and benefits. Already, as this report is being released, a conservative “revolt” has taken place, with half of states announcing plans to “secede” from the federal government’s expanded unemployment insurance programs. These misguided efforts will remove a half billion dollars a week from the nation’s economic recovery, while deepening inequities felt by workers of color and hurting families that need the aid to get by (Stettner 2021). Some of these states are now considering legislation to cut the duration of benefits and erect more barriers to benefits—further weakening the system and leaving those states ill-prepared for the next downturn.

In the wake of the COVID-19 crisis, Congress swiftly enacted changes to expand the program and improve eligibility and benefit sufficiency. Now the challenge is how to learn from those lessons and adopt permanent changes to strengthen the unemployment insurance system. The urgency of understanding the shortfalls and reforming the system are clear. U.S. payrolls remain down over 8 million jobs from their February 2020 peak (Gould 2021). Even if the economy generates a record-setting 1 million jobs each month until September, Labor Day will arrive with millions facing long-term unemployment and having exhausted their lifeline of unemployment benefits. Others will find themselves defined out of being eligible, as their low earnings and part-time status will not qualify them for benefits; but for the expiring Pandemic Unemployment Assistance program, they would have had nothing. The withdrawal of support will complicate, if not halt, the economic recovery.

This report examines the problems that resulted in an unemployment benefit system that struggled to rise to the crisis we faced in 2020 and will struggle again as states end emergency benefits, and when federal pandemic unemployment provisions expire in September. In addition, this report proposes critical first steps on the road to systemic unemployment insurance reform—fixes that state legislatures and governors can enact to ensure equity and adequate standards regarding just financing, eligibility, duration of benefits, and benefit levels and amounts—so that no one is left behind.

The Biden-Harris administration has proposed significant reforms to the unemployment insurance system in its fiscal year 2022 budget. Congress must seize this opportunity to begin to fix a failed system before more workers—particularly women and workers of color and their families—are hit again with a potential double dip in the labor market. If these fixes are not implemented now, the race to the bottom that has already started will leave us with a wholly inadequate system for the next downturn. Now is the time to fix UI.

—Rebecca Dixon is executive director of the National Employment Law Project. William Spriggs is chief economist at the AFL-CIO and a professor in, and former chair of, the Department of Economics at Howard University.

Endnotes

1. According to a recent audit by the U.S. Department of Labor’s Office of the Inspector General, as of January 2, 2021, states had drawn down a total of $392 billion to pay UI benefits for the PUA, PEUC, and FPUC programs. See U.S. DOL-OIG 2021. According to researchers at the Economic Policy Institute, the UI expansions in the CARES Act and regular UI payments reduced the number of those in poverty by 7.2 million in June 2020. See Zipperer 2020.

2. Since the 2001 downturn, women’s labor force participation has been relatively flat at near 60% (not counting the sharp drop in this rate during the COVID-19 pandemic). It dropped during the Great Recession and never fully recovered for white women. See BLS CPS 2021.

References

Bureau of Labor Statistics, Current Employment Statistics (BLS-CES). 2021. “All Employees, Food Services and Drinking Places” [CES7072200001], retrieved from FRED, Federal Reserve Bank of St. Louis, https://fred.stlouisfed.org/series/CES7072200001, June 7, 2021; “All Employees, Manufacturing (MANEMP)” [CES3000000001], retrieved from FRED, Federal Reserve Bank of St. Louis, https://fred.stlouisfed.org/series/MANEMP, June 7, 2021; and “All Employees, Nondurable Goods (NDMANEMP)” [CES3200000001], retrieved from FRED, Federal Reserve Bank of St. Louis, https://fred.stlouisfed.org/series/NDMANEMP, June 7, 2021.

Bureau of Labor Statistics, Current Population Survey (BLS-CPS). 2021. “Labor Force Participation Rate – 20 Yrs. & Over, White Women” [LNS11300029], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/LNS11300029, June 7, 2021.

Freeman, Richard B. 2013. “Failing the Test? The Flexible U.S. Job Market in the Great Recession.” National Bureau of Economic Research Working Paper no. 19587, October 2013.

Gould, Elise. 2021. “The labor market is down 7.6 million jobs since February 2020, but the total jobs shortfall should take into account pre-pandemic labor market trends,” Twitter, @eliselgould, June 4, 2021, 9:02 a.m.

Nichols, Austin, and Margaret Simms. 2012. Racial and Ethnic Differences in Receipt of Unemployment Insurance Benefits During the Great Recession. Urban Institute, June 2012.

Stettner, Andrew. 2021. Fact Sheet: What’s at Stake as States Cancel Federal Unemployment Benefits. The Century Foundation, May 13, 2021.

U.S. Department of Labor, Office of Inspector General (DOL-OIG). 2021. COVID-19: States Struggled to Implement Cares Act Unemployment Insurance Programs, May 2021.

Zipperer, Ben. 2020. “Over 13 Million More People Would be in Poverty Without Unemployment Insurance and Stimulus Payments,” Working Economics Blog (Economic Policy Institute), September 17, 2020.

TABLE OF CONTENTS

Reforming Unemployment Insurance

• Foreword
• Executive summary
• Introduction
• Primer
• Statement of the problem
• Section 1. Universal standards
• Section 2. Financing
• Section 3. Eligibility
• Section 4. Benefit Duration
• Section 5. Benefit levels
• Appendix

Key proposals

• Minimum standards: Establish federal minimum standards for which workers are eligible for unemployment insurance benefits, the minimum length of time benefits can last during regular economic times and during downturns, the share of lost wages replenished by UI benefits, and a weekly wage floor that benefits amounts cannot drop below.
• Tax penalties: Encourage the use of statutory tax penalties by allowing the federal government to apply incremental increases to the federal tax rate on employers in states that fail to meet minimum universal standards and other key obligations of a more equitable UI system.
• Noncompliance: Provide workers with a pathway to report state noncompliance to the federal government.
• Processing delays: Ensure that workers with pending applications that are not being processed in a timely way receive at least the minimum weekly benefit.

Introduction

The problem

The unemployment insurance system is a cornerstone of our economic infrastructure. It exists to support working people who have lost their jobs through no fault of their own with cash benefits while steadying the economy during crises. But the UI system in many states now fundamentally fails in its core missions. Under the current system, the federal government sets certain basic ground rules, while states can fill in most of the details. State eligibility formulas exclude core groups of workers that include disproportionate shares of workers of color, such as low-wage workers, and women, such as part-time workers. Also unfairly left out are many gig workers who are misclassified as contractors and thus denied the benefits afforded only to employees in traditional employment relationships. It is up to states to determine whether workers and their employers have complied with state and federal rules, and many states lack effective tools for important tasks such as determining which employees are being misclassified as contractors.

States compete in a race to the bottom on UI taxes and, in times of economic distress, slash their way to replenishing depleted trust funds by shortening benefit duration and tightening eligibility. As a result, the once-standard, but by no means adequate, 26 weeks of benefits in normal economic times is eroding and some states offer just 12 weeks of benefits. Today, weekly benefits replace just about 40% of average wages, which is not nearly enough for workers, particular low-wage workers with families, to get by. These deteriorated standards are particularly harmful to Black workers. UI data show that states with high shares of Black workers tend to have lower UI recipiency rates—shares of unemployed workers who actually receive unemployment benefits—and lower average weekly UI benefits.

The solution

Require states to meet minimum federal standards for UI eligibility, duration of benefits, and benefit levels.

Implementation

To ensure that states meet minimum federal standards for UI eligibility, duration of benefits, and benefit levels, deploy carrots—assistance in the form of federal data collection enabling delivery of broader and better targeted benefits—but rely on sticks—incremental increases in tax rates for employers that fail to meet the minimum requirements, supported by mechanisms for workers to report state noncompliance.

Setting universal minimum guarantees across three big policy areas

Many of the problems we’ve diagnosed within the UI system are driven at least in part by large structural choices that the designers of the program made when it launched in the 1930s. In the long run, a sustainable UI program for the 21st century may require fundamental rethinking of those choices. Given the political reality that interest in UI reform peaks in the wake of an economic crises and ebbs thereafter, failure to pursue major revisions now—in the midst of the coronavirus pandemic—risks squandering a rare opportunity. Our effort here therefore aims at the most urgently needed repairs.

Policy proposal: Enact a federal law establishing universal minimum guarantees across three key big policy areas: eligibility for benefits, duration of benefits, and benefit levels

To roll back the states’ race to the bottom, and guard against further erosion, we propose that federal law establish universal minimum guarantees across three key big policy areas: eligibility for benefits, duration of benefits, and benefit levels. States that wanted to establish more robust or more expansive benefits than the minimum guarantee could still do so. Guaranteeing universal minimum standards nationwide will make the system easier to navigate, and make it easier for workers to understand their eligibility.

Ensuring that states meet the minimum requirements

To ensure that states can afford to deliver on these guarantees, we propose a set of financing reforms—fair, efficient taxes that strongly encourage employers to be good partners with workforce agencies in administering the system.

Foremost, we propose requirements with real consequences for falling short, not just incentives, because recent efforts to gently nudge states to modernize have not resulted in meaningful or lasting changes. For example, although federal changes in the wake of the Great Recession sought to encourage states to extend benefits to part-time workers, and states did make some technical changes on that front, “monetary eligibility” rules still effectively bar many part-timers from collecting any UI benefits. In the current political environment, in which some states are outright refusing to deliver even benefits fully paid for with federal dollars (Stettner 2021), we doubt that meaningful reforms can be achieved with the kinds of modest carrots and unthreatening sticks previously on offer (Galle 2019).

Instead, we would update and expand the list of obligations states must meet in order for their businesses to qualify for low federal unemployment taxes, and give the Department of Labor more flexibility to set federal tax rates.

Policy proposal: Allow the federal government to apply incremental increases to the federal tax rate on employers in states that fail to meet minimum universal standards and other key obligations

The federal tax rate, the Federal Unemployment Tax Act (FUTA) rate, is 0.6%, but this rate rises tenfold to 6.0% if a state fails to meet its statutory obligations. This penalty is so large, however, that the Department of Labor has never been willing to impose it. Decades ago, Congress wrestled with a similar problem with the charitable contribution deduction: Because revocation of a charity’s eligibility to receive deductible donations was effectively a “death sentence,” the IRS very rarely imposed it, even in situations where individuals were exploiting charitable resources for their own use (Manny 2007). In response, in 1998 Congress enacted a system of “intermediate sanctions,” under which the IRS is empowered to impose much smaller penalty taxes on organization managers. We would similarly recommend that Congress authorize the Department of Labor to increase the federal tax rate on employers in small increments within the range between 0.6% and 6.0%, depending on the degree of state noncompliance. Certain minimum penalties for clear breaches of federal guarantees, such as for potential benefit duration of less than the federal minimum, should be set by statute.

