Whether due to decreased demand, financial setbacks or a global health crisis, laying off employees is sometimes necessary to keep the business functioning. As an employer, you play an important role in supporting those workers with temporary unemployment insurance (UI) benefits.
While letting employees go is a normal part of doing business, it can sometimes be challenging to understand exactly how the process works. You may be wondering what your responsibilities are as an employer and how unemployment claims affect your taxes. Here are answers to common questions about what happens when former (or furloughed) employees file for unemployment claims.
What is unemployment insurance?
Let’s start by outlining the basics of the unemployment system. Unemployment insurance provides temporary cash payments to eligible workers on a weekly basis while they look for work. In most states, eligible workers can receive unemployment benefits for up to 26 weeks a year. The benefit amount is a stipend based on a set percentage of the employee’s average annual pay.
To be eligible, an employee must:
- Be unemployed due to a factor out of their control (such as being laid off or furloughed, or losing seasonal work).
- Meet state requirements for wages earned or time worked during an established period of time, plus any additional state requirements. Find details about your state’s program here.
Unemployment benefit programs are managed at the state level, with federal oversight by the U.S. Department of Labor. That means states have their own programs, but they must all follow the same guidelines established by federal law.
States fund their unemployment insurance programs through taxes paid by businesses, known as Federal Unemployment Tax Act (FUTA) taxes and State Unemployment Tax Act (SUTA) taxes. In some states, employees also pay a state-level tax to contribute to unemployment funds they may one day use themselves.
Can a fired employee collect unemployment?
Generally speaking, unemployment is only available for employees who have been laid off through no fault of their own, such as due to lack of work. However, in many states, if you fire an employee for being a poor fit for the job, lacking the necessary skills for the position or failing to perform to expected standards, they may still be able to collect unemployment.
If an employee quits voluntarily or was fired for misconduct or company policy violations, they are likely ineligible to collect benefits.
What is an unemployment claim?
When an employee has been let go or furloughed, they may file an unemployment claim with the state they live in. This claim is basically a notification to the state, the federal government and the previous employer that they are requesting cash benefits after being laid off. If approved, states distribute benefits using the aforementioned unemployment insurance taxes collected from employers.
What should a business expect after an unemployment claim is filed?
When a person files an unemployment claim, the former employer will receive a notice that this person filed the claim. The notice generally includes a report with general facts regarding the claim, as well as information provided by the employee to the unemployment commission.
As the employer, you’ll be expected to validate the details of the claim and correct any inaccuracies in the report, such as:
- Wages, dates and type of employment, such as full-time, part-time or contract.
- Reason for the separation, such as whether the person was laid off due to lack of work, voluntarily quit, was fired or left because of a trade/strike dispute.
- Whether the employee refused employment.
- Any form of compensation they received, such as a pension, vacation or severance pay.
When you receive the notice, you need to take action. If the worker’s claim is valid, simply accept the claim. But if the claim is invalid or misleading, you can contest it.
[Read more: Can an Employer Deny Unemployment?]
What happens when you contest an unemployment claim?
If a former employee has submitted an inaccurate claim:
- Notify the unemployment commission. Contest an employee’s unemployment claim by responding to the state unemployment commission within the time frame listed on the notice. In most states, claims should be contested within 10 days to avoid penalties or potential tax increases.
- Gather documentation. If a company is contesting a claim for an employee who was fired with cause, they will need to provide evidence to back up the appeal. Or you may need to provide evidence that the employee quit, such as a letter of resignation.
- Attend a hearing. In some cases, employers may need to attend an unemployment benefits hearing, which is basically just a meeting where someone interviews you about the facts of the case.
- Receive notice of determination. Once the claim has been contested, both you and the claimant will receive a “Notice of Determination” that will show whether or not the unemployment claim has been accepted by the state.
Keep in mind that if the employee loses the determination, they may still be able to appeal the decision.
How do unemployment claims impact business taxes?
As mentioned above, unemployment insurance funds are derived from state and federal taxes that are paid for mostly by businesses. No matter what state you are located in, you’ll need to pay FUTA taxes. Employers must pay 6% of the first $7,000 each employee earns per calendar year (for an annual maximum of $420 per employee). In some states, you’ll be eligible to get some of these payments back in the form of a tax credit.
When it comes to SUTA taxes, the amount you owe is usually based on:
- The number of employees you have.
- How much you’ve already paid into the unemployment insurance system.
- The number of your former employees that have claimed unemployment benefits.
Since the amount you pay is based in part on the number of claims made by former employees, each approved unemployment claim means your SUTA tax rate will likely increase. There are some exceptions to this—for example, the mass layoffs caused by the COVID-19 pandemic will not affect unemployment insurance tax rates in many states.
Each state has its own calculations. To find out the detailed rules surrounding your state’s unemployment taxes, contact your state government labor office.
[Read more: How are Employers Affected by Unemployment?]
Has COVID-19 changed employer responsibility for unemployment insurance?
2020 saw a steep rise in unemployment claims as COVID-19 rippled through the job market. In most states, though, employers still have the same responsibilities and tax obligations. And the majority of employers can breathe easy knowing that pandemic-related layoffs won’t be counted against their SUTA tax rate.
For the most part, employers have not had to change how they normally handle unemployment claims. However, it’s important to know what’s changed in the unemployment landscape. In March 2020, the CARES Act established three new federal unemployment aid programs in response to COVID-19. All three were extended by the American Rescue Plan signed in March 2021:
- Federal Pandemic Unemployment Compensation (FPUC), in which the federal government provided an extra $600 a week through the end of July 2020 to those receiving normal unemployment benefits. The extension provided an extra $300 per week benefit after December 26, 2020, and through March 14, 2021.
- Pandemic Unemployment Assistance (PUA), which made it possible for people not normally eligible for unemployment to apply for benefits through the end of 2020, including business owners, self-employed workers and 1099 earners.
- Pandemic Emergency Unemployment Compensation (PEUC), a temporary program allowing workers to receive up to 53 weeks of additional payments for people who have already exhausted normal unemployment insurance benefits.
All of these additional pandemic-related unemployment benefits expired on September 6, 2021.
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