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'How the Unemployment System Works -- Part 1' reports on the ins and outs of the unemployment compensation system, including how your tax rate is assessed and the eligibility requirements for employees.
The benefits paid to jobless workers are financed through federal and state unemployment taxes paid by employers like you. Every state has a system that bases your unemployment tax rate on the amount of benefits that has been paid to your former workers.
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 stay on top of the system, you need to know who's eligible for unemployment benefits and what actions can disqualify an otherwise eligible worker.
To be eligible for unemployment benefits, a person must have some amount of work experience within the last one and one-half years. Most states require that an employee work 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 can tell you the minimum in your state. Think about setting up a probationary period for new hires that is shorter than the minimum time that would qualify them for benefits.
There are a few other requirements that must be met before someone is eligible for benefits. If you think an ex-employee doesn't meet them, consider contesting the payment of benefits.
In general, only workers who "involuntarily" leave their jobs are eligible for unemployment compensation. But that doesn't mean someone who quits won't file a claim. Such people can allege that they were "forced out" due to illegal or discriminatory practices, or misrepresent the circumstances under which they left.
There are two major reasons you should care about whether your ex-workers are collecting unemployment, and why you should try to prevent an improper claim from being paid. First, your state unemployment tax rate is directly affected by the number of ex-employees who collected unemployment after leaving your business. Second, if there's a chance that the worker is going to sue you for discrimination or wrongful discharge, you can discourage the lawsuit by establishing that your conduct was appropriate in an unemployment compensation hearing. If you succeed in the unemployment compensation hearing, you're more likely to win in a later suit for wrongful termination. If you lose in the unemployment matter, however, you may decide that you should settle with the worker rather than going to trial in the other lawsuit.
And one more tidbit about unemployment compensation: most states don't count time spent and money earned in self-employment toward the minimums. If you fold your business, you probably won't be eligible for benefits.