Providing workers with a voice and options when universal standards are not met

Intermediate sanctions might help ensure state consistency with universal guarantees in the long run, but additional measures are needed to provide workers with a voice in ensuring that universal guarantees are met and to hold them harmless when they are not. Even an expanded sanctions regime depends on Department of Labor willingness to use it. Under current administrative law doctrine, agencies can foil most enforcement regimes by refusing to initiate action (Barkow 2016). Private parties often have no avenue for judicial recourse to challenge agency inaction (Metzger 2015).

Policy proposal: Provide workers with a pathway to report state noncompliance to the federal government

Workers should have a pathway to report state noncompliance to the federal government. We therefore propose that the sanctions statute include opportunities for the public, including labor organizations and other community groups, to petition the Department of Labor to initiate a sanctions action, patterned on existing administrative law procedures that allow private parties to petition for rulemaking (CRS 2020). As in the petition for rulemaking process, DOL would be obligated to respond to nonfrivolous petitions, and if it chooses not to take action, it must explain why not. A decision not to impose sanctions would be reviewable in court as “final agency action.” Petitioners would be entitled to recover costs and attorneys’ fees for nonfrivolous petitions and court challenges.

Policy proposal: Ensure that workers with pending applications that are not being processed in a timely way receive at least the minimum weekly benefit

In states that fail to deliver guaranteed benefits in a timely way, workers should be entitled to at least the minimum weekly benefit while their application is pending. As explained in Section 5, the benefit levels section of the report, the minimum benefit in normal economic times is the greater of $250 or 30% of the state’s average weekly wage, and in downturns the greater of $300 per week or 40% of the state’s average weekly wage.

Benefit lapses leave mother scrambling to pay bills

Amy Cabrera-Cabello, Arizona

I am a single mother trying to put my son through college and then medical school. I was working at the largest provider of meeting and travel services in the world, until COVID. After taxes my state benefits are a little over $200 a week. I am not sure how that little bit of money is supposed to help the average worker.

Then [after receiving benefits for a while] things got worse. On December 26, 2020, I didn’t receive a check. I called and after waiting on hold for two hours, spoke to a woman who was convinced [the missed check] was due to Trump signing the relief bill late. I continued calling, often waiting on hold for hours. I was told to file an extension, but that the system was so backed up it could take 11 weeks.

After more than two months, I received some payments, but on March 20th they stopped again. I was told to file for another extension. I can barely pay my bills on the little benefits in Arizona. Not getting it at all, and having this happen frequently, is even more nerve-wracking.

Enacting universal guarantees as a path to bigger reforms

Not all the signatories think these steps go far enough to solve unemployment insurance’s deep-seated challenges. We all agree, though, that the universal guarantees we propose below are major improvements over the status quo, may help to set UI on a path to bigger reforms, and are well worth pursuing in their own right.

References

Barkow, Rachel. 2016. “Overseeing Agency Enforcement.” George Washington Law Review 84: 1129–1186.

Congressional Research Service (CRS). 2020. Petitions for Rulemaking: An Overview, CRS Report R46190, January 2020.

Galle, Brian. 2019. “How to Save Unemployment Insurance.” Arizona State Law Journal 50: 1009–1064.

Manny, Jill. 2007. “Nonprofit Payments to Insiders and Outsiders: Is the Sky the Limit?” Fordham Law Review 76: 735–763.

Metzger, Gillian. 2015. “The Constitutional Duty to Supervise.” Yale Law Journal 124: 1836–1933.

Stettner, Andrew. 2021. “Fact Sheet: What’s at Stake As States Cancel Federal Unemployment Benefits.” The Century Foundation, May 13, 2021.

TABLE OF CONTENTS

Reforming Unemployment Insurance

• Foreword
• Executive summary
• Introduction
• Primer
• Statement of the problem
• Section 1. Universal standards
• Section 2. Financing
• Section 3. Eligibility
• Section 4. Benefit Duration
• Section 5. Benefit levels
• Appendix

The economic shock of the COVID-19 pandemic has shined a bright light on the nation’s unemployment insurance system. It has not been a pretty sight. Swamped by the sudden, massive influx of claims in March of 2020, many state UI programs faltered. Computer systems crashed and telephone helplines were perpetually busy. The problems persisted. By the fall, reports were widespread of people in need often waiting weeks—or months—for their benefits (Long and Fowers 2020; Zakrzewski and Riley 2020; Moss 2020; Iacurci 2020).

As state UI structures shook from the initial jolt, federal policymakers realized that benefit levels were too low and not available to enough workers. In part to offer stimulus to a sharply contracting economy, the federal government provided unemployed workers claiming standard UI benefits with a supplemental $600 per week in additional benefits. These Pandemic Unemployment Compensation (PUC) program benefits—enacted as part of the CARES Act—were hugely important to millions of Americans in need.

Also critical were two other temporary UI programs created by the CARES Act: Pandemic Emergency Unemployment Compensation (PEUC), which extended the duration of benefits, and Pandemic Unemployment Assistance (PUA), which provided benefits to some groups of workers left out of the regular UI system, such as the self-employed and temporary workers. Workers eligible for PUA were also eligible for the $600 weekly supplement. The PUA program brought sustained help to a broader swath of the U.S. workforce: As of March 2021, about 7.5 million workers who otherwise would have been without benefits were receiving them under the program (NELP 2020; Picchi 2020; U.S. DOL-ETA 2021c).

But there were problems. In addition to the delays in processing benefits, weaknesses of some of the state UI systems drew the attention of organized criminal enterprises, which engaged in identity theft and other forms of fraud to steal funds. Well-publicized cases of fraud led to measures that slowed the delivery of benefits to legitimate applicants in some states (Cohen 2020; Holzhauer 2020).

These problems were not simply the result of a once-in-a-century pandemic. If they were, perhaps the country could move on under the assumption that better public health measures would avoid future recurrences. Instead, significant underlying issues with the nation’s UI system were exposed by the stress of the pandemic-driven economic jolt. Under pressure, the system gave way in places where it was already broken (McDermott 2020; Adamczyk 2020).

The idea that the UI system needs an overhaul is not new. It is a product of the New Deal—and its design still bears the influences of that era and the decades immediately following. The eligibility standards for workers to qualify for aid—and the level and duration of the help they receive—remain rooted in outdated images of typical UI claimants as male factory workers whose plants have temporarily shut during a recession.

The notion of the economy these standards reflect is also obsolete, one where labor markets recover very quickly after recessions hit, and workers return to their old jobs. In that economy, beneficiaries would need aid for a few months until the nation recovers and the plant reopens. Like the 1950s image of the economy this reflects, the UI system marginalizes many women and workers of color, leaving too many of them without aid, or with much too little aid, when they lose jobs through no fault of their own (West et al. 2016; Edwards 2020; Kofman and Fresques 2020).

The UI system has failed to keep up with the modern economy

The American economy of today is not the economy UI was built for. The temporary shifts of the pandemic economy notwithstanding, more women are in the labor force. Factories that close often never reopen (at least in this country). Part-time work has grown as a share of the labor market since the mid-1950s (when data on part-time employment began to be collected). And online platform work and other emerging forms of employment arrangements are capturing a great deal of policy and media attention (BLS 2018, 2021a; Congdon and Vroman 2021).

Yet relatively little has been done to update the rules of the UI system to capture these shifts. As a result, the share of unemployed workers who actually receive UI benefits had fallen below 3 in 10 before the pandemic, down from closer to 4 in 10 (36%) in 2007 before the Great Recession (U.S. DOL-ETA 2021a). And as this report will show, workers whose lives are already the most financially precarious—disproportionately workers of color, women, and individuals with disabilities —are the most likely to be left out by exclusionary eligibility rules (Tucker and Vogtman 2020; Bhutta et al. 2020; Gould and Wilson 2020; Gould, Perez, and Wilson 2020; BLS 2019).

One reason for the failure to modernize the UI system is that federal policymakers tend to focus on UI only during economic downturns, legislating additional weeks of federally funded aid to address the immediate distress but doing little to reform the system as a whole.

Another less obvious factor is likely the growing influence of corporate power and capital in our politics and economy. The share of private-sector workers in unions is down to about 6%, making it easier for employers to keep wealth they create for themselves and shareholders. The tilting of the economic playing field toward the wealthy and capital likely has a number of reasons, including changes in tax, antitrust, and trade policy as well as global economic shifts (Piketty 2017). But the effect in the U.S. is clear and not favorable to workers. The labor share of national income has been calculated to have declined from 65% to 57% from 1980 to 2012 (BLS 2021b; Farber et al. 2020; Clausing 2017).

The UI system in many states now fundamentally fails in its core missions

The deepening inequality is reflected in a UI system that in many states now fundamentally fails in its core missions. As Rebecca Dixon and William Spriggs explain in the Introduction, families need unemployment insurance to get them through temporary rough spells, and UI is one of the government’s most effective policies for fighting recessions. Yet states keep cutting and cutting. Particularly in states with histories of weak labor movements (which often overlap with those that have the most troubled racial history), UI benefits are now among the shortest, and reach the lowest shares of unemployed workers, of anywhere in the developed world. As of 2019 there were 10 states offering fewer than 26 weeks of benefits (two offering as few as 12 weeks of benefits), and in several of those states fewer than one in six workers were able to claim even that short span of benefits. Right before the pandemic (in January 2020), weekly benefits were replacing less than half of average wages, and in some states benefits topped out at less than $275 per week—equivalent to less than a $7 hourly wage. If that is even still a net, there is no safety in it (U.S. DOL-ETA 2020, 2021b; OECD 2021a, 2021b; CRS 2019).

Even these dismal numbers fail to capture the struggles of workers largely left on the margins of the American economy, and who are equally excluded by an assortment of technical but crucial UI rules. In many of these groups, workers of color and women are overrepresented, as noted in the Eligibility section of this report.

Too many workers fall through the cracks

Part-time workers, who are especially likely to be working women and individuals with disabilities, fall through the cracks of UI in most places. The obstacles to their claiming benefits are myriad: requirements to earn a certain level of wages over a short period; rules obligating beneficiaries to be seeking full-time employment; limits on the reasons a worker can leave a job; and loopholes that deny benefits for workers affiliated with staffing agencies, among others. The lack of UI coverage for lower-earning part-time workers also harms Black and Latinx workers, who are a disproportionate share of people working part time because they can’t get the full-time hours they want (BLS 2020; IWPR 2016; Golden and Kim 2020).

