The U.S. Labor Department is increasing scrutiny of how states are managing a new jobless-benefits system for independent contractors and threatening to terminate some states’ authority to operate the virus-relief program if they don’t take corrective action, Bloomberg Law has learned.

The federal government in recent weeks has demanded that states across the country come into compliance in processing Pandemic Unemployment Assistance claims, sending as many as three dozen states detailed letters specific to their circumstances following initial inquiries, according to interviews with unemployment officials in six states.

The program is a first-of-its-kind stimulus initiative Congress created as part of the $2.2 trillion CARES Act passed in late March. PUA extends jobless aid to gig workers, freelancers, and others who hadn’t traditionally qualified for regular unemployment insurance, plugging a major hole in the safety net created by the rise of online-platform companies such as Uber, Grubhub, and TaskRabbit.

Federal officials are pressing states to verify that PUA recipients are still qualified based on one of several virus-related criteria the Labor Department outlined in recent guidance. Some states, including Kentucky, have been told in corrective-action letters that claimants must certify eligibility on a weekly basis—a change in procedure after these states had previously been under the impression that they could ask individuals to self-certify every other week.

The DOL’s heightened oversight reflects an effort to ensure nationwide consistency in PUA processing and to avoid payments to ineligible Americans. It is part of a broader focus on rooting out improper payments and fraud in the federal-state jobless-benefits system.

The department’s internal watchdog has warned that PUA is “highly vulnerable” to fraudulent activity because individuals can self-attest that they’re eligible without immediately providing documentation. But the stepped-up compliance checks are causing frustration, as officials in some states are concerned the federal scrutiny could further strain efforts to efficiently process and pay claims.

Termination Threatened

In cases where states don’t make the requested fixes, “the Department may need to take steps to terminate its agreement with the state, after providing 30-days’ notice, if it determines that the state does not have an adequate system for administering the PUA program,” Gay Gilbert, DOL’s unemployment insurance administrator, said in a letter to one state official that Bloomberg Law reviewed. “Termination of such agreement would remove the state’s authority to operate these programs.”

An official in a different state, Darryl Scott, Delaware’s unemployment insurance director, confirmed receiving similar termination language in correspondence with the DOL. Bloomberg Law verified that at least four states received corrective-action letters following initial inquiries.

Scott Sanders, executive director of the National Association of State Workforce Agencies, highlighted the enhanced oversight in a June 25 email to state officials, obtained by Bloomberg Law, that said as many as 35 states may have received “nonconformity” notices.

One state labor official said that state representatives’ feedback on separate calls held recently by DOL and national organizations showed that many are “extremely frustrated” by DOL’s demands.

“It’s hard to quantify how crazy internally all of our departments are right now [in] keeping up with the crush of filers and implementing and updating new programs,” the official told Bloomberg Law, requesting anonymity due to the issue’s sensitivity. “Every change requested takes precious time to respond to, and any necessary reprogramming takes time and can have unintended consequences.”

A DOL spokeswoman provided a prepared statement in response to questions from Bloomberg Law about its scrutiny of state systems.

“The Department is responsible for the oversight of states’ implementation of the CARES Act programs, including ensuring program integrity and proper program operation,” she said in that statement.

“Among the CARES Act programs, the PUA program is unique due to COVID-specific eligibility requirements, processes for calculating weekly benefit amounts, and populations of claimants. In addition, there have been serious program integrity concerns, including from organized fraud rings, that have highlighted the importance of proper program implementation and eligibility verification,” the spokeswoman added.

“As a result of these and other factors, the Department felt it was important to assess States’ implementation earlier in the process,” she said. “It is the Department’s goal to work with all states to implement the program correctly and, to that end, the Department is working to provide the comprehensive technical assistance to states to ensure that benefit payments are going to eligible individuals.”

NASWA, the main group representing state unemployment agencies, didn’t respond to requests for comment.

