The Unemployment Benefits System: How it Works and When to Contest a Claim

Filed under Managing the Workplace. Fact checked on May 24, 2012.

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Former employees may be entitled to unemployment benefits depending on the circumstances under which they quit or were terminated. It's important to contest unemployment claims which are unjustified because successful unemployment benefit claims affect your tax rate, and you may discourage fired employees from pursuing wrongful discharge legal claims.

When an employee leaves or you have to fire someone, you may have to deal with the issue of unemployment benefits for that worker. There are two main reasons why you should care about whether your ex-workers are collecting unemployment, and why you should try to prevent an improper claim from being paid:

  • You'll want to keep your tax rates as low as possible. Your state unemployment tax rate is directly affected by the number of your ex-employees who collected unemployment after leaving your business.
  • If there's a chance that the worker is going to sue you for discrimination or wrongful discharge, you can discourage the lawsuit. If that doesn't work and a lawsuit is filed, you may increase your chances of winning. A disgruntled worker's first contact with the legal system is usually in the unemployment setting. If you win in this arena, you're more likely to win in a later suit for wrongful termination, where the stakes may be much higher. On the other hand, if you lose in the unemployment matter, you may decide that the facts are not in your favor and that you should settle with the worker rather than going to trial in the other lawsuit.

In order to determine when and how to contest claims, you should understand the workings of the unemployment system.

Work Smart

Don't let a possible unemployment claim stop you from firing someone who you feel should be fired. Even though a successful unemployment claim may raise your tax rates, don't let the fear of a rate increase keep you from firing an employee who is truly dragging your business down. One bad apple can destroy the morale of an entire office--or worse!

How the Unemployment System Works

The unemployment insurance system was designed with two major goals in mind:

  • To provide a weekly check to workers who lose their jobs through no fault of their own.
  • To promote economic stability by rewarding those employers who minimize their workforce turnover, and by maintaining the flow of dollars through the economy even when there is widespread unemployment.

The benefits paid to jobless workers are financed through federal and state unemployment taxes paid by employers like you. To promote the two goals noted above, every state has a system that bases your unemployment tax rate on the amount of benefits that has been paid to your former workers.

Your actions affect your tax rate. This is one of the few times in life when you can influence your tax rate by your own actions. If you fire or lay off workers only when absolutely necessary, use the proper procedures to do it, and routinely contest unemployment benefit claims when you think the worker is ineligible, you can lower your unemployment tax rate. In some states, you can lower your rate to zero, and pay no unemployment taxes at all! On the other hand, if you don't pay attention to these things, you may well find your unemployment taxes eating into your bottom line.

To find out more about how the system works and how you can influence your tax rate, you need to know which workers are eligible for unemployment benefits and the actions that can disqualify an otherwise eligible worker.

Unemployment Benefits Eligibility

To be eligible for unemployment benefits, a person must have at least some minimum amount of work experience within the last one and one-half years before filing for benefits.

State formulas are used and each state has a different formula for determining the minimum needed to obtain benefits in that state. Most of the states require that the employee worked at least some part of two different calendar quarters within the past one and one-half years, and a large percentage of states also have a specific dollar amount of wages that must have been earned.

Your local unemployment office should be able to tell you what the minimum is in your state. You should know what your state's minimum is, and think about setting up a probationary period for new hires that is less than the minimum time that would qualify a worker for benefits.

Warning

In most states, time spent and money earned in self-employment does not count toward these minimums. If you decide to pack up your business, you probably won't be able to get unemployment benefits.

In addition, there are a few other eligibility requirements. If you suspect your ex-employee doesn't meet them, consider contesting the payment of benefits.

  • The worker must be truly unemployed. If the worker has a well-paying part-time job or is self-employed, he or she usually won't be eligible for benefits.
  • The worker must make a claim for benefits at the local state employment office, and respond to any cards, letters or requests to appear from the government; otherwise benefits will be cut off.
  • In most areas the employment office also helps jobless workers find a new position, and the worker must cooperate with the office — must file job applications, show up for interviews, and accept a suitable position if one turns up through this process. In some states the worker must report back to the agency with the number of job applications he or she has made each week, to prove that the job search is continuing.
  • The worker must be ready, willing and able to work. That means his or her health must be good enough for work in a reasonable number of jobs that are available in your area. It also means the worker did not decide to take a long vacation. If the worker has enrolled in some type of school or training course, it must be approved by the state unemployment agency, or the worker must be willing to leave the course if school hours would conflict with a suitable job offer.

Factors Disqualifying Otherwise Eligible Employees

Those who are eligible for benefits because they've worked and earned the minimum amount required in their state, and because they are available to work, can still be disqualified from receiving benefits, depending on how and why they lost their jobs.