And, until the temporary Pandemic Unemployment Assistance experiment in 2020, UI offered no help at all for “gig” workers and millions of other workers around the country misclassified by their employers as contractors. Because UI taxes are imposed on wages, employers are incentivized to treat their workers as contractors, at least for legal purposes, and whole industries arguably are built on this kind of arbitrage. This treatment leaves the affected worker with no available benefit when they experience a work interruption. Black workers are more likely than other workers to be temporary help agency workers, and Asian workers are more likely than other workers to work for contract firms (Kosanovich 2018). Finally, genuine small-business entrepreneurs who might respond to financial setbacks by trying to enter the workforce, and who might benefit from some transitional funding, have no recourse.

States compete in a race to the bottom

It is not our goal here to resolve all of the deep structural challenges that have steered the nation’s unemployment insurance system to these straits. But some of the more immediate drivers are created by poor design of UI’s finances. As we explain in the report, regular state UI benefits and a portion of extended benefits in downturns are funded through state taxes on corporations. And states compete in a race to the bottom in UI taxes just as globally there is a race to the bottom for corporate taxes generally. The pressure to keep UI taxes low contributes to a climate in which states with depleted UI coffers slash their way to budget balance by shortening the duration of benefits, tightening eligibility, and (less visibly, but no less damagingly) underinvesting in UI system infrastructure. Further, nearly all states impose higher tax rates on businesses with higher shares of former workers claiming UI benefits. Evidence strongly suggests that this rule encourages employers to make it harder for separated workers to get the benefits they are due.

An opportunity to make needed repairs

The spotlight shining on the UI system provides a rare opportunity to make needed repairs to bring the system into the 21st century. UI reform is not just a set of technical fixes, but in a real and immediate sense is racial justice, is gender justice. And a UI system that is reformed to reflect both the current economy and the current workforce would not only strengthen the economy but also promote genuine economic opportunity for all.

References

Adamczyk, Alicia. 2020. “The U.S. Unemployment System Was Already Broken. Then the Coronavirus Pandemic Hit.” CNBC, October 8, 2020.

Bhutta, Neil, Andrew C. Chang, Lisa J. Dettling, and Joanne W. Hsu. 2020. “Disparities in Wealth by Race and Ethnicity in the 2019 Survey of Consumer Finances.” FEDS Notes. Board of Governors of the Federal Reserve System, September 28, 2020.

Bureau of Labor Statistics (BLS). 2018. Women in the Labor Force: a Databook. BLS Reports. December 2018.

Bureau of Labor Statistics. 2019. Characteristics of Unemployment Insurance Applicants and Benefit Recipients (economic news release) “Table 1: Unemployment Insurance (UI) Benefit Applicants and Recipients among Unemployed Persons Who Had Worked in the Past 12 Months by Selected Characteristics, 2018.” Last modified November 7, 2019.

Bureau of Labor Statistics (BLS). 2020. “Persons with a Disability: Labor Force Characteristics—2020” (news release). February 24, 2021.

Bureau of Labor Statistics (BLS). 2021a. Current Population Survey data. Employment Level–Part-Time for Economic Reasons, Nonagricultural Industries [LNS12032197]; Employment Level–Part-Time for Noneconomic Reasons, Nonagricultural Industries [LNS12032200]; Employment Level–Nonagricultural Industries [LNS12035019], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org, June 11, 2021.

Bureau of Labor Statistics (BLS). 2021b. “Union Members Summary” (news release). January 22, 2021.

Clausing, Kimberly. 2017. “Labor and Capital in the Global Economy.” Democracy A Journal of Ideas no. 43, Winter 2017.

Cohen, Patricia. 2020. “Fraud Schemes Exploit Weak Spots in Unemployment Claims System.” New York Times, October 1, 2020.

Congdon, William J., and Wayne Vroman. 2021. Covering More Workers with Unemployment Insurance: Lessons from the Great Recession. Urban Institute, February 2021.

Congressional Research Service (CRS). 2019. Unemployment Insurance: Consequences of Changes in State Unemployment Compensation Laws. R41859, updated October 23, 2019.

Edwards, Kathryn. 2020. “The Racial Disparity in Unemployment Benefits.” The RAND Blog, July 15, 2020.

Farber, Henry S., Daniel Herbst, Ilyana Kuziemko, and Suresh Naidu. 2020. Unions and Inequality Over the Twentieth Century: New Evidence from Survey Data. October 9, 2020.

Golden, Lonnie, and Jaeseung Kim. 2020. Underemployment Just Isn’t for U.S. Part-Time Workers. CLASP, May 2020.

Gould, Elise, and Valerie Wilson. 2020. Black Workers Face Two of the Most Lethal Preexisting Conditions for Coronavirus—Racism and Economic Inequality. Economic Policy Institute, June 2020.

Gould, Elise, Daniel Perez, and Valerie Wilson. 2020. Latinx Workers—Particularly Women—Face Devastating Job Losses in the COVID-19 Recession. Economic Policy Institute, August 2020.

Holzhauer, Brett. 2020. “Unemployment Benefits Fraud: What to Know and How to Protect Yourself.” Forbes, October 9, 2020.

Iacurci, Greg. 2020. “The ‘Black Hole’ of Unemployment Benefits: Six Months Into the Pandemic, Some are Still Waiting for Aid.” CNBC, September 27, 2020.

Institute for Women’s Policy Research (IWPR). 2016. Pathways to Equity: Narrowing the Wage Gap by Improving Women’s Access to Good Middle-Skill Jobs. March 2016.

Kofman, Ava, and Hannah Fresques. 2020. “Black Workers Are More Likely to Be Unemployed but Less Likely to Get Unemployment Benefits.” ProPublica. August 24, 2020.

Kosanovich, Karen. 2018. “Workers in Alternative Employment Arrangements.” Spotlight on Statistics, Bureau of Labor Statistics. November 2018.

Long, Heather, and Alyssa Fowers. 2020. “A Record 3.3 Million Americans Filed for Unemployment Benefits as the Coronavirus Slams Economy.” Washington Post, March 26, 2020.

McDermott, Brendan. 2020. “Fix the Flaws COVID-19 Has Exposed in the Unemployment System.” Progressive Policy Institute. April 3, 2020.

Moss, Rebecca. 2020. “Laid Off Workers Battle Outages, Jammed Phone Lines as Pa. Unemployment System Buckles From Coronavirus Surge.” Philadelphia Inquirer, March 31, 2020.

National Employment Law Project (NELP). 2020. “Unemployment Insurance Provisions in the Coronavirus Aid, Relief, and Economic Security (CARES) Act” (fact sheet). March 2020.

Organisation for Economic Co-operation and Development (OECD). 2021a. Comparative Policy Tables 2020 online database, OECD Tax-Benefit Data Portal, accessed May 2021.

Organisation for Economic Co-operation and Development (OECD). 2021b. Social Benefit Recipients (SOCR) Database, Annual Data by Country (online database). Accessed June 2021.

Picchi, Aimee. 2020. “Extra $600 in Unemployment Benefits Ends: ‘It’s an Impossible Situation.’” CBS News, July 31, 2020.

Piketty, Thomas. 2017. Capital in the Twenty-First Century. Cambridge: Harvard University Press.

Tucker, Jasmine, and Julie Vogtman. 2020. When Hard Work is Not Enough: Women in Low-Paid Jobs. National Women’s Law Center, April 2020.

U.S. Department of Labor Employment and Training Administration (U.S. DOL-ETA). 2020. “Table 3-12: Duration of Benefits.” In Comparison of State Unemployment Laws 2020.

U.S. Department of Labor Employment and Training Administration (U.S. DOL-ETA). 2021a. Unemployment Insurance Chartbook (online database), “Category 12 Regular Program Insured Unemployment as a Percent of Total Unemployment.” Accessed June 2, 2021.

U.S. Department of Labor Employment and Training Administration (U.S. DOL-ETA). 2021b. Unemployment Insurance Chartbook (Online database), “Category 13 Recipiency Rates, by State.” Accessed June 2, 2021.

U.S. Department of Labor Employment and Training Administration (U.S. DOL-ETA). 2021c. “Unemployment Insurance Weekly Claims” (press release). April 1, 2021.

West, Rachel, Indivar Dutta-Gupta, Kali Grant, Melissa Boteach, Claire McKenna, and Judy Conti. 2016. Strengthening Unemployment Protections in America: Modernizing Unemployment Insurance and Establishing a Jobseeker’s Allowance. Center for American Progress, June 2016.

Zakrzewski, Cat, and Tonya Riley. 2020. “The Technology 202: State Unemployment Websites are Crashing Amid Record Number of Claims.” Washington Post, April 2, 2020.

TABLE OF CONTENTS

Reforming Unemployment Insurance

• Foreword
• Executive summary
• Introduction
• Primer
• Statement of the problem
• Section 1. Universal standards
• Section 2. Financing
• Section 3. Eligibility
• Section 4. Benefit Duration
• Section 5. Benefit levels
• Appendix

Key proposals

• Wage replacement rates: Increase replacement rates to levels that truly alleviate severe economic hardship, particularly for low-wage workers, with a progressive formula that replaces at least 85% of wages for the lowest earners and gradually decreases to replace 50% of wages for higher earners, 30% of wages for very high earners, and so on.
• Dependent allowance: Help alleviate food and housing insecurity when parents or caregivers lose a job by providing a minimum dependent allowance of $35 (inflation adjusted) per dependent per week.
• Subminimum wage earners and tipped workers: Treat subminimum wage earners fairly by calculating benefit amounts based on what they should have earned if they were paid the prevailing minimum wage or, for tipped workers, wages with tips, whichever is greater.
• Part-time workers: Support rather than discourage part-time work as a bridge back to employment by implementing an earnings disregard that keeps part-timers’ UI benefits, combined with their part-time earnings, from falling short of their pre-layoff average weekly wage.
• New entrants and reentrants: Support job seekers who are newly entering or reentering the labor market with an allowance of $200 per week or 20% of the state’s average weekly wage, whichever is greater.
• Economic downturns: Make unemployment benefits a more powerful tool for recovery by increasing wage replacement rates, minimum and maximum benefit amounts, the dependent allowance, and the jobseeker’s allowance when extended benefits are triggered on:
  • 100% replacement for lowest-tier earnings and 65% of wages for highest-tier earnings
  • Minimum benefit the greater of $300 per week or 40% of the state’s average weekly wage (up from the greater of $250 or 30%)
• Taxation of benefits: Increase UI take-up and get more UI benefits recirculating as spending in the economy by fully exempting households with less than $100,000 in adjusted gross income from federal taxation of UI benefits.

