A letter is quietly sitting on your desk. You rip it open, and the words on the page make your head spin—“Notice of Unemployment Insurance Claim Filed.” Understanding the unemployment claims process might feel intimidating, but learning how to manage unemployment claims is an inevitable part of being an employer.
In this article, we’ll give you a game plan so you can deal with unemployment notices the right way.
What is an unemployment claim?
Put simply, it’s a notice that an employee files in order to get unemployment compensation from their state agency after a layoff. Unemployment insurance, commonly shortened to UI, provides financial help for unemployed people who aren’t working for a reason that’s totally out of their control. Unemployed workers must show they’re actively seeking new employment to receive the weekly payments for up to 26 weeks (note: the federal government no longer provides pandemic-related extended benefits, which have expired).
For example, people have UI eligibility if they lost their job due to downsizing, seasonal work (e.g., with food service or agricultural employers), or if a company shuts its doors altogether. An employee cannot, however, claim unemployment insurance benefits if they’ve been fired for failure to perform as expected. The same goes for someone who is self-employed, like an independent contractor, unless that contractor has been misclassified.
Benefit amounts are determined through a computation that calculates a percentage of an employee’s wages over a 52-week period, so the number of weeks in a calendar year. They can be claimed for a limited period of time, typically six months after the person left the company, or until that person finds a new full-time job.
Federal law and general guidelines for unemployment insurance are established by the Federal Unemployment Tax Act, or FUTA for short. FUTA taxes actually make up the Federal Unemployment Trust Fund that finances the states’ unemployment programs, making UI not just a federal tax—it’s actually a joint federal and state unemployment insurance, which means each state, district, and territory has its own rules and regulations.
Don’t worry, you can find a path through the maze of regulations. Use this Department of Labor site to find links to information for your specific state.
How does unemployment insurance impact your taxes?
The unemployment insurance program is funded by federal-state payroll taxes that are paid by employers like you. And yes, you pay both FUTA and the State Unemployment Tax Act (SUTA) employer taxes.
What you pay in taxes is determined by state law, and it’s typically based on three factors that impact how a company is experience-rated and, as a result, how much your UI tax rate can increase:
The size of your business
How much you’ve paid into the system
The number of former employees who’ve claimed unemployment benefits
According to the Internal Revenue Service (IRS), if your company is exempt from paying income tax, such as if it’s a 501(c)(3) nonprofit organization, you’re also exempt from paying unemployment insurance. However, check with your state’s labor department to learn more about any SUTA obligations, which include paying state-level obligations or reimbursing states for any unemployment benefits that were paid to former employees. Your industry may even have its own SUTA employer rate that could be higher or lower than others.
Most companies are, in fact, subject to the FUTA tax rate (6% of an employee’s wages up to $7,000) if they can say “yes” to either statement:
Your company paid $1,500 or more to at least one employee in any calendar quarter.
Your company had at least one employee for some part of the day in any 30 or more different weeks. This includes full-time, part-time, and temporary employees, but not business partners.
FUTA taxes