When an employee leaves or is terminated from employment, they may become eligible to file unemployment claims, which are paid for by employers through federal and state unemployment taxes.
The unemployment insurance program exists to provide benefits to eligible workers who are unemployed through no fault to their own. The U.S. Department of Labor is the federal agency in charge of establishing eligibility requirements for receiving unemployment benefits, which are enforced by state agencies when awarding UI benefits.
Eligibility for unemployment benefits is determined using the following factors: the prior wages the claimant earned in the base period, the reason for his/her work separation, and whether he/she is able and available to accept a new position.
Technically speaking, anyone, anywhere, at any time can file an unemployment claim, but it is up to the state agency (specifically the adjudicator in charge of the case) to determine whether the claimant’s case meets the established federal eligibility requirements, as well as any additional state requirements. Once a claim has been filed, the claimant’s former employer is given the opportunity to respond to the claim and, if applicable, make its case for why the employee isn’t eligible to receive unemployment benefits in a hearing. The adjudicator then makes a decision one way or the other and, unless one of the parties chooses to appeal the decision, it stands. If either the employer or the claimant files an appeal, an additional hearing will be held to review the case again, and then a final decision will be made.
There are two very important acronyms an employer must know in order to understand the financial impact unemployment claims can have on their business: FUTA and SUTA.
The Federal Unemployment Tax Act (FUTA) authorizes the IRS to collect a payroll tax paid by employers that is used to fund state workforce agencies. The current FUTA tax is 6 percent. Employers are required to pay the FUTA tax on the first $7,000 they pay to each employee during a calendar year (less any payments exempt from FUTA). This amount is called the wage base. The State Unemployment Tax Authority (SUTA), is a similar payroll tax collected on a state level, also used to fund unemployment benefits paid out to claimants. The SUTA wage base varies by state.
Understanding how the unemployment claims process works is essential for employers, because the number of former employees who collect unemployment benefits directly affects the business’s state unemployment tax (SUTA) rate.
If a former employee is awarded unemployment benefits, the state agency will then investigate to determine which employer is liable for those costs, or is a “chargeable employer.” Most state agencies use a base period to determine the chargeable employers, although there are a few other methods a state agency might use. If a business is found to be a chargeable employer for a claim, the charges are reflected in the business’ experience rating account. At the end of the fiscal year, state agencies will use the amount of charges in a business’ experience rating account to determine its experience rate classification, which is then used to determine the business’ SUTA rate.
Bottom line: The more former employees for whom a business has to pay for unemployment benefits, the higher that business’ SUTA rates will be.
The impact of a successful unemployment claim doesn’t stop there – employers can be charged for unemployment benefits up to 18 months after an employee has left the company, depending on the base period. That means that even a year after a business owner has already hired a replacement, they can still be on the hook for unemployment benefits for that employee and receive a surprise notice in the mail from their local state agency.
Beyond the cost of the claim itself, employers also incur expenses associated with the cost of processing a claim internally, not to mention the cost fighting an improper claim, which often include legal fees and lost productivity costs for any employees required to testify as witnesses in a hearing.
Fortunately, there are a number of things employers can do to mitigate all the direct and indirect costs of unemployment claims:
While G&A can’t help you completely avoid the emotions that come with terminating an employee, we can help you avoid the painful process and potential risks associated with unemployment claims management. Our knowledgeable human resources professionals have extensive experience managing and administering UI claims, as well as COBRA insurance, and more.
G&A Partners can reconcile unemployment payroll taxes and process claims to ensure your company doesn’t incur any unnecessary expenses. With continuous oversight and rigorous attention to detail, our experts ensure the job is done so you can focus on more productive and less painful pursuits – like growing your business and taking care of your current employees.
Make sure to check out the recap of our webinar: “The Ins & Outs of Unemployment Insurance,” hosted by G&A’s own UI specialist Jametra Isaac.