Managing Unemployment Compensation Costs and Caseload



Overview

Unemployment insurance (UI) is a combined federal-state program that began during the Great Depression and has evolved extensively since then. Federal law provides minimum requirements for UI programs, and states are free to provide for higher employer contributions and more generous benefits to employees. State laws share some common provisions, but peculiarities complicate the compliance obligations for employers with workers in more than one state. This article covers UI overall and does not address particular state laws, which vary from state to state. Readers should seek guidance on the particulars of their own state's laws as to the matters addressed below.

This article addresses coverage, financing, eligibility, benefits and administration of unemployment insurance at the federal and state levels, as well as the relationship between UI and other workplace laws. The article then provides a thorough review of the administration of UI costs and management of claims, including responding to UI claims in terms of a cost/benefit analysis, procedural rules applicable in UI proceedings, the appeals process, litigation strategy and best practices. The article concludes with a brief discussion of global issues and trends related to UI claims and claims management.

Background

UI began as a New Deal program under the administration of President Franklin D. Roosevelt with the signing of the Social Security Act of 1935 (SSA). The SSA required states to create UI programs; if they failed to do so, the federal government would do it for them. There are now UI programs in all 50 states plus Washington, D.C., Puerto Rico and the U.S. Virgin Islands.

Title III of the SSA established federal grants to states for the operation of approved UI programs. Title IX authorized and structured the Federal Unemployment Trust Fund, and Title XII created a program of federal loans to insolvent state programs. The UI system was enhanced by the Federal Unemployment Tax Act of 1939 (FUTA), which governs much of the existing federal/state relationship in this area. Federal law establishes certain minimum requirements but permits states to provide more generous benefits, to charge higher UI premiums and to establish different methods for allocating the ongoing costs of UI benefits among employers based on various employer experience ratings.

Unemployment statistics are collected by the states and are available from the U.S. Bureau of Labor Statistics. See Labor Force Statistics from the Current Population Survey.

Federal Law

Under FUTA, the federal government sets certain rules for coverage, financing and eligibility, but allows states to adopt different rules that do not conflict with the federal minimums.

Coverage at the federal level

In general, FUTA requires an employer to contribute UI taxes if it pays $1,500 in wages during any calendar quarter or employs one or more workers on at least one day in each of 20 weeks in the current or previous year. See U.S. DOL: Unemployment Insurance Tax Topic.

Under FUTA, agricultural workers are covered if an employer pays $20,000 in wages in any calendar quarter or employs 10 or more workers on at least one day of 20 weeks. FUTA requires coverage of domestic workers in a private home or college fraternity, sorority or club if the employer pays cash wages of $1,000 or more during any calendar quarter in the current or preceding year. Certain services performed for Section 501(c)(3) charitable not-for-profit organizations that employ four or more workers for 20 weeks are not taxable under FUTA, but they must be covered as a condition of approval of state programs. Federal law also requires that all state and local government entities be covered, regardless of size.

Certain individuals may be excluded from coverage, including elected officials, judges, members of the National Guard, temporary emergency employees, and part-time members of advisory boards and commissions. In 2000, Indian tribes also were required to be covered. Unemployment compensation for federal civilian employees is provided by a special arrangement administered by the states as agents of the U.S. government. Another federal program covers former members of the military. Benefits under that program are determined on the basis of the individual's pay at the time of termination and are not available while collecting educational benefits from the Veterans Administration.

Financing at the federal level

Generally, UI is paid entirely by employers. FUTA requires employers to contribute a certain percentage of each employee's earnings up to a specified wage ceiling. If the state maintains an approved UI program in compliance with federal requirements, the state is allowed to keep a certain portion of the total amount required to be collected by FUTA. The percentage of earnings the employer is required to contribute to the program has changed from time to time, as has the ceiling of earnings subject to the tax.

Federal law requires that all states adopt a system of experience rating. This system provides an incentive for employers to control job loss because FUTA allows states to reduce employers' UI tax rate based on three years of past experience (or a minimum of one year for newly covered employers). See The Cost of Layoffs in Unemployment Insurance Taxes.