Introduction

The problem

On average, unemployment insurance benefits replace just about 40% of a worker’s prelayoff wages. When accounting for the time-limited nature of UI income and the nonwage benefits that are part of the compensation package for many workers (benefits like employer-provided health insurance and retirement contributions), the true pay replacement rate is much lower.1 It is the states that set benefit levels, and states vary tremendously in the benefit levels they offer, due to different minimum and maximum benefits, as well as formulas for computing benefits based on wage history. There are currently no federal standards for UI benefits, and many states pay benefits that are so low they allow jobless workers to fall quickly into poverty during a spell of job loss (GAO 2020). In no state are UI benefits enough to cover a worker’s basic needs (Roberts and Schweitzer 2020).2

Black and Latino workers face greater hardship when they receive low levels of benefits because they are less likely than white workers to have private savings to use to supplement income from unemployment insurance (Gould-Werth 2021; Gould, Perez, and Wilson 2020; Gould and Wilson 2020). Women and workers of color are further disadvantaged because they are disproportionately clustered in low-paying jobs, and thus receive lower levels of benefits than their more highly compensated counterparts (Tucker and Vogtman 2020). In this way, the UI system entrenches and deepens existing inequities, particularly the systemic racism that has prevented workers of color from building family wealth (Bhutta et al. 2020; Kijakazi et al. 2019).

Workers with dependents, workers earning subminimum wages, tipped workers, and part-time workers all face particular difficulty making ends meet with the benefit levels to which they are entitled. In the current system people who are struggling as they seek to secure their first job or to reenter the labor market after an absence (for reasons that may extend from child-rearing to incarceration) receive no benefits at all. And despite the fact that unemployment spells are longer when economic conditions are worse, and that increasing unemployment benefits when the economy is in a downturn helps both individual workers and the macroeconomy by supporting spending, the regular UI program does not adjust benefit levels in response to economic trends (BLS 2021a; Bachas et al. 2020).

The solution

We can do better than a system that fails to alleviate severe economic hardship and deepens inequities. The policy proposals laid out below would increase the level of UI benefits, including making the benefit formula more progressive so that low-wage workers are better supported. The proposals also address the special difficulties that some groups of workers, particularly women and workers of color, face when trying to meet their need under the current system of determining unemployment benefit levels. Benefit levels should meet a guaranteed minimum in all states.

Implementation

Benefits offered by state-run UI systems should meet federally guaranteed minimums. To aid states in the determination of benefit levels, the federal Department of Labor should establish a system that computes benefit amounts from wage records that are collected in national data sets such as the Quarterly Census of Employment and Wages (QCEW). Given that the recent work and earnings history of potential UI recipients is fully contained in QCEW data, it would be a straightforward task to compute each potential recipient’s UI benefit in a system where benefit levels were harmonized across the country. This would be a huge administrative efficiency improvement when compared with today’s patchwork system of benefit formulas that vary significantly by state.

Determining replacement rates

Each state sets its own formula for determining weekly benefit amounts—so the share of weekly wages that is “replaced” by unemployment insurance benefit payments vary widely by state. While the wage replacement rate thus varies by state, the U.S. Department of Labor’s Employment and Training Administration tracks replacement rates by state and region and computes a national average. Except for a brief period in the UI program’s early years, the wage replacement rate has remained below 40% (O’Leary and Rubin 1997; U.S. DOL-ETA 2021).

Context: How current low and uneven wage replacement rates fall short of what workers need

While UI benefits are higher for low-wage workers, they rarely exceed 50% of a worker’s previous wages. Social scientists agree that current wage replacement rates in the U.S. are too low (von Wachter 2019).

Because UI benefits replace only wages, and not benefits such as employer-paid health insurance premiums and employer-paid retirement contributions, the replacement rate of total compensation is even lower. Typically about 30% of what employers spend on employee compensation goes toward benefits (BLS 2021b), but UI payments replace only a portion of wages and ignore the much higher true monetary benefits that workers receive from work. Changes in the law in the 1970s and 1980s that made UI benefits taxable also reduce the value of benefits relative to workers’ prelayoff earnings.

Black and Latino workers are particularly harmed by low benefit amounts. For one, while many states have made it harder to access benefits in recent years, the states with the deepest cuts to their UI programs are mostly Southern states and have higher shares of Black residents (Kofman and Fresques 2020). Further, Black and Latino households have far lower private wealth on average than white households, and lower levels of wealth mean there is less ability to absorb the shock of income loss stemming from a spell of joblessness (Bhutta et al. 2020; Gould and Wilson 2020; Gould, Perez, and Wilson 2020).

In addition, there is a real problem in this country of workers being underpaid for their work, whether it is because they are deprived of overtime pay or paid a subminimum wage (Cooper and Kroger 2017). This reduces their benefits amounts and makes it difficult for them to cover basic necessities.

Policy proposal: Increase replacement rates using a progressive structure

To better assist all workers in meeting their basic needs while they search for work, UI benefit levels should be harmonized across all states by the U.S. Department of Labor and set progressively to provide low-wage workers with a higher replacement rate of pre-termination wages than their high-wage counterparts. Under the proposed progressive system for calculating UI benefits, different benefit rates apply to different levels of earnings for each worker, with rates falling as earnings rise (kind of like how marginal tax rates work, but in reverse). Table 5.1 shows the proposed replacement rates for earnings at different wage levels. The calculation used to determine the level of wage replacement at each level of earnings begins with dividing total earnings across the base period by the number of weeks in the base period to determine a worker’s average weekly wage. This number should be compared with the state’s average weekly wage (AWW) to determine the level of wage replacement. As shown in the table, under this progressive replacement rate structure, UI replaces 85% of wages a worker earns up to 50% of the state AWW, 70% of wages a worker earns that are between 51% and 100% of the state AWW, and 50% of wages a worker earns that are greater than 100% of the state AWW.

Table 5.1

Policy proposal: Set minimum and maximum benefit levels that ensure adequate benefit levels

Though formulas that set benefit levels as a percentage of weekly wages work well for workers in the middle of the earnings distribution, they are less effective for workers at the top and bottom of the earnings distribution: Low earners may end up with benefit levels that are too low to help them handle living expenses when their work income is reduced. State UI systems have recognized this issue and set minimum and maximum benefit levels. However, minimum and maximum benefit levels vary greatly across the states, and there is no federal standard states must meet.

Scant weekly benefits don’t pay bills for out-of-work restaurant worker

Ruby De La Rosa, Massachusetts

When the pandemic hit, I was given UI almost immediately, as my restaurant had closed for quarantine. At first, it was so easy and helpful. [But] once the additional $600 was removed from UI, I could no longer afford my rent, car payment, and other bills, [as I was] only approved for $174 a week. This is an unlivable wage. When I was working prior to the pandemic, I was making $600+ per week as a waitress.

We recommend setting standards for minimum and maximum benefit amounts as follows:

• minimum benefit amount of at least 30% of the state’s average weekly wage or $250 per week,3 whichever is greater
• maximum benefit amount of no more than 150% of the state’s average weekly wage

The choice to cap benefits for any individual worker at an amount equal to 150% of the state’s AWW is consistent with a sound social insurance principle—followed, for example, by the Social Security program—that benefits should rise in line with income so long as tax contributions rise as well.4 Table 5.2 shows how the rates and caps outlined in Table 5.1, when applied to earnings, produce progressive effective replacement rates for workers at a variety of points along the earnings distribution.

Table 5.2

Appendix Table 5a at the end of this section provides a detailed look at the calculations illustrating the progressive wage replacement structure proposed here, using examples that assume that the state’s average weekly wage is $1,000.

Ensuring that benefit levels are adequate for all groups of workers

Policy proposal: Implement a dependent allowance

Households with children are much more likely to face food and housing insecurity when a job is lost (Keith-Jennings, Nchako, and Llobrera 2021). Systemic racism contributes to this vulnerability for households headed by women of color, as women of color are overrepresented in low-wage work (Matthews and Wilson 2018). Women of color also are especially vulnerable as they make up a disproportionate share of single-parent households. Nondiscretionary expenses are higher for workers caring for dependents, such as young children, adult children with disabilities, aging parents, and full-time college students. Many of these expenses, such as child care, tuition, diapers, groceries, medical prescriptions, and care giving, can’t be reduced without great harm when households are faced with the income constraints associated with job loss.

Ten states currently offer dependent allowances, though amounts and eligible dependents vary by state (Whittaker and Isaacs 2019; U.S. DOL-ETA 2020). A national minimum standard is called for: In all states unemployment benefits should include additional supports for workers caring for dependents. We propose adding a dependent allowance of at least $35 per week per dependent (indexed to inflation) to workers’ benefits.

The definition of eligible dependents should be broad and include at least:

• children ages 18 and younger, including foster children, stepchildren, and children for whom the worker has at least 50% custody in shared-custody arrangements
• full-time students, up to the age of 26
• nonworking adults in the household ages 60 and older, such as workers’ parents
• adults with disabilities in the household

Table 5.3 shows how this change, combined with implementation of the progressive replacement rates outlines above, would affect benefit levels for hypothetical workers in Mississippi and Massachusetts.

Table 5.3

Policy proposal: Calculate benefit amounts for subminimum wage earners and tipped workers based on the prevailing minimum wage or the worker’s wages with tips, whichever is greater, so that subminimum wage workers aren’t penalized twice by their low earnings

There are 3 million tipped workers—disproportionately women and people of color—and over 100,000 workers with disabilities who are paid a subminimum wage (Allegretto and Cooper 2014; West 2019). Further, employers of some specific classes of workers, such as certain workers with disabilities, full-time or young workers in some sectors, and a few categories of agricultural workers carved out from the minimum wage provisions of the Fair Labor Standards Act, may be allowed to pay less than the prevailing minimum wage. Many workers are also paid less than the amount they are legally entitled to under the law. This phenomenon, known as wage theft, includes not paying promised pay, paying workers less than the legal minimum wage, failing to provide legally required overtime pay, confiscating tips, taking illegal deductions from wages, asking employees to work off the clock, and misclassifying employees as independent contractors to pay a wage lower than the legal minimum. Wage theft disproportionately hurts low-wage workers and has a very high cost for workers, as shown in a study on just one form of wage theft, which found that in the 10 most populous states, 2.4 million workers are paid below minimum wage, with their losses averaging about $3,300 per year per worker (Cooper and Kroeger 2017).5

Whether workers receive subminimum wages legally or illegally, their low earnings depress their UI benefit levels. In cases where workers qualify for unemployment insurance benefits but their reported wages are below the prevailing minimum wage,6 we propose calculating their benefits as though they had earned the prevailing minimum wage. Tipped workers who earn a subminimum wage should be able to self-report their tips and then have their UI benefits calculated on the basis of their earnings with tips or the prevailing minimum wage, whichever is greater. Finally, it is worth highlighting that the minimum benefit formula outlined above should go a long way in improving UI benefits for workers earning subminimum wages.

