Veterans Languish in the Hiring Process While Employers Wrestle with Tax Credit Confusion

As of June, U.S. unemployment sits at roughly 9.5 million according to the Bureau of Labor Statistics (PDF download). The labor market is still in a recovery that largely hinges on case numbers and vaccinations. While some have thrived, the economic impact has been inequitable, disproportionately affecting workers in the lowest income brackets and hardest hit sectors, including retail and leisure and hospitality. This uneven recovery has compounded barriers to employment that many marginalized groups have historically faced. As the economy continues to recover, providing opportunities that can help break down those barriers and ensure all workers have an opportunity to secure gainful employment is more critical than ever.

The Work Opportunity Tax Credit (WOTC) program has been around for years, but its purpose is arguably even more crucial in a post-pandemic world of work. The program, which was recently renewed for five more years, is an important incentive for employers to hire and retain qualified veterans and other eligible individuals from specific groups that have historically faced barriers in securing employment. To realize the program’s value in today’s environment, it is essential to understand how the WOTC works and eliminate confusion surrounding a core element of the program: the precise timing of the requirement for an employer to screen a job applicant for qualifying WOTC factors in relation to when the employer may make an offer of employment to the job applicant.

Understanding the WOTC Program’s Purpose

The WOTC program is a federal tax credit available to employers who hire and retain qualified individuals from target groups that have faced challenges in securing employment. Specifically, the WOTC program provides employers with an incentive to hire job applicants from the following targeted groups:

• qualified veterans,
• qualified short-term and long-term recipients under the Temporary Assistance for Needy Families program,
• ex-felons,
• designated community residents,
• vocational rehabilitation referrals,
• summer youth employees,
• Supplemental Nutrition Assistance Program recipients,
• Supplemental Security Income recipients and
• qualified long-term unemployment recipients.

WOTC joins other workforce programs that incentivize workplace diversity and facilitate access to quality jobs for American workers. The program’s impact is significant, providing qualifying employers in excess of $1 billion in tax credits annually for hiring approximately two million eligible employees each year. Beyond helping traditionally disadvantaged job applicants, the WOTC program also benefits the U.S. more broadly by reducing the need for these disadvantaged groups to rely on considerably more costly government-sponsored support programs.

With the program recently receiving an extension until December 31, 2025, and as job opportunities are continuing to expand as we recover from the impact of the pandemic, the influence and importance of the WOTC program only stands to grow. Key to maximizing its benefits is an understanding of how to implement the program, including knowing which individuals fall under the targeted groups and understanding the pre-screening and certification process to ensure employers have a proper incentive to seek out WOTC-eligible candidates for employment.

The Time Is Now for Clarity

COVID-19 caused substantial disparities across industries, which in some cases are likely to take years to rectify. According to ADP Research Institute’s Workforce Vitality Report for Q1 2021, leisure and hospitality were by far the hardest hit sectors and remain significantly behind all other industries in recovery. Overall, payrolls are still down by 7.5 million private sector jobs, even after a significant recovery last spring and summer.

The labor market recovery has been uneven to date, with some workers, communities and sectors hit harder than others. ADP Research Institute data shows those making under $15 per hour – the job applicants who are more likely to benefit from the WOTC program – saw job losses of over 35 percent overall during the initial onslaught of the pandemic, compared to those who make more than $32 per hour, who experienced by comparison a 9 percent job loss overall. As the economy continues to recover, programs like the WOTC are imperative in ensuring the recovery is inclusive of every member of the workforce.

Market Confusion: Defining an Offer of Employment

To help employers effectively leverage the WOTC program as an incentive to employ candidates from the groups the program is designed to help, the IRS should clarify specific requirements to ensure all providers are administering the program for their employer clients in a uniform fashion. In particular, there is some confusion in the market regarding what specifically constitutes an “offer” of employment before which an employer must screen an applicant under the WOTC program. Some WOTC screening service providers establish processes where the WOTC eligibility screening occurs once a contingent offer has been made, while other providers establish processes where employers perform the screening prior to making any offer, contingent or otherwise.

Regardless, a clear line must be drawn here. Having an unambiguous definition as to what constitutes an “offer” of employment will ensure all industry providers are conducting a uniform screening process that ultimately meets the intent of the program, which is for employers to seek out WOTC-eligible candidates prior to making any offer. A process that allows for the screening of WOTC-eligible candidates after an offer of employment is made will provide a tax benefit to employers, but will not serve as the intended incentive for them to seek to hire WOTC-eligible candidates, undermining the purpose of the WOTC.

A recommended approach would be to require pre-screening of the categories included in the Form 8850 before an employer makes any job offer, including formal written offers, verbal offers, conditional or contingent offers. This clarification will help ensure the applicant meets the qualifications of one of the targeted groups identified and preclude any process that collects the information to see if someone is qualified after the job offer has already been made to that person.

Incorporating the WOTC into a Larger DEI Strategy

The WOTC program can be a great asset in ensuring a recovery of today’s economy that is inclusive of all workers who have traditionally faced obstacles to employment. The WOTC program should be one of many approaches employers take to access the talent they need to achieve their business objectives and advance their diversity, equity and inclusion (DEI) efforts. The key to leveraging the WOTC program to advance an employer’s DEI goals is in helping employers understand the program, including the intent to incentivize hiring decisions. By clarifying what constitutes an “offer” of employment and implementing industry-wide standards to guide the program’s implementation, we can continue toward a world of work that is rooted in full and equal employment.