Experience Rating
Experience rating is the method by which employer contribution payments under the state unemployment compensation laws may be varied on the basis of each individual employer's experience with unemployment. Experience rating is based on the proposition that the cost of unemployment compensation should be paid in such a way that those employers whose workers suffer the most involuntary unemployment should pay at a higher rate than those employers whose workers suffer little involuntary unemployment.
As a result of experience rating, employers may be liable for the lowest rate under the law (usually ranging form 0.0% to 0.5%) to rates that exceed 5.4% in some states for employers with high involuntary unemployment. (With the increase in the total federal credit to 5.4% in 1985, the states were required to provide for experience rating up to at least 5.4% beginning at that time. Many states now have maximum rates well in excess of 5.4%.)
Experience rating is provided under all state unemployment compensation statutes. Four distinct formulas devised to establish the relative experience of individual employers with unemployment costs are currently in use by states: the benefit ratio formula, the benefit wage ratio formula, the payroll decline ratio formula, and the reserve ratio formula.