Policy proposal: Mandate that administrative data collected from UI programs across the country include hours worked by employee, so that programs can calculate more adequate benefit levels for subminimum wage workers

Note that there are data collection implications for the subminimum wage earner benefits proposal. Calculating what workers would have earned had they earned the minimum wage requires multiplying their hours worked by the minimum wage. Currently, only a small number of states collect data on hours worked by individuals. As part of their data collection and reporting to the federal Quarterly Census of Employment and Wages or QCEW (the federal database of administrative data from UI programs across the country), states would have to collect data on the hours worked by individuals. But this data capacity would already be expanding as we pursue the recommendations made in other sections of this report. Specifically, in Section 2, on finance, we recommend that states switch to an experience rating method for determining an employer’s UI tax rate that measures the hours worked of each employer’s workforce (instead of basing the tax rate on unemployment insurance claims filed by the firm’s workers). If states are already collecting this data, there is only a small incremental effort needed to record these hours by worker. Given that states such as Minnesota and Washington already maintain these records, hours collection is well within the capacity of other state systems. Collecting hours-worked in the QCEW provides important benchmarks for other federal data surveys, and thus would also offer significant informational benefits for researchers and policymakers.

Policy proposal: Pay fair benefits to part-time workers

State UI systems badly mistreat underemployed workers, imposing harsh and economically irrational rules on workers who return to the workforce on a part-time basis. In theory, most states allow a worker to continue to claim UI even if they collect some part-time wages, but existing state rules make little sense. Workers can earn up to a set amount, known as the “disregard,” but then every dollar earned above that amount reduces UI benefits dollar for dollar. In effect, this is a remarkably inefficient tax system: it imposes a zero tax rate up until a cliff, then a 100% rate after the cliff. Further, in many states, the earnings disregard is so low—$30 or $40—that there is no real point to working at all.

In a UI program with minimum federal standards, the earnings disregard should be set at a level that enables part-time workers to access unemployment insurance while they search for full-time work, and encourages unemployed workers to work part time as they search for full-time work. We propose implementing an earnings disregard in which all earnings from part-time work are disregarded until the sum of a worker’s part-time wages and UI benefit exceeds 110% of prelayoff wages.7 Workers’ combined benefits plus part-time earnings could modestly exceed their previous weekly wage because even at equal earnings, part-time work typically is not a full replacement, either in terms of benefits or security. As an alternative, federal law could require a disregard of no less than 50% of the worker’s average weekly benefit, as several states now permit.

Arts worker pays high penalty for working part time

Nate Claus, New York

As a freelance union stage manager for theater, dance, opera, and other live events, when my show closes, it almost always means that the entire company shuts down. That puts us all out of work simultaneously. Because of this cycle, folks in my business rely on a combination of “day jobs” and unemployment insurance to help us to survive as we search for the next gig.

Unfortunately, day jobs, by nature, are often on call or part time. I have had to accept part-time work for earned wages that reduced my unemployment benefits to the degree that my income those weeks was less than it was for weeks where I didn’t work at all. If our UI system were set up in a way that put unemployed workers first, it would make such a critical difference in my life.

Policy proposal: Support job seekers newly entering or reentering the labor force with an allowance of $200 per week or 20% of the state’s average weekly wage

The unemployment insurance system should be reimagined to support all job seekers in the labor force, not just those with a narrowly defined qualifying loss of a job under a traditional employer-employee relationship. In addition to supporting them with financial UI benefits, the prospect of financial benefits may encourage UI applications from job seekers and bring them into other employment assistance and workforce development programs. As described in the eligibility chapter of this report, we propose establishing a jobseeker’s allowance to workers newly entering the labor force and searching for work, and workers who are reentering the labor force after taking time away. We propose that the benefits for eligible job seekers should be set at the greater of 20% of the state’s average weekly wage or $200 per week (indexed to median wage growth). Workers eligible for the jobseeker’s allowance would also be eligible for dependent allowances.

Setting benefit levels during economic downturns

Policy proposal: Make weekly benefit amounts responsive to periods of economic downturn

Benefits should be increased when labor demand is depressed, not only to better support workers, but also to provide more effective macroeconomic stabilization. When the economy is depressed and vacancies fall below the number of jobless workers, it is low economywide spending that is holding back employment growth, not workers who aren’t looking hard enough for jobs. More-generous UI benefits can help boost this spending. Yet until 2020, the only past effort to increase UI benefits to respond to the business cycle was a relatively tiny $25 weekly addition during the Great Recession.

These past failures to boost the low baseline levels of UI benefit generosity during recessions hampered the system’s ability to serve as an effective macroeconomic stabilizer. Indeed, evidence from increased benefit levels during the COVID-19 crisis indicates that increasing benefit levels during moments of macroeconomic contraction results in large boosts to aggregate demand and strong spending.8

As described in Section 4, on benefit duration, our proposed extended benefits triggers are reliable indicators of macroeconomic contraction. In periods when extended benefits trigger on, we propose adjusting the replacement rate formulae for all benefits as follows:

• 100% for wages up to 50% of the state’s average weekly wage, up from 85% in non-EB periods
• 85% for wages between 51% and 100% of the state’s average weekly wage, up from 70% in non-EB periods
• 65% for wages greater than 100% of the state’s average weekly wage, up from 50% in non-EB periods

In addition, we propose:

• increasing the minimum benefit to the greater of $300 per week or 40% of the state’s average weekly wage
• increasing the weekly allowance per dependent to $50 (indexed to inflation)

Finally, we propose increasing jobseeker’s allowance benefits to the greater of $250 or 30% of the state’s average weekly wage per week (with the $250 threshold indexed to median wage growth).

Reforming taxation of UI benefits

The real value of UI benefits to claimants is reduced through taxation. UI benefits were fully tax exempt for the first 40 years of the U.S. system, but then taxes were phased in between 1978 and 1986. The historic rationale for imposing UI taxes was to reduce the desirability of receiving UI relative to the desirability of working.9 Yet as described in Section 4, contemporary research shows that there is little empirical basis for concerns about the economic effects of increasing the take-home value of UI benefits.10

Indeed, taxing benefits adds additional complexity and compliance costs to the system and reduces take-up of UI benefits (Anderson and Meyer 1997), preventing the program from effectively serving its dual mandate of smoothing consumption for workers who lose jobs through no fault of their own and stabilizing the macroeconomy. There are, however, some reasons to tax UI benefits. In the absence of UI benefit taxation, well-compensated workers who draw benefits part of the year, or high-income dual-earner households with one separated worker, will receive a higher after-tax replacement rate than low earners.

Policy proposal: Exempt UI income from federal taxes for low-income households

We recommend exempting UI income received by low-income households from federal income tax.11 This will increase take-up and increase effective benefit levels for households with the highest marginal propensity to consume—to spend their benefits and thus help boost aggregate demand—thereby improving UI’s ability to function as a macroeconomic stabilizer (Bivens 2017). At a minimum, to reduce the extent to which federal taxes pull fiscal resources out of states with more-generous UI systems, federal income tax on UI benefits could be redeposited in state trust funds.

While we strongly recommend exemption, were low-earner benefits to be taxed, we would recommend allowing them to be treated as “earnings” for Earned Income Tax Credit (EITC) purposes.

Policy proposal: Phase out exemption so that UI benefits received by households whose  adjusted gross income exceeds $150,000 are fully taxed

To increase equity when generating federal revenue, we recommend phasing out exemption for high-income households. The American Rescue Plan fully taxed UI benefits for households with adjusted gross income greater than $150,000, and we recommend following that benchmark, although with a more gradual phase-out beginning at $100,000 AGI.

Appendix Table 5A

Endnotes

1. For example, see Table 1 in the federal government periodic summary of what employers spend on employee compensation for the shares attributable to wages versus benefits (BLS 2021b).

2. According to Roberts and Schweitzer (2020), “there isn’t a single county, parish, borough, census area, or city in the United States where state unemployment benefits alone can cover a set of very modest monthly expenses (for example, the 40th percentile of area rent) for a typical one-adult, one-child family.”

3. The $250 weekly benefit amount would change over time, as it would be indexed to median wage growth.

4. A key proposal in section 2 of  this report would increase the taxable maximum for the base of the Federal Unemployment Tax Act (FUTA) tax to be equal to the taxable maximum for the base of the Social Security (Federal Insurance Contributions Act or FICA) tax, which was just under $143,000 in 2021. A worker earning $143,000 annually makes roughly $2,750 each week, and under the formulas proposed in this section would qualify for a UI benefit of roughly $1,775. This rounds up roughly to 150% of the average weekly wage in 2020, which was just under $1,200 nationally.

5. See Cooper and Kroeger 2017 for an overview of wage theft in the U.S. economy and an estimate of its reach.

6. At the local, state, or federal level.

7. If macroeconomic conditions warrant the triggering of extended benefits, it is beneficial to the macroeconomy to raise benefit levels, so during extended benefit periods, we propose that all earnings from part-time work be disregarded unless the sum of a worker’s part-time wages and UI benefit exceeds 125% of their prelayoff wages.

8. See Ganong et al. 2021 for evidence on the large macroeconomic boost provided by pandemic-related UI expansions, including increases in benefit generosity.

9. It is sometimes argued that UI benefits should be taxed because they are replacements for wages, but this is also true in a general sense for benefits from Social Security, Supplemental Nutrition Assistance Program (SNAP), Temporary Assistance for Needy Families (TANF), and other safety-net programs. These programs are generally untaxed or only partly taxed because it is simpler to adjust benefit levels directly, rather than issuing benefits and then taxing back part of the value of that benefit. Further, federal taxation of state-funded UI benefits is effectively a federal surtax on state UI tax collections (Galle and Pancotti 2021). For any given target replacement rate a state might choose, federal taxation of benefits requires the state to pay more, and therefore to impose more in state taxes, to achieve the identical replacement rate.

