Unemployment taxes are a part of business life. Not only do companies have to pay the taxes, they have to pay attention to the claims too. And, if you’re not careful when it comes to filing or responding to unemployment claims from former employees you could end up facing serious fines.
According to the May 2022 jobs report from the United States Bureau of Labor Statistics, unemployment is holding steady at 3.6%. While the number of unemployed Americans is down significantly from mid-pandemic numbers, business owners still need to be vigilant about what goes into staffing resources. Why? Because if a future situation requires a furlough or layoffs, it’s critical to have personnel files organized and documentation prepared.
What should you do to prepare? We’ll tell you. Let’s look at the key employer responsibilities related to unemployment benefits.
What is Unemployment Insurance?
Unemployment insurance was created to provide employees with some degree of wage security when they are between jobs. It is specifically relevant when an employee is let go due to a situation beyond their control–for example, a worker who was laid off. In those situations, employees can apply to receive a percentage of the wages they would have earned if they were still employed.
It’s important to note that not every worker qualifies for unemployment benefit payments.
Those who do not qualify include:
● Workers who are fired
● Workers who leave voluntarily
● Independent contractors
● People who simply elect not to work
How is Unemployment Insurance Funded?
Ok so maybe the big question—how’s the system being funded? The short answer is unemployment insurance is fueled by taxes that employers pay at both the state and federal level.
The money an unemployed person gets from unemployment insurance is funded by the payroll taxes your company pays to the government. Unemployment insurance is managed by both federal and state governments. Each state has its own unemployment insurance program, which the federal government oversees. Because each state has its own rules for administering unemployment benefits, it’s important to know what they are for each of your company locations.
The federal government generates unemployment benefit payments using the Federal Unemployment Tax Act (FUTA) tax while some states use a State Unemployment Tax Act (SUTA) tax which is a predominantly employer paid tax. (Some states do require employees to pay a portion of these taxes.) The amount an employer pays is a percentage of their taxable wage base.
The federal tax here is regressive and is based on an employee’s annual salary. The federal taxes collected primarily pay for administrative fees. Each state uses its own formula for drawing taxes for this program. While there is a minimum wage threshold of $7,000 per year that payments can be based on, on average at the state level taxes are collected on the employer’s taxable wage base.
What Benefits does Unemployment Insurance Provide?
Most programs provide employees with the opportunity to claim about half of the salary they were receiving for up to 26 weeks of their unemployment. The exact period of eligibility for a worker is based on the number of weeks that they were actively a part of an employer’s taxable wage base in each calendar quarter.
While the goal of the program is to provide an employee with up to half of their salary, in actuality, the average amount received is generally just over $300 per week.
Who gets the money if employees work in multiple states?
All states use these four factors to determine which state should receive the unemployment tax dollars when an employee works in more than one state.
- Is the employee’s work localized?
- Where is the employee’s day-to-day office located?
- What is the location of the employer’s main (home) office?
- Where does the employee live?
What’s happens when an employee files an unemployment claim?
An employee leaves the company, and a few weeks later you receive a notice from the state saying the employee has filed an unemployment claim. It was bound to happen, but what do you do?
First things first: Determine if the claim is valid. If you fired them for cause or they voluntarily left the company, you can contest the claim. If they were terminated because of a situation out of their control, such as a layoff, you can accept the claim. If you accept the claim, you can either indicate that you accept it or simply do nothing.
If you contest the employee’s unemployment benefits eligibility requirements, you’ve got some work ahead of you. You’ll first need to quickly respond to the state unemployment department and there is often a select period of time to do that (usually 10 days).
If you don’t respond by the deadline, you could get hit with a higher tax rate plus penalties. Your response should include details such as the employee’s compensation, occupation and employment dates, in addition to detailing exactly why the employee was terminated. (Having comprehensive records in their employment file is critical to successfully winning a claim.)
But the work may not be over yet. If you contest the claim and the state determines that you are in the right, the former employee can still appeal the decision. When this happens, the state unemployment office will conduct a telephone hearing between your company and the terminated employee and their legal counsel.
You, and the company’s legal team, will have an opportunity during this hearing to explain the former employee’s time with your business. The burden of proof to convince the state that the former employee was terminated for cause is on your shoulders, so make sure you’ve got everything you need. You are permitted to have witnesses and evidence on the call, so be sure to get all people and documentation lined up beforehand.
How can Employers Lower Unemployment Costs?
There is no “silver-bullet” to lowering your unemployment insurance tax payments BUT if you’re willing to put some work in upfront, you can experience long-term savings benefits.
- Review candidates before hiring. And then review them again. Thorough hiring protocols can ensure that you really are hiring the right person for the right job. And that they feel that way too. This can help avoid poor performance issues because the employee isn’t invested or was simply the wrong candidate.
- Train and retrain. Training does two things—it equips the employee with the skills and knowledge that they need to be successful and it shows them that the company is invested in their success. Employees will not just function better, they’ll want to.
- Review your tax rate options. Some states allow companies to “purchase” lower unemployment insurance tax rates by changing their contribution plans.
- Time your staffing increases. Do you need a new full-time staff member? Will an independent contractor be able to help you get through this busy period? Controlling your staffing helps to control your unemployment tax payments.
Ready to take the next step?
As you navigate the new workplace models, don’t forget that help is just a click away. Paycor has helped more than 40,000 companies just like yours navigate their HR needs including the management and distribution of unemployment insurance benefits. Paycor’s HR and benefits management software can help you maintain compliance related to the unemployment benefits of your team. Tour our product suite today and see for yourself.