Generally, unemployment benefits are designed for people who are laid off because the employer doesn't have enough work for them, or who lose their jobs because of something the employer did wrong. Therefore, a worker will be disqualified for benefits if:

  • The worker turned down a "suitable" job offer during the period of unemployment. "Suitable" work generally means something appropriate for the worker's prior training, experience, and salary level, but those who have been unemployed for a long time are expected to be less picky as time passes.
  • The worker was fired for misconduct. This can mean violation of a specific work rule, or violation of an "unwritten rule" that the employee could be expected to know (for example, stealing, insubordination, excessive unexcused absences etc.) In most situations involving misconduct you should have documentation of warnings and progressive discipline that will enable you to easily prove what happened and keep the worker from receiving benefits at your expense. However, be aware that poor performance or incompetence is not usually considered misconduct. Although you have the right to fire a poor performer, he or she will probably be able to collect unemployment.
  • The worker left the job voluntarily, without a good cause connected to the job. In all states, a worker who quits because the employer does something nasty like harassing or discriminating against him or her, or making a significant change in wages, hours, job duties, location, or other working conditions, has "good cause" to quit and won't be denied benefits. States differ in their interpretation of whether good cause includes quitting for health-related or personal reasons such as a spouse's relocation — consult your attorney for the most up-to-date rules that apply to your area.
  • The worker is unemployed because of a strike or other work stoppage caused by a labor dispute.
  • The worker is receiving workers' compensation, Social Security, a private pension, or severance pay.
  • The worker has lied on the benefit claim or has omitted some important information, in order to get or increase benefits.

When and How to Defend Unemployment Claims

There's no point in wasting your time and possibly running up legal bills, by contesting the payment of benefits to a worker who clearly deserves them. So, if you have to lay someone off because business is not booming as you had hoped, or if you fired someone because you want to hire your brother-in-law instead, don't bother to object when your ex-employee makes a claim.

On the other hand, if you have to fire someone for stealing or someone quits to start their own business, you can and should make an effort to prevent your tax rate from rising as a result.

Work Smart

What do you do if it's a gray area, and you're not sure whether the worker deserves benefits or not? Go ahead and contest the claim as discussed below, up to the point where you'd need to hire a lawyer. At that point, if the worker has won, you may want to reevaluate whether the issue is worth pursuing. Your lawyer should be able to tell you whether your chances of winning are good, or slim to none.

It's also true that there may be times when it's not in your interest to prevent your worker from collecting benefits, even if you would probably win if you tried. The most common situation is where you want to get rid of someone but don't have a good (or a legal) reason for doing it, or you suspect the worker is going to sue you. To solve the problem you "buy out" the worker by offering severance package. The package may include an agreement that you won't do anything to prevent the worker from collecting unemployment, along with some severance pay, continuation of health benefits, or other items.

If you go this route, just be sure to have the worker sign an adequate release of liability before he or she leaves.

Tools to Use

The Business Tools contain a sample release from liability that you may find useful. A written release from liability is a type of contract. As in any situation where you are asking someone to sign a contract, your lawyer should read over the document before you use it and should be involved if negotiations with the worker demand changes in the contract.

How to Defend Unemployment Claims

When one of your former employees files for benefits, you'll get an official report from the state unemployment agency. Fill it out and return it within the deadline stated on the form! These deadlines are rarely extended, even if you have a good excuse. If you don't respond, or respond too late, the worker will automatically get benefits in most states. And follow these guidelines:

  • Just give the facts. Typically, the report will ask how long the employee worked for you, what his or her earnings were, whether the worker quit voluntarily or was dismissed, and what the facts surrounding the termination were. Don't give just a one-word explanation — but don't write a whole novel either! A few sentences should do it.
Example

If you need to fire somebody because of excessive unexcused absences, don't just write "discharged for absenteeism" on the unemployment claim report. Instead, you need to say when the absences occurred, how many there were, and when prior warnings were given. You also need to say something about the final incident that led to dismissal. You might say, "Jocelyn was absent from work without notice six times within two months. She received oral warnings after the first two absences, and written warnings after the second two. After the fifth absence Jocelyn was warned in writing that another such absence would lead to being fired. On May 17, Jocelyn failed to return to work following a scheduled vacation and was dismissed."

  • Have a presence at the hearing. You should have a presence at hearings, formal or informal, before the state unemployment insurance officials. This is the only effective way to present your side and to respond to any false or incomplete statements your ex-employee might make. The "burden of proof" is on the employer — that means it's up to you to prove your statements, by testifying or presenting documents. The supervisor who actually witnessed the misconduct or other action that led to the termination should be present to testify; in most cases, that means you.
Tip

It's a good idea to have an attorney represent you at any hearing, especially the first time you are involved in an unemployment case. Attorney representation becomes a virtual necessity if you lose at the hearing level and decide to appeal to the court.

  • If you learn new facts, report them to the state. If you later learn of facts that would disqualify the claimant for benefits (for example, he or she turned down a job offer, went on a long vacation without looking for work, or refused to take the old job back if you offered to rehire the worker), report these facts to the state unemployment agency.
  • If you lose, file an appeal. If the employee is found eligible for benefits despite your objections, follow up with an appeal to the administrative agency, and (if you lose again) to the courts, unless, of course, your lawyer tells you this would be fruitless in your particular case.

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