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Monday, August 2, 2010

Compensated Work Sharing Arrangements (Short-Time Compensation) as an Alternative to Layoffs

Alison M. Shelton
Analyst in Income Security

Short-time compensation (STC) is a program within the federal-state unemployment compensation system. In the 20 states that operate STC programs, workers whose hours are reduced under a formal work sharing plan may be compensated with STC, which is a regular unemployment benefit that has been pro-rated for the partial work reduction.

Although the terms "work sharing" and "short-time compensation" are sometimes used interchangeably, the term "work sharing" refers to any arrangement under which workers' hours are reduced in lieu of a layoff. Under a work sharing arrangement, a firm faced with the need to downsize temporarily chooses to reduce work hours across the board for all workers instead of laying off a smaller number of workers. For example, an employer might reduce the work hours of the entire workforce by 20%, from five to four days a week, in lieu of laying off 20% of the workforce. States with STC programs require employers who seek STC for their workers to submit a formal work sharing plan for approval.

Employers have used STC combined with work sharing arrangements to reduce labor costs, sustain morale compared to layoffs, and retain highly skilled workers. Work sharing can also reduce employers' recruitment and training costs by eliminating the need to recruit new employees when business improves. On the employee's side, work sharing spreads more moderate earnings reductions across more employees—especially if work sharing is combined with STC—as opposed to imposing significant hardship on a few. Many states also require that employers who participate in STC programs continue to provide health insurance and retirement benefits to work sharing employees as if they were working a full schedule. Work sharing may bring macroeconomic benefits to state governments if it helps to preserve employment, consumer spending, and revenues during cyclical downturns.

Work sharing and STC cannot, however, avert layoffs or plant closings if a company's financial situation is dire. In addition, some employers may choose not to adopt work sharing because laying off workers may be a less expensive alternative. This may be the case for firms whose production technologies make it expensive or impossible to shorten the work week. For other firms, it may be cheaper to lay off workers than to continue paying health and pension benefits on a full-time equivalent basis. Work sharing arrangements in general also redistribute the burden of unemployment from younger to older employees, and for this reason they may be opposed by workers with seniority who are less likely to be laid off.

From the perspective of state governments, concerns about the STC program have included the program's high administrative costs. Massachusetts has made significant strides in automating STC systems and reducing costs, but other states still manage much of the STC program on paper.

Currently, only 20 states operate STC programs to support work sharing arrangements. Three of the 20 STC states—Colorado, New Hampshire, and Oklahoma—enacted their STC programs in 2010. Through the end of 2008, the STC program has never constituted more than about 1% of unemployment benefits paid annually across the United States, although in 2009 this ratio rose to 2%. The reasons for low state and employer take-up of the STC program are not completely clear, but a key cause would appear to be ambiguity in the 1992 federal law that authorizes STC. Because of this ambiguity, the U.S. Department of Labor (DOL) has not provided guidance or technical assistance on STC to the states since 1992. A more active public policy would require either DOL reinterpretation of the 1992 law or congressional action to either clarify federal law or give the Secretary of Labor authority to determine needed additional provisions.

Date of Report: July 16, 2010
Number of Pages: 22
Order Number: R40689
Price: $29.95

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