Eligibility at the federal level

Federal law limits unemployment benefits to individuals who are out of work through no fault of their own and who are available for work and are actively seeking work. Workers fired for misconduct or who quit without good cause are disqualified from receiving benefits, usually for a specified length of time. Good cause includes such things as unsafe working conditions, sexual and other harassment, domestic violence, and relocating to accompany a spouse. See Individuals Who Refuse Unsafe Work May Be Eligible for Retroactive Unemployment Benefits.

FUTA specifies that benefits are not available for professional athletes between seasons and for educational employees during the summer (or other break) if they have a reasonable expectation of being rehired when the season or academic term resumes. Immigrants who do not have a legal right to work in the U.S. are also ineligible for benefits. FUTA prohibits the denial of eligibility for benefits solely on the basis of pregnancy or the termination of a pregnancy.

Benefits at the federal level

The amount and duration of benefits is generally not regulated by federal law. However, Congress may take action to extend or boost UI benefits during economic downturns in an effort to stimulate the economy and to provide relief for unemployed workers.

Administration at the federal level

Federal administration of UI generally is limited to setting the ground rules for states to follow, and to collecting and dispensing the portion of UI premiums remitted to the federal government.

State Law

As indicated above, state laws may differ from the federal requirements as long as they do not conflict with them. In other words, states are permitted to be more inclusive in coverage, allocate financial responsibilities differently and be more generous with benefits.

Coverage at the state level

All states exempt independent contractors from the definition of employee, but there are differences among the states as to what constitutes an independent contractor. A small number of states have different rules on coverage of agricultural and domestic workers. States also differ over which classes of employees they have chosen to exempt from coverage as permitted by FUTA. Nearly half of the states provide greater coverage for nonprofit organizations than required by FUTA.

Financing at the state level

As a result of the federal-state partnership, UI premiums are a combination of a fixed tax and a variable tax. The fixed tax is applied to the employer's payroll, whereas the variable tax is determined by the number and amount of claims a state pays to former employees. The variable tax is added to the fixed tax and then applied to the employer's payroll in the form of an experience rating.

A majority of states have adopted higher ceilings than required by FUTA. In a handful of states, employees also contribute to payment of UI premiums, in which case the employee's share is taken as a mandatory payroll deduction and forwarded to the responsible agency along with the employer's share.

Four types of experience-rating formulas are in use among the various states: the reserve ratio, the benefit ratio, the benefit-wage ratio and the payroll variation formula. See Conformity Requirements for State UC Laws.

States also vary in terms of who gets charged for the cost of benefits. Some charge the cost of benefits to the most recent employer. Other states allocate responsibility between past employers during a base period determined by order of employment or proportion of base period earnings. The base period is usually defined as the first four of the last five completed quarters. Thus, it is possible for an employer to be charged for a former employee who quit or was fired and was subsequently hired and laid off by a second employer. See What impact will unemployment claims have on our business?

Eligibility at the state level

All states require workers to have earned a minimum amount of wages and to have worked a minimum amount of time in covered employment to be eligible for benefits. These requirements vary from one state to another and are a function of the differences in average wages and in the cost of living among the various states. See How long must an employee work for an employer before he or she is able to collect unemployment? and Do employees file for unemployment in the state in which they live or work?

Employees who voluntarily leave employment may still be eligible for UI benefits, under certain circumstances, if the separation was for good cause. Such circumstances may include unsafe working conditions, sexual or other harassment, domestic violence, or relocation to accompany a spouse. A particular state's definition of good cause reflects its public-policy judgments. In the vast majority of states, good cause must be related to employment.

Employees may also be eligible for UI benefits if their hours are reduced significantly. See Can employees be eligible for unemployment benefits even though they are still working part-time; what is a work-share program? and Employers May Benefit from State-Run Work-Share Programs During Pandemic.