10. The literature on the employment effects of potential benefit duration discussed in Section 4 is applicable here, as longer durations increase the net take-home value.

11. The arguments for exempting state UI benefits from federal tax are stronger than the case for states exempting their own benefits. We do not recommend requiring states to exempt UI from their own income tax, although federal exemption would automatically result in state exemption in about half of states.

References

Allegretto, Sylvia, and David Cooper. 2014. Twenty-Three Years and Still Waiting for Change: Why It’s Time to Give Tipped Workers the Regular Minimum Wage. Economic Policy Institute, July 2014.

Anderson, Patricia M., and Bruce Meyer D. 1997. “Unemployment Insurance Takeup Rates and the After-Tax Value of Benefits.” Quarterly Journal of Economics 112, no. 3 (August): 913–937.

Bachas, Natalie, Peter Ganong, Pascal J. Noel, Joseph S. Vavra, Arlene Wong, Diana Farrell, and Fiona E. Greig. 2020. “Initial Impacts of the Pandemic on Consumer Behavior: Evidence from Linked Income, Spending, and Savings Data.” National Bureau of Economic Research working paper no. 27617, July 2020. DOI 10.3386/w27617

Bhutta, Neil, Andrew Chang, Lisa Detting, and Joanne Hsu. 2020. “Disparities in Wealth by Race and Ethnicity in the 2019 Survey of Consumer Finances.” Federal Reserve Board FEDS Notes, September 28, 2020.

Bivens, Josh. 2017. Inequality Is Slowing U.S. Economic Growth: Faster Wage Growth for Low- and Middle-Wage Workers Is the Solution. Economic Policy Institute, December 2017.

Bureau of Labor Statistics (BLS). 2021a. “Duration of Unemployment” (data graphic related to Employment Situation Summary April 2021).

Bureau of Labor Statistics (BLS). 2021b. “Employer Costs for Employee Compensation –December 2020” (news release). March 18, 2021.

Cooper, David, and Teresa Kroeger. 2017. Employers Steal Billions from Workers’ Paychecks Each Year. Economic Policy Institute, May 2017.

Galle, Brian, and Elizabeth Pancotti. 2021. The Case for Forgiving Taxes on Pandemic Unemployment Aid. The Century Foundation, February 2021.

Ganong, Peter, Fiona Greig, Max Liebeskind, Pascal Noel, Daniel M. Sullivan, and Joseph Vavra. 2021. “Spending and Job Search Impacts of Expanded Unemployment Benefits: Evidence from Administrative Microdata.” Becker-Friedman Institute Working Paper No. 2021-19, February 2021.

Gould, Elise, and Valerie Wilson. 2020. Black Workers Face Two of the Most Lethal Preexisting Conditions for Coronavirus—Racism and Economic Inequality. Economic Policy Institute, June 2020.

Gould, Elise, Daniel Perez, and Valerie Wilson. 2020. Latinx Workers—Particularly Women—Face Devastating Job Losses in the COVID-19 Recession. Economic Policy Institute, August 2020.

Gould-Werth, Alix. 2021. Research on Race and Consumption Shows Why Racial Disparities in Unemployment Insurance Receipt are Detrimental to Economic Recovery in the United States. Washington Center for Equitable Growth, March 2021.

Government Accountability Office (GAO). 2020. COVID-19: Urgent Actions Needed to Better Ensure an Effective Federal Response. Report to Congressional Committees. November 2020.

Keith-Jennings, Brynne, Catlin Nchako, and Joseph Llobrera. 2021. Number of Families Struggling to Afford Food Rose Steeply in Pandemic and Remains High, Especially Among Children and Households of Color. Center on Budget and Policy Priorities. April 2020.

Kijakazi, Kilolo, K. Steven Brown, Donnie Charleston, and Charmaine Runes. 2019. What Would It Take to Overcome the Damaging Effects of Structural Racism and Ensure a More Equitable Future? Urban Institute. May 2019.

Kofman, Ava, and Hannah Fresques. 2020. “Black Workers Are More Likely to Be Unemployed but Less Likely to Get Unemployment Benefits.” ProPublica. August 24, 2020.

Matthews, Madison, and Valerie Wilson. 2018. “Separate is Still Unequal: How Patterns of Occupational Segregation Impact Pay for Black Women.” Working Economics Blog (Economic Policy Institute), August 6, 2018.

O’Leary, Christopher, and Murray Rubin. 1997. “Adequacy of the Weekly Benefit Amount.” In Unemployment Insurance in the United States: Analysis of Policy Issues, edited by Christopher O’Leary and Stephen Wandner, 163–210. Kalamazoo, Mich.: W.E. Upjohn Institute for Employment Research.

Roberts, Lily, and Justin Schweitzer. 2020. “You Can’t Afford to Live Anywhere in the United States Solely on Unemployment Insurance.” Center for American Progress. September 2020.

Tucker, Jasmine, and Julie Vogtman. 2020. When Hard Work is Not Enough: Women in Low-Paid Jobs. National Women’s Law Center, April 2020.

U.S. Department of Labor Employment and Training Administration (U.S. DOL-ETA). 2020. “Monetary Entitlement” in Comparison of State Unemployment Laws 2020,

U.S. Department of Labor Employment and Training Administration (U.S. DOL-ETA). 2021. UI Replacement Rates Report (online database). Accessed April 2021.

von Wachter, Till. 2019. “Unemployment Insurance Reform.” Annals of the American Academy of Political and Social Science 686, no. 1 (November): 121–146.

West, Rachel. 2019. “Everyone is Overlooking a Key Part of the New $15 Minimum Wage Bill.” TalkPoverty, June 19, 2019.

Whittaker, Julie M., and Katelin P. Isaacs. 2019. Unemployment Insurance: Programs and Benefits. Congressional Research Service (CRS) Report RL33362, October 2019.

TABLE OF CONTENTS

Reforming Unemployment Insurance

• Foreword
• Executive summary
• Introduction
• Primer
• Statement of the problem
• Section 1. Universal standards
• Section 2. Financing
• Section 3. Eligibility
• Section 4. Benefit Duration
• Section 5. Benefit levels
• Appendix

Key proposals

• Duration of standard benefits: Provide longer protection for unemployed workers during normal economic times by setting the minimum duration of potential benefits at 30 weeks during periods of low unemployment.

• Duration of extended benefits: Respond faster and more uniformly to growing labor market distress by using federal and state unemployment rates and changes in unemployment rates to automatically and rapidly trigger on extended benefits when the economy is deteriorating (when the unemployment rate reaches 5% or is 1.3 times the minimum unemployment rate in the previous year). Enhance the economy-stabilizing effects of extended benefits by lengthening duration as the labor market worsens, to as many as 99 weeks (when the unemployment rate reaches 10% or 3.2 times the initial minimum unemployment rate).
• Phased reductions of extended benefits: Support still-struggling groups of workers and stabilize state economies by eliminating “look-back” provisions that allow extended benefits to trigger off while the labor market remains weak (when unemployment is stabilizing at an elevated level or falling only because people have given up actively searching for work). Instead, sustain benefits until unemployment rates are declining and the declines are driven by rising employment (as indicated by a 0.2% reduction in the share of the state’s 25- to 54-year-olds with a job, i.e., the prime-age employment-to-population (EPOP) ratio (see Table 4.1 for the full set of on- and off-triggers).
• Federal data enhancements: Acknowledge the workers who tend to be left behind in recoveries with more targeted data. Require the Bureau of Labor Statistics (BLS) to develop state-level measures of prime-age employment rates that are reliable enough to use as UI off-triggers. Also require the BLS and the Department of Labor Office of Employment and Training Administration (U.S. DOL ETA) to analyze flows of workers out of UI recipiency and into paid employment by demographic and labor market characteristic to ensure that benefit extensions under future reforms do not trigger off when the overall labor market improves but it is actually just more-credentialed workers who are benefiting.

Introduction

The problem

The maximum length of time for which eligible workers can receive unemployment insurance benefits is too short in many states in normal times, grows too slowly and too little under automatic expansions during times of economic distress, is often prematurely cut short, and reinforces existing damaging disparities in the labor market by race.

Currently, it is up to state legislators to set the “potential benefit duration” (PBD) for the standard UI programs in their state. The current UI system does not provide benefits that last long enough to alleviate economic insecurity and enable workers to secure well-matched reemployment during normal economic times, largely because the standard number of weeks provided by most states—26—is well below international norms, and because a growing number of states provide even fewer weeks of eligibility.

Further, during times of labor market distress caused by negative economic shocks, potential benefit duration is not responsive enough to economic conditions. The automatic triggers that extend additional weeks of benefits to workers in high-unemployment states under the permanent Extended Benefits (EB) program have glaring flaws. Those flaws—explained below—have prompted Congresses in past recessions to enact ad hoc emergency programs to provide additional federal UI benefits. For example, over the Great Recession and through 2013, roughly 8.5 times as many weekly claimants received benefits from the Emergency Unemployment Compensation (EUC) program enacted by Congress in 2008 than from the EB program.1

The weakening of social insurance stemming from the shrinkage of potential benefit duration in some states in normal economic times and the failure to always maintain extended PBDs during periods of macroeconomic distress is apparent. UI is meant as wage replacement during periods of joblessness, but unemployed workers who receive fewer weeks of benefits have a smaller share of wages replaced by UI benefits and are under greater pressure to accept alternative work that is not a good fit for their skills and preferences.2 Further, cuts in weeks of benefits are highly likely to disproportionately harm workers with job search barriers like a lack of formal credentials or systemic discrimination based on race, ethnicity, gender, sexual identity, or other factors. These workers—and others who have a smaller cushion of savings for emergencies—rely on the social insurance function of UI the most, and shrinking PBDs disproportionately harm them.3 Short benefit duration particularly harms workers of color, as structural racism in labor markets leads to their suffering long durations of unemployment on average (BLS 2021). The limited duration of UI benefits keeps the UI system from being fully effective, not only in alleviating economic insecurity during downturns but also in providing a needed boost to the overall economy: Extending unemployment insurance to workers who then spend that money on necessities in the economy is one of the most prominent ways the federal government can combat macroeconomic contraction, and current policy prevents this tool from being used effectively.

