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In 2008, the construction industry was growing and, like today, contractors struggled to find qualified craft professionals to staff jobs. However, at that time, contractors didn’t have to worry much about where to place workers when jobs were completed. Typically, there was enough work on other projects, and contractors simply shifted people from one jobsite to another to keep them working productively.

Then came 2009, when many construction companies faced the unpleasant task of issuing massive layoff notices and reducing their workforces by 40 percent to 60 percent just to survive. Because most construction businesses were in the exact same position, there was no work to be had anywhere, and consequently more workers were forced to collect unemployment benefits for extensive periods of time.

The Silent Profit Killer
Widespread unemployment in the construction industry resulted in the introduction of what many business owners refer to as “the silent profit killer,” which is directly tied to rising State Unemployment Tax Act (SUTA) rates. SUTA is a payroll tax all employers were accustomed to paying, yet little attention was paid to it, and no one imagined how much these rates would escalate based on the sizable and sustained unemployment that transpired.

In most states, SUTA is a calculation of the ratio between yearly payroll paid and unemployment benefits paid out. It works on a three-year rolling cycle, much like workers’ compensation premium rates. In 2009, construction companies saw yearly payroll cut in half, while the amount of unemployment benefits paid out skyrocketed. Essentially, states were paying out more in benefits than employers were paying in and the state unemployment benefit reserves were being depleted.

Businesses continued to reduce their workforces in 2010 and 2011, resulting in a disastrous three-year cycle from which their SUTA rate was calculated. The imbalance in the ratio and the federal extension of unemployment benefits to 99 weeks forced states to increase SUTA rates substantially.

For example, a Florida company with a SUTA rate of 1 percent in 2008 was slammed with a SUTA rate of 5.4 percent (state maximum) based on its three-year calculated ratio. On top of the tax rate going up, the amount business owners paid on SUTA rose from the first $7,000 of payroll per worker to $8,000 of payroll per worker. Translated into dollars in 2008: A $15 per hour carpenter required a contractor to pay a total of $0.15 per hour in SUTA up to that worker’s first $7,000 in income, or roughly $75 per year. Once the SUTA rate rose to 5.4 percent, the amount paid hit $0.81 per hour for that same worker, now for the first $8,000 in income. This equates to $432 per year paid in unemployment taxes per employee, an increase of 576 percent.

Cautious Approach to Hiring
At the end of this 2012-2014 SUTA cycle, the industry has seen clear improvements in the construction economy, resulting in the need for contractors to make hiring decisions as their sales and workload increases. Fortunately, many contractors have approached hiring cautiously, recognizing the instability of the recovering economy and the overall reduction in backlog.

Smart companies are careful not to repeat the sins of the past—hiring full-time employees for short-term periods—knowing that layoffs can negatively impact their SUTA rates, which are finally starting to trend downward. Many savvy contractors rely on a construction labor staffing firm to meet increased workload and workforce demands. In essence, they retain their fixed workforce (workers they can keep productive year round) while partnering with a contingent labor partner to find shorter-term workers.

At the end of a job, contractors can send the contingent workers back to their staffing partner, helping them prevent layoffs and associated unemployment benefit costs, and ultimately minimizing SUTA rates. In addition, when used properly from a reputable construction labor staffing firm, contingent skilled labor can increase workforce productivity, reduce workers’ compensation costs and minimize health care expenditures. The savings outweigh the premiums paid to a staffing partner, and they look nice on the bottom line.

Scott Speanburgh is a regional vice president for Tradesmen International. For more information, visit www.tradesmeninternational.com.

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