Benefits at the state level

In general, benefits are based on a percentage of an individual's earnings over a recent 52-week period up to a maximum amount. This calculation and maximum benefit varies by state. See State Unemployment Insurance Benefits.

As noted above, the amount and duration of benefits generally is not regulated by federal law, but this may be influenced by the perceived need to stimulate the economy and provide relief for unemployed workers. Congress can mandate that states extend UI benefits or otherwise enhance what states must provide to unemployed workers. See Unemployment Insurance Relief During COVID-19 Outbreak.

Administration at the state level

State-level administration varies within the limits of federal oversight. The Social Security Administration requires states to have a mechanism to provide a fair hearing to participants who are denied benefits, including a means for claimants to appeal a denial of benefits. All states give employers the same right to appeal adverse decisions. However, once it has been determined that a claimant is entitled to benefits, the claimant will continue to receive benefits until the decision has been reversed. Some states reserve the right to recover benefits previously paid to claimants in the event the claimant loses on appeal. See Benefit Denials and How to Determine If You Should Contest an Unemployment Claim.

In all states, the appeal process has two phases: first, with an individual hearing officer (however denominated) and, second, before a board, panel or commission. Some states allow a third level of appeal to a state court. Thus, in some states, there are four or more chances to win or lose a UI case. Ordinarily, any evidence and testimony that is to be considered must be presented at the first phase of the appeal process during the parties' "day in court." The deadline to file an appeal is rather short in all states—from just eight to 30 days—and the actual day in court is usually set soon after the appeal is filed. The great majority of state statutes specify that UI decisions do not establish binding precedents in any separate or subsequent proceeding or litigation. However, employers would be wise not to assume that nothing that occurs in the UI process can be introduced as evidence—or otherwise influence—parallel proceedings.

Effective Practices

Workforce planning. Understanding the organization's present and future staffing needs can significantly reduce unemployment claims. Hiring the right number of workers in the right areas helps avoid furloughs and layoffs, which in turn will reduce unemployment claims. Understanding and implementing alternatives to layoffs may be of greater strategic benefit to the organization than short-term cost savings. See Unemployment Insurance and Furlough Q&As.

Quality hiring. Hiring the right people that fit the organization's needs and culture can help avoid employee terminations. Lower turnover rates mean lower UI premiums and lower UI caseloads for employers.

Employee training. To be successful, employees need to be trained properly. Many UI claimants are awarded benefits despite employer assertions that the employee failed to perform adequately because the UI hearing officer determined the employer had not provided the employee with adequate training to succeed in the position.

Managing performance. Quality performance management processes such as regular employee appraisals and performance feedback can be helpful to demonstrate the employer's commitment to helping employees succeed. Effective performance management processes and documentation can help employers avoid unemployment charges when employees are terminated for cause. See One and Done: When to Skip Progressive Discipline.

Terminating employees. Severance agreements, outplacement benefits and good communication with employees being terminated are effective tools in managing UI costs. Severance pay may reduce or delay the start of UI benefits. Effective outplacement efforts may bring payment of UI benefits to an earlier end because the claimant has found a new job. Effective and honest communication about the reasons for termination may help a discharged employee realize that the organization had good cause for the termination and thereby avoid the time and expense of defending a meritless claim.

Managing UI Claims

The effective management of the UI claims process arguably is the most important thing that an organization should address. Employers must take extremely quick, accurate and intelligent action when responding to UI claims. Filing deadlines can be in the range of one to two weeks from when the notice was mailed to the employer. See Top 3 Mistakes Employers Make with the Unemployment Insurance Process.

Internal claims procedure

One of the steps in effective management is establishing an internal procedure to make sure that UI claims are immediately brought to the attention of the proper individuals—at a minimum, this means management and the person who made the discharge decision or the claimant's direct supervisor if the UI claim arises out of a voluntary termination. It is critical that an accurate understanding of what really occurred be obtained immediately because the deadlines for employers to respond to UI claims are usually short. There are far too many instances of employers being saddled with additional UI costs because their responses were either late or inadequately investigated before the claims were filed.