The solution

A small number of straightforward policy reforms can significantly address the problems with potential benefit duration in the current UI system. We propose policy reforms to shore up the baseline level of PBD during normal times, make PBDs adjust rapidly and predictably—without relying on ad hoc actions by Congress—during periods of labor market distress, and ramp down gradually as key economic benchmarks are hit. Federal law should guarantee universal minimum benefit duration, as we now detail.

Implementation

Federal standards should be implemented to ensure that all states follow the processes for determining benefit duration outlined in this chapter.

Setting potential benefit duration in normal economic times

Unemployment insurance is a hybrid federal–state program. During normal times when the labor market is not distressed, states finance the regular UI system and state legislatures decide the potential benefit duration for their state. For decades following the enactment of the UI system, all states followed a norm that the minimum PBD should be 26 weeks. Before the Great Recession of 2008, for example, all states had PBDs of least 26 weeks.

However, since then, many states have weakened this standard. Before the COVID-19 economic shock hit the U.S. in March 2020, 10 states had reduced PBDs in their normal UI programs to less than 26 weeks (Whittaker and Isaacs 2019; Evermore 2020).4 Additionally, even after the COVID-19 shock prompted some states to restore some weeks of benefits, bills were introduced in a handful of states to reduce PBDs, and one appears headed for the governor’s signature (Golshan and Delaney 2021; Styf 2021).5 Reductions in normal PBD take needed assistance away from families while they are still struggling, as well as undermining the system’s macroeconomic stabilization goals in times of crisis.

Context: How low baseline levels of benefit duration weaken the economic stabilizing capacity of the standard UI program

When the economy contracts and people are no longer working, their earnings losses translate directly into spending declines, leading to further contraction. UI benefits kick in during these periods of macroeconomic contraction and offset some of that lost spending, helping to stabilize the economy. Low baseline levels of state PBDs hurt the macroeconomic stabilization function of the UI system in at least three ways. First, even during steep and long recessions, the majority of unemployed workers are getting UI benefits through standard programs, not extended benefits programs (including both the regular EB program and the ad hoc emergency programs).6 If the PBDs of these normal programs are shortened, it makes UI less effective as an automatic stabilizer. This is particularly true early in recessions, before any extended or emergency benefit programs have a chance to kick in.

Second, the states with reduced PBDs during normal times are also states with notably low recipiency rates, and these low baseline levels combined with their potential to discourage workers from applying mean there is less UI benefit spending stabilizing the economy.7 (Short PBDs might help convince unemployed workers that it is not worth the potential hassles of navigating the UI system.)8

Third, in the current system, the generosity of federal financing for extended benefits is determined in part by the state’s PBD of normal UI benefits, and this is often the case as well with the ad hoc emergency benefit increases financed during recent recessions. Reducing normal PBDs can hence reduce states’ availability to receive federal financing for extended benefits, or can reduce the amount they receive.

Policy proposal: Set a minimum potential benefit duration of 30 weeks during normal economic times

Before the COVID-19 shock, the state with the longest PBD was Massachusetts, which provided 30 weeks of benefits. Given that 30 weeks obviously provides longer protection for laid-off workers, and given that there is little to no evidence that the longer PBD in Massachusetts did any harm to their labor market or state economy, we suggest that the current gold standard among U.S. states set the new benchmark for a reformed UI system.

It is perhaps useful to note that a 30-week minimum would still leave the benefits available in the United States among the shortest in the developed world. Figure 4A shows the maximum PBD across a wide range of U.S. peer countries.

Social scientists agree that 26 weeks is too short to effectively serve UI’s basic purposes. Outside recessions, 2 million individuals on average collect some UI benefits in a given week. Of these, between 200,000 and 300,000 individuals will exhaust their available UI benefits each month (von Wachter 2019).

Figure A

Setting potential benefit duration during downturns

The existing “automatic” system for increasing the number of weeks that unemployed workers can receive UI benefits during economic downturns has triggers that are deeply flawed. The Extended Benefits program triggers are not responsive enough, do not trigger benefits early enough during downturns, and “trigger off” extended benefits too soon. Again, by making benefits too brief, these flaws deepen family hardship and worsen recessions.

Context: How the current Extended Benefits program works

Under the Extended Benefits program, if an economic shock causes a state’s labor market to deteriorate to certain low benchmarks, the federal government funds (but the states will administer) additional weeks of benefits to workers who have exhausted their regular benefits. By establishing benchmarks that trigger extended benefits, past Congresses acknowledged that UI benefits should automatically last longer during labor market downturns. But as explained below, the precise design of the existing EB program often renders these triggers far less useful than they should be.

First, a note about financing. Under permanent law, the EB program is financed 50% by the federal government, though in an ad hoc way during recessions, Congress has usually amended federal law to provide for 100% federal funding of EB.

The total number of additional weeks typically ranges from 13 to 20 weeks, depending on state laws and state unemployment rates. Specifically, the EB program provides two tiers of extended PBDs: tier 1 adds 13 weeks and tier 2 adds an additional seven weeks. The mandatory triggers for tier 1 are based on the level and/or the change in the insured unemployment rate (IUR)—a measure of the share of people in the labor force who are receiving UI benefits. Obviously, this measure can vary not only by labor market conditions but also based on state-level eligibility criteria, as states with stricter eligibility criteria would have lower IUR rates, all else being equal. As will be explained in more detail below, the IUR is a deeply flawed measure of labor market distress that should be replaced with a trigger that is a much more focused measure of labor market distress: the official unemployment rate, a measure that includes workers who are unemployed but not receiving UI benefits. States can also opt to use an additional EB trigger that is based on the standard unemployment rate. Currently, more than half (27) of the states use only the IUR-based trigger for their EB program.9

Figure 4B illustrates that the existing base EB triggers fail to adequately extend benefits during the onset of recessions, and they cut extended benefits off far too soon to ensure support for jobless workers and an expedited recovery. It shows the share of UI recipients that were on standard UI, EB programs, and the discretionary programs (for example, the Emergency Unemployment Compensation or EUC program enacted by Congress during the Great Recession). It is particularly evident that in the wake of the Great Recession, EB programs did far less work in providing benefits to unemployed workers than the discretionary EUC program. Clearly, the existing triggers in UI need fixing to make sure the system is as responsive to downturns as it should be.

Figure 4B

Context: How flaws with the current EB program’s on-triggers delay benefits and hurt workers in low unemployment states

Both of the triggers for turning on extended benefits have flaws. The insured unemployment rate often fails to reflect the true state of labor market distress because state UI policies can suppress UI recipiency in normal times. For example, if many of a state’s workers are unemployed, but because of strict eligibility guidelines are not receiving UI, then they are not counted in the IUR. States that use the standard unemployment rate triggers for EB see many more unemployed workers newly enrolled due to EB triggering-on during periods of labor market weakness.10

Both triggers are state-specific only and hence cannot be triggered on by deterioration in the national labor markets. Failing to include national as well as state triggers is problematic for several reasons. First, as mentioned above, residents of an otherwise low-unemployment state who live in a region with higher unemployment that is suffering due to a deterioration in the national labor market could be frozen out of aid. Second, without national triggers providing for wider extension of PBDs, the EB program provides a weaker macroeconomic stabilizer effect. Finally, without national triggers, states may suffer lags in extending benefits. A state with low unemployment as the national labor market deteriorates is highly likely to see its own unemployment rate rise shortly. Policymakers once recognized the value of a national trigger in helping states stay ahead of the curve: The EB program included a national unemployment trigger until the 1981 Omnibus Reconciliation Act.11

Context: How flaws with the current EB program’s off-triggers prompt premature withdrawal of needed assistance

By far the biggest problem with the current UI system’s EB triggers is that benefits are set to trigger off too early during periods of extended labor market distress. The EB program contains “look-back” provisions which trigger benefits off if there has been no significant increase in unemployment over the past two years. In essence, the EB program was structured under an implicit assumption (not so wrong before the 1990s) that labor market recovery would happen very quickly after recessions hit. So, for example, if unemployment rises even to an extremely elevated level like 9% and then stays there for two years, the EB provisions would automatically trigger off. This is not an academic concern. The national unemployment rate hit 9.0% in April 2009, but remained at 9.0% (or higher) until September 2011.

Context: How the ad hoc off-triggers for emergency aid hurt workers

After the 20 weeks of EB benefits (including both tier 1 and tier 2) are added to normal UI benefits, further extensions to PBDs have to be legislated on an ad hoc basis by Congress. In recent decades these extensions were labeled “temporary emergency unemployment compensation” or “emergency unemployment compensation” (TEUC or EUC), and were fully federally financed. These programs have been tied to calendar periods rather than economic conditions, and often lapse well before the economy recovers. For example, the federally financed extended benefits included in the CARES Act passed in April 2020 as a response to the COVID-19 economic shock—the Pandemic Emergency Unemployment Compensation (PEUC) benefits—lapsed at the end of 2020, when the virus was surging and the labor market remained very weak.

Sometimes these lapses are temporary, and longer PBDs are reextended after a short break, but temporary income losses can be devastating to households on tight budgets even if the programs are reextended and payments are retroactive —and cause extreme anxiety among workers depending on benefits.12 Sometimes these lapses are permanent. The EUC program put into place during the Great Recession in 2008 was allowed to completely lapse by the end of 2013, when unemployment had just barely dipped below 7% nationally and sat above its highest level during the early 2000s recession and jobless recovery. And by late May 2021, half of the states had announced plans to cut off their residents’ access to some or all of the emergency programs enacted in the wake of the coronavirus pandemic: the PEUC program as well as the Pandemic Unemployment Compensation (PUC) program offering $300 weekly in enhanced benefits and the Pandemic Unemployment Assistance (PUA) program offering benefits to workers traditionally denied UI, like self-employed workers (Berger 2021; Zeballos-Roig and Kaplan 2021).13 This threatened to cause extraordinary harm to vulnerable families and to impede economic recovery (Cooper 2021). Given that workers of color bore the brunt of the coronavirus downturn, they are at risk, once again, of being left behind (Gould and Wilson 2020; Gould, Perez, and Wilson 2020).

These glaring flaws regarding the triggers of extended PBDs—automatic extensions that trigger on too slowly and unevenly and can trigger off while the labor market remains weak, and the reliance on congressional whim rather than economic conditions to determine further PBD extensions—can be fixed by reforms we suggest below.