‘Administrative Hassle’

States struggled to build PUA infrastructure on the fly. Those challenges plus the billions of added dollars spent on unemployment created a situation where federal oversight was necessary to ensure integrity. Congress gave DOL’s watchdog $30 million to review pandemic response and target fraud and waste in jobless-benefits processing.

Many states stalled in launching their PUA systems due to challenges in updating their software to accommodate workers who didn’t have an employer-employee relationship. Confusion among workers and state officials about program requirements persists, even as PUA’s popularity has soared.

PUA accounted for 14.3 million continuing claims as of June 20, compared with 17.3 million regular state unemployment filings, according to the latest DOL data.

DOL’s compliance reviews began in May, with every state and jurisdiction receiving a series of questions about their PUA system, state labor officials said. The DOL and its regional offices reviewed the responses and started drafting messages specific to states deemed to be non-compliant, the officials added.

The weekly certification mandate that Kentucky and some other states received represented a shift in their understanding of program parameters that could stall their ability to dole out benefits, said Michele Evermore, a senior policy analyst with the National Employment Law Project, which advocates for low-wage workers.

“Being allowed to do bi-weekly certifications takes a lot of strain off of the infrastructure,” said Evermore, who advises some states on unemployment-benefits processing. “And now, all of a sudden, when states are experiencing extreme duress, to eliminate that valve to limit the number of times the person is required to access the system, that’s really going to add to an already difficult situation. The last thing that states need right now is more administrative hassle.”

But the federal initiative may help certain states rein in fraud by adopting eligibility verification protocols.

“It’s important that the federal government is looking into it and trying to prevent fraudulent claims,” said Isabel Soto, a labor market policy data analyst at the conservative American Action Forum. Soto acknowledged the central tension whenever states balance the need for accuracy versus demands for speedy processing: heightened scrutiny doesn’t promote efficiency.

“The other side of the coin—doing some of those things is only going to make it more difficult for people who really need benefits to get paid in a timely way,” she added.

Kentucky to Delaware

State and federal unemployment officials have expressed concern from the start of the PUA program that people could continue to claim benefits after they arguably could or should have gone back to work.

“They’re checking in with the states to see if PUA applications line up with the rules set forth,” said Jeff Fitzgerald, director of unemployment insurance for Colorado’s Department of Labor and Employment. He said Colorado didn’t get a nonconformity letter after it responded to DOL’s initial questions.

The DOL asked Colorado to make sure its weekly certification form required recipients to confirm that they’re still unemployed or facing reduced unemployment for a qualifying reason, Fitzgerald said. The department also asked Colorado to confirm that it is notifying PUA recipients of the potential for fraud or perjury penalties if their answers on the weekly certification form aren’t truthful.

State unemployment agencies in Alabama, Delaware, and Kentucky faced similar queries, representatives of each state’s unemployment program confirmed. In Alabama and Kentucky, the DOL followed up with corrective-action plans.

The DOL told Kentucky to make a handful of adjustments, including to revise their system to guarantee weekly certification, according to Sebastian Kitchen, a spokesman for the state’s unemployment program.

The feds told Kentucky it must use a monetary determination—based on a worker’s previous wages—to set the benefit amount, and give PUA recipients the ability to adjust the eligible amount as their on-the-job income changes, Kitchen said.

Several states that responded to Bloomberg Law’s inquiries said they either didn’t get a nonconformity letter or described the communication with DOL as being question-and-answer based, rather than a federal demand for corrective action.

Kersha Cartwright, a spokeswoman for Georgia’s labor department, which didn’t receive a corrective-action plan, said federal scrutiny of PUA is understandable. Claimants’ lack of a traditional employer-employee relationship makes it harder for states to verify that recipients are eligible; to determine an appropriate benefit amount; and to ensure recipients aren’t voluntarily turning down work to continue collecting benefits, she said.

PUA is “where your potential for fraud is, because we don’t have those W-2 wages,” Cartwright said, adding that states must complement and support federal efforts to detect and prevent fraud.

“If you’ve received benefits and you weren’t eligible, we’re going to ask for that back,” she said.

*by Ben Penn and Chris Marr via Bloomberg Law*