Employers should have a strategic process for deliberating on what the initial investigation shows. It is reckless for an employer to routinely accept or oppose all UI claims. The employer must make a decision about whether to challenge based on the perceived costs and benefits in terms of costs, administrative burdens and strategic considerations. See What circumstances usually result in employees successfully collecting unemployment benefits? and Unemployment Fraud Is on the Rise.

Informed decision-to-challenge claims

An effective challenge to a claim should be based on an informed and practical decision to do so. This will require employers to become familiar with the procedural rules in their state and to abide by them, including filing deadlines; numbers of photocopies required; in-person, telephone and virtual hearing procedures; authentication of documents; gathering documentary and testimonial evidence from outside sources through subpoenas; and giving proper notice to the claimant and the UI hearing officer. Every rule is an opportunity for the employer to lose—or win—a UI case.  

Retention of representation and presentation of appeal

Another consideration is deciding whether to retain an attorney or authorized representative to handle UI matters. An organization must also decide whether to appeal by telephone or in person. Appearing by telephone may be more convenient, but appearing in person is usually much more persuasive.

Obtaining evidence

Organizations will need to determine whether there are important documents and testimony that are not within the employer's control. In this case, the employer must obtain such evidence informally or by subpoena. Often, only the UI agency is authorized to issue a subpoena, and an employer must issue a written request to the agency explaining what evidence is sought and why having a fair hearing hinges on the agency's decision to issue a subpoena.

Understanding the hearing process

In the UI process, it is critical for employers to understand that the UI claims hearing is like a trial—one side wins, and one side loses. It is not a mediation, a general gripe session, or a way of punishing either the employee or the employer. It is a trial of a fairly simple legal issue—whether the employee legally qualifies for UI benefits under the facts of the case—and the parties must appear in person, or by telephone where permitted, to present their cases.

Employers must also understand the role of the hearing officer, who will act as the determiner of disputed facts and law. If parties have a point to make either in terms of fact or law, they should make it at this level. Otherwise, it will probably not be considered on a subsequent appeal. The hearing officer also may take an active role—if not the leading role—in questioning witnesses and examining exhibits. The hearing officer may be more deferential when the employer is represented by legal counsel, another authorized UI claims representative, or an HR professional whom the hearing officer has a lot of experience with and knows is up to the task of questioning witnesses and mustering documentary evidence in an efficient and legally proper fashion.

Appeal process

Since there will be at least one level of appeal beyond the UI evidentiary hearing, the person managing the hearing process must keep in mind the likelihood of a further review of the proceedings. This means anticipating and laying the groundwork for an appeal during the hearing process itself by persuading the hearing officer on the facts and the law. It also means preparing to demonstrate that the hearing officer made a serious mistake in applying the law in the event the outcome is adverse to the employer.

The UI hearing also provides the employer the opportunity to communicate with the claimant in a manner that is designed to avoid further appeals and parallel legal proceedings.

Global Perspectives

Compared with some countries, the U.S. system for compensating individuals who have lost their jobs due to no fault of their own is not especially generous. Many European countries grant liberal unemployment benefits and have specified requirements regarding processes and communication when conducting layoffs.

See:

Remote Work and 'Partial Activity' in France

Canada Provides COVID-19 Emergency Benefits Response

Most of World Lacks Unemployment Insurance 

Trends in UI Claims and Claims Management

There are a number of noteworthy trends in the area of UI claims management. One is a growing awareness on the part of UI claimants of their legal rights, fueled in part by the easy access of information via the Internet from government websites, law firms, bloggers, and knowledgeable friends and family.

Gig-worker eligibility for unemployment insurance benefits is a moving target. Federal guidance on independent contractor classification and state decisions are often contradictory. Employers should review current state and local rules surrounding these workers to ensure proper classification. See Gig Workers, Self-Employed Covered Under CARES Act.

Additional Resources

SHRM's Unemployment Resource Hub Page

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