Policy proposal: Reform the Extended Benefits program to trigger on quickly as the labor market deteriorates and trigger off only when genuine recovery is underway

To ensure that unemployment benefits trigger on quickly as labor market distress begins and remain in place until the labor market mounts a genuine recovery, we propose the parameters for triggering on and off new tiers of PBD shown below in Table 4.1. Triggers-on are determined by the minimum of state or national unemployment rates—not the insured unemployment rate—and are determined by either a prespecified unemployment rate or a change in the unemployment rate. Triggers-off require both a reduction in either the state or national unemployment rate and an improvement in state-level measures of the share of adults between the ages of 25 and 54 with a job, known as the prime-age employment-to-population (EPOP) ratio. We sometimes refer to the prime-age EPOP ratio as a “failsafe” criterion, in that it will keep PBDs from falling into a lower tier based on improvements in the unemployment rate that are driven solely by reductions in labor force participation.

Table 4.1

Triggers-on proposal

The key to effective triggers to turning on extended UI benefits is to ensure they respond quickly and provide longer PBDs as the labor market falters. We propose the on-triggers respond to the minimum of state or national unemployment rates. Existing triggers were designed in an era when unemployment rate expectations were much higher than today. As the Federal Reserve (2020) has observed, “it has become increasingly clear that low unemployment can be sustained without leading to an unwanted increase in inflation.”

Thus, we recommend that the first tier of longer PBDs (rising from 30 to 33 weeks) be triggered on when the state or national unemployment rate hits 5%. However, to ensure that states with traditionally low unemployment rates can see longer PBDs as their unemployment rate deteriorates quickly, we also allow the tier to be triggered on by a rise in the unemployment rate to 1.2 times the minimum unemployment rate that prevailed in the previous 12 months. So, if in July 2021 a state experienced an unemployment rate of 3.5% in any one of the months between the previous July through June, an unemployment rate of 4.2% in July 2021 would trigger on the first tier (33 weeks) of longer PBDs. This modification ensures that PBD extensions respond quickly to obvious deterioration in the labor market (say that caused by the onset of a health crisis like COVID-19 or by hurricanes and other natural disasters), even when the labor market was starting from a healthy state with a historically low unemployment rate.

From the first tier of extended PBDs, each additional percentage-point increase in the unemployment rate would trigger longer PBDs, as shown in Table 4.1. PBDs max out at 98 weeks for unemployment rates of 10% or higher. The unemployment rate levels that trigger on each new tier of PBD largely follow the recommendations of Dube 2021.

Triggers-off proposal

In addition to making UI benefit extensions quickly responsive to downturns, we also propose reforms aimed at keeping PBDs from falling during those periods when overall unemployment is stabilizing or declining for the “wrong” reason—when people have stopped their active job search and are dropping out of official counts of the labor force, and so are not counted as unemployed.14 To ensure that higher tiers of PBD only trigger off when unemployment rates are declining and those declines are driven by rising employment, we propose adding a second (necessary but not sufficient) trigger-off that requires a 0.2 percentage-point reduction in a state’s prime-age employment-to-population ratio (the share of the population ages 25 to 54 with a job).

So, for example, say that the state and national unemployment rate falls from 8% to 7% (and assume the alternative triggers-on don’t apply in this situation because the state and national economies entered the recession with a relatively high unemployment rate). All else being equal, this would lead to a reduction in PBD from 72 to 59 weeks according to Table 4.1. But, if over the last three months the prime-age EPOP averages a level that shows no improvement (or an improvement of only 0.1 percentage points) when compared with the prior (nonoverlapping) three-month period, then the PBD will remain at 72 weeks. Only when the unemployment rate is below 8% and there has been a 0.2 percentage-point improvement in the nonoverlapping three-month average of prime-age EPOPs will the PBD slide down to a lower tier. This same 0.2 percentage-point improvement is needed each time the unemployment rate falls far enough to push PBDs down to another tier. Because it is a necessary condition over and above improvements in unemployment, we refer to the required prime-age EPOP improvement as a “failsafe” condition.

The usefulness of this approach to making triggers automatic can be seen during and after the Great Recession. If these triggers had been in place, 37 states in 2014 and 2015 would have continued to have at least some tier of extended benefits in place rather than having all benefit extensions cut off at the end of 2013, when Congress forced them to lapse.

The prime-age EPOP failsafe would have been useful in this time as well. Nationally, the unemployment rate fell by a full percentage point (from 9.9% to 8.8%) between April 2010 and October 2011. All else being equal, this would lead to a reduction in PBD in the current proposal. But, over this same period, the prime-age EPOP actually fell by 0.3 percentage points. If the unemployment rate falls even as employment declines, this means by definition that all of the “improvement” in the unemployment rate was driven by reductions in the labor force participation rate—a reduction which itself was largely caused by the depressed labor market. A prime-age EPOP failsafe would keep PBD from falling in this situation.

Policy proposal: Improve data sources

Currently, the Bureau of Labor Statistics does not calculate state-level prime-age EPOPs that are measured precisely enough to make the PBD determinations we recommend. Accordingly, part of our policy proposal is a requirement that the BLS adds a prime-age EPOP measure to its monthly Local Area Unemployment Statistics (LAUS). This should be easily within its existing capability and resources.

A related and even more pressing data enhancement needed to establish useful triggers for extending UI benefit duration would be the ability to better measure group-specific unemployment rates. It is well-known that state-level unemployment rates calculated for particular racial or ethnic groups or even educational groups are inaccurate and change a great deal from month to month because household surveys do not reach enough members of the affected groups.15 Further, declining response rates among some racial and ethnic groups are actually making these household surveys even less useful in calculating group-specific labor market outcomes (Baker and Cai 2021).

Despite this measurement problem, significant evidence shows that workers of color often are still struggling to find work even as the economy overall recovers from recessions.16 There is a clear fairness argument for providing better ways to calculate group-specific employment rates: Our economic policy should be designed to improve the labor market experiences of all demographic groups, not just those who are quickest to recover. There is also an economic argument. Often those workers recovering fastest in the wake of economic downturns are white and college-educated workers who tend to have higher incomes and wealth than those still experiencing high unemployment. Improving labor market outcomes for more advantaged groups can conceal the continuing need to support poorer households who need it most. Cutting off benefits too soon for poorer families also slows the economic recovery, as they are usually the most apt to spend (Bivens 2017).

Ideally, we would measure group-specific unemployment rates finely enough to require that all (or at least most) group-specific unemployment rates declined before triggering off an extended tier of PBDs. Because today’s statistical infrastructure does not allow measures that are precise or timely enough to make these requirements reasonable, we further call on the BLS to expand the sample size of existing household surveys and explore other measures to ensure reliable, real-time data on labor market outcomes at much finer levels of geographic and group-specific detail.

Finally, we call for higher-quality and more finely disaggregated collection of data within the UI system. One promising avenue to construct group-specific triggers could be to use “exit rates” from UI receipt to employment, to determine the pace of needed labor market improvement. The existing data on UI recipients is plagued with a host of deficiencies and challenges that would currently make this impossible (see, for example, Cajner et al. 2020). Fixing this data collection is vital not only for a number of needed policy reforms but also for construction of even better benefits on- and off-triggers in the future.

Endnotes

1. Authors’ analysis of the data underlying Figure 4B referenced later in this chapter.

2. See Farooq, Kugler, and Muratori 2020 for evidence that longer UI benefit durations can increase the quality of a job match.

3. The social insurance function of UI essentially works as a substitute for other instruments that can help laid-off workers smooth consumption over a spell of job loss, the most obvious other instrument being private wealth. Given that holdings of private wealth are highly unequal, and that households with less education or headed by historically discriminated-against groups have less private wealth, it stands to reason that these groups will be most in need of an alternative instrument to private wealth (like UI) for maintaining consumption over a spell of job loss.

4. Whittaker and Isaacs (2019) include a list of the states with benefit durations of less than 26 weeks in the pre-COVID period.

5. As of early May, the Tennessee General Assembly had approved cutting unemployment eligibility weeks.

6. See Chodorow-Reich and Coglianese 2019 for this finding that regular UI benefits provide the majority of fiscal impulse (when combined with extended benefits), even during steep recessions.

7. See McHugh and Kimball 2015 for evidence on low-duration states seeing lower recipiency rates overall. Some of this correlation is clearly related to other factors: The reduced PBDs are obviously a sign of state government indifference or hostility to effective UI benefits generally, and so likely are accompanied by other aspects of the UI system (eligibility requirements or administrative features) that also reduce recipiency. But, as described in the main text, there are also independent causal effects running from reduced PBD to lower recipiency.

8. Anderson and Meyer 1997 provide evidence that lower benefit durations reduce takeup rates. The generosity of benefit levels matters the most for take-up rates.

9. For a list of states with the respective triggers, see U.S. DOL-ETA 2021a.

10. Mastri, Vroman, Needels, and Nicholson (2015) note that states were encouraged to adopt total unemployment rate triggers during the Great Recession because the American Recovery and Reinvestment Act provided 100% of EB financing. They find that adopting these triggers resulted in much-higher first EB payments (or number of new UI enrollees under the EB program).

11. See Lake 2002 for a history of these provisions.

12. See Kaverman and Stettner 2021 for how such delays harmed UI recipients when benefits lapsed in January 2021.

13. A particular target of Republican governors was the $300 in enhanced benefits included in the American Rescue Plan Act of 2021 (enhanced weekly UI benefits initially enacted under the CARES Act totaled $600 but were allowed to lapse in August 2020). For more on the controversial governors’ attacks on the emergency benefits, see Adamczyk 2021.

14. Traditional unemployment measures estimate the share of individuals looking for work who cannot find it. In contrast, labor force participation measures the overall share of the population that is working. Severe economic conditions can lead to some potential workers giving up on finding work, leading to a measured drop in unemployment that does not reflect an actual improvement in economic conditions.

15. For example, in a recent estimate of unemployment rates by state and race, Moore (2021) finds that over half of states lack a sufficient sample size to reliably calculate the Black unemployment rate.

16. See, for example, Cajner et al. 2017.

17. It is true that some papers, notably that by Hagedorn, Karahan, Manovskii, and Mitman (2015) find large effects, but as Boone et al. (2021) explain, that study has at least three substantial methodological problems.

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TABLE OF CONTENTS

Reforming Unemployment Insurance

• Foreword
• Executive summary
• Introduction
• Primer
• Statement of the problem
• Section 1. Universal standards
• Section 2. Financing
• Section 3. Eligibility
• Section 4. Benefit Duration
• Section 5. Benefit levels
• Appendix

The table below summarizes key proposals under the five priority recommendations for urgent interventions to ensure that the unemployment insurance system can sustain families and the economy. A subset of these proposals are highlighted in the Executive Summary. Individual chapters in the report discuss these policies in detail and provide additional important reforms.