OLYMPIA — Senate Democrats handed labor unions a major victory yesterday by passing a bill to boost unemployment benefits for laid-off construction workers, farm laborers and other seasonal employees.

The legislation reverses a key part of a landmark — and bitterly disputed — overhaul that lawmakers made just two years ago to the state's unemployment-insurance system.

The Democratic-controlled House passed a similar measure two weeks ago and is expected to go along with the Senate version. Democratic Gov. Christine Gregoire helped lobby for the bill, so there is little doubt she will sign it.

Labor leaders say the 2003 rewrite went too far and has been driving some unemployed workers into poverty.

"Keeping people in their homes and able to pay their bills is what we're all about," Rick Bender, president of the Washington State Labor Council, said after yesterday's vote.

But Republicans and most business leaders, who have long complained about having some of the highest unemployment costs in the nation, argued it's too soon to begin rolling back the 2003 changes. They warned the bill will stifle the state's economic recovery and drive up unemployment.

"People would rather have a job than have a little bit more unemployment insurance," said Senate Minority Leader Bill Finkbeiner, R-Kirkland.

Yesterday's 25-20 Senate vote — like the House vote — fell almost exactly along party lines, with one Democrat joining the Republican opposition.

Two years ago, the unemployment-insurance changes won broad bipartisan support in the Legislature. But Democrats and labor leaders say that deal was done in haste and under political duress.

At the time, legislators were scrambling to help the state win Boeing's newest jetliner project, the 787. In addition to handing Boeing a $3.2 billion tax break, lawmakers went along with a business-driven proposal to scale back unemployment costs.

But Boeing recently shocked the rest of the business community when it announced it would support labor's effort to undo a key change that was made in how unemployment benefits are calculated.

Under the 2003 law, benefits are based on the average of an unemployed worker's previous four quarters of earnings. Before 2003, the state used an average based on the year's highest two quarters of earnings — the system the state will return to under the bill the Senate passed.

The difference for some workers is significant.

Under the two-quarter system, for instance, a laid-off worker earning $25,000 the first half of the year, but only $5,000 in the second half qualified for the maximum benefit of $496 a week before the 2003 law. Under the four-quarter system, that same worker would receive $300 a week.

Democrats argued the year-round average was unfair to people who work in seasonal industries and are forced to go on unemployment most years. But Republicans said the reverse is true and pointed out that people whose earnings are spread evenly over the entire year lose out under the two-quarter average.

Despite the 2003 changes, Washington continues to have one of the most expensive unemployment systems in the country — costing employers well over twice the national average.

Democrats said their new legislation will not hurt businesses. To pay for the increased benefits for seasonal workers, the bill cuts benefits for everyone else by about 4 percent. It also avoids any tax increases on business by dipping into the state's unemployment-insurance trust fund.

And the bill exempts certain industries, including agriculture and commercial fishing, from a portion of their unemployment taxes, saving them an estimated $54 million through 2007.

"We really did try to find a balance where there's no cost to business and no hit to benefits," said Sen. Mark Doumit, D-Cathlamet, who sponsored the Senate version of the bill.

But business leaders said they have yet to see firm figures on how the Democrats' plan pencils out. They predict going back to the old method of calculating benefits will eventually increase business costs.

At a minimum, the legislation will reduce the unemployment trust fund by more than $100 million — costs the business community eventually will have to make up, said Gary Chandler, vice president for governmental affairs at the Association of Washington Business.

And Republicans said reversing a key part of the 2003 deal sends a chilling message to businesses that are thinking about expanding or locating here.

"We're shifting the transmission in reverse and slamming on the accelerator," said Sen. Luke Esser, R-Bellevue.

But Democrats said their plan provides a needed "timeout" in the most controversial portion of the 2003 overhaul.

The bill calls for a legislative task force to look for an unemployment-insurance system that all sides can agree to. If an agreement isn't reached within two years, the system would revert to the 2003 changes.

The legislation leaves in place other parts of the 2003 rewrite, including capping the maximum benefit at $496 a week and limiting the time someone can collect benefits to 26 weeks instead of the 30 weeks that used to be granted.

Ralph Thomas: 360-943-9882 or rthomas@seattletimes.com