As Rhode Island’s economy recovers from the fallout caused by COVID-19, state lawmakers are proposing an unemployment-insurance overhaul to help laid-off employees return to work.

The legislation (H6249), introduced by House Small Business Committee Chair Carol Hagan McEntee and crafted with input from Department of Labor and Training Director Matt Weldon, aims to support workers and employers by strengthening a program that allows people coming out of joblessness to continue receiving unemployment benefits while they work part-time.

By allowing workers to keep claiming benefits while they earn, partial unemployment insurance can act as an encouragement to re-enter the workforce. H6249 adjusts and expands Rhode Island’s partial unemployment system to do two things: Make work pay more and permit a greater number of workers to use the program.

Here’s how Boston Globe reporter Brian Amaral describes the bill:

Under the current system, if people make more than what they get in their weekly unemployment check, they’re not eligible for any unemployment money — including that extra $300 from the federal government.

The bill Weldon is supporting would allow people to work up to 150 percent of their normal benefit amount and still receive unemployment compensation, which means they’d be able to stay in the unemployment system, and keep the extra $300, while working and earning more. The bill would also allow people to work more without having money deducted, up to 50 percent of their weekly benefit rate.

“It would maybe encourage people concerned about losing on the safety net to get more shifts,” Weldon said.

Making work pay more

H6249 boosts pay for part-time work by expanding what is called the “earnings disregard”:

Notwithstanding the foregoing, for weeks ending on or after May 1, 2021, through June 30, 2022, “wages” includes only that part of remuneration for any work that is in excess of fifty percent (50%) of the weekly benefit rate for total unemployment, rounded to the next lower multiple of one dollar ($1.00), to which the individual would be entitled if totally unemployed and eligible in any one week, and “services” includes only that part of any work for which remuneration in excess of fifty percent (50%) of the weekly benefit rate for total unemployment, rounded to the next lower multiple of one dollar ($1.00), to which the individual would be entitled if totally unemployed and eligible in any one week is payable.

The earnings disregard allows a person to work — up to a certain weekly earnings amount — while still collecting the full amount of unemployment benefits she would receive if not working. Once a worker has earnings above the disregard threshold, each additional dollar earned from work is offset with a dollar lost in unemployment benefits.

Take the example of a typical food service worker in Rhode Island who usually earns the food preparation and service occupation’s median wage of $12.58, receiving a weekly paycheck of $503 for a 40-hour work week. If she were to become unemployed, this person would receive $552 in weekly support — $252 in state unemployment insurance benefits and $300 from the federal supplement.

With the current system, this person can take a part-time job working up to 4 hours per week at a wage of $12.58 while still receiving $552 in unemployment benefits in addition to her paycheck. The four hours of earnings are “disregarded,” meaning she can receive a paycheck from work while still receiving full unemployment benefits as if she were not working. Each hour worked above four hours triggers a dollar-for-dollar phase-down of unemployment benefits, such that the worker can receive a total compensation level (earnings plus partial unemployment payments) up to $602 per week.

The legislation increases the earnings disregard, allowing workers to clock more hours and earn more money before unemployment benefits begin to phase out. Because money earned above the disregarded threshold is counteracted with a dollar-for-dollar decrease in unemployment benefits, creating an effective marginal tax rate of 100% (before accounting for payroll, income and other taxes), raising the threshold can increase the incentive for workers to take on additional hours.

Under the proposal, a typical food service worker can work up to 10 hours per week before her earnings begin to offset her unemployment benefits. This means she can receive up to $678 in weekly compensation.

Allowing more workers to claim benefits

H6249 expands the pool of part-time workers who can claim partial unemployment insurance. It does this by raising the cap on how much one can earn while receiving benefits:

For weeks beginning on or after May 1, 2021, through June 30,2022, an employee shall be deemed partially unemployed in any week of less than full-time work if they fail to earn wages for that week in an amount equal to or greater than one hundred and fifty percent (150%) of the weekly benefit rate for total unemployment to which they would be entitled if totally unemployed and eligible.

Not all workers coming out of joblessness can claim partial unemployment benefits. Under current law, a worker is only eligible if her weekly earnings are less than what she would receive in state unemployment benefits (not counting the federal supplement) if she were not working. Rhode Island’s unemployment insurance wage replacement rate is roughly 50%, meaning, in effect, someone who worked 40 hours per week when she was previously employed can receive partial unemployment insurance if she now works 20 or fewer hours.

Once a person works too much to claim partial unemployment benefits, her eligibility for both state and federal unemployment compensation is cut off — creating a precipitous cliff. Due to the all-or-nothing structure of the federal supplement, earning one dollar above the threshold can mean losing hundreds of dollars in partial unemployment benefits. In the current system, a food service worker who clocks 21 hours instead of 20 receives an additional $12.58 in wages for the extra hour, but loses about $350 in unemployment benefits (about $50 in state benefits, which are cut off before they can fully phase out, plus the $300 federal supplement). This effectively creates an astronomical marginal tax rate of 2,787% for the 21st hour worked — and that’s before taking into consideration payroll, income and other taxes.

H6249 expands eligibility to more — but not all — re-employed workers. Under the proposal, a worker can receive partial unemployment compensation if she earns less than 150% of what she’d receive from the state in jobless benefits. In effect, this means someone who previously worked 40 hours per week can claim partial benefits if she now works 30 or fewer hours. Raising the earnings threshold allows workers to earn more, up to a certain amount, without being penalized.

In other words, the new legislation would allow a typical food service employee to take on ten additional hours before hitting the benefit cliff. It also slightly reduces the size of the cliff, from $350 to $300, making the marginal tax rate on the 31st hour worked 2,388% — not quite as enormous, but still a cliff so large it would make Wile E. Coyote blush.

As a result, under both current law and the proposed system, a newly-reemployed person working 15 hours per week would receive a higher income than someone working 40.

Can the cliff be avoided? Unfortunately, probably not. Federal law “limits the payment of [unemployment compensation] to periods in which an individual has experienced unemployment, that is, an actual reduction in hours worked,” according to the US Department of Labor. In other words, full-time workers can’t receive unemployment insurance — not even partial unemployment insurance. Rhode Island lawmakers probably cannot eliminate the partial unemployment eligibility cap altogether and send the $300 weekly federal bonus to all re-hired workers regardless of their earnings or hours worked. This means the cliff has to fall somewhere.

While they can’t scrap the threshold entirely, lawmakers should think about lifting it higher than 150% of weekly unemployment benefits. Raising it as close to the equivalent of full-time work as possible would have multiple benefits. First, it would allow more workers to claim the federal $300 supplement, reducing the number of workers who face the perversity of losing out on income by working more. Second, it would help employers ramp up business capacity, which they say is currently curtailed by workers not wanting to go over the benefit cutoff.

Third, and perhaps most importantly to state lawmakers, lifting the eligibility threshold beyond 150% would come at no cost to state coffers — in fact, it would boost revenue collections. By the time a worker reaches earnings equal to 150% of unemployment benefits, her state unemployment payment is fully phased out, thanks to the dollar-for-dollar offset of earnings and benefits that kicks in after the earnings disregard period. Raising the threshold would not cause any more state unemployment insurance payments to be made, but it would allow more workers to receive the $300 federal boost. And since Rhode Island taxes unemployment benefits as ordinary income, allowing more workers to receive the federal supplement means more dollars for the state budget. That’s not to mention the boost to sales tax revenue from putting more dollars in peoples’ pockets, and the increase in payroll tax revenue from workers taking on more hours.

All in all, H6249 is a big upgrade to Rhode Island’s unemployment insurance system and represents a sensible approach to supporting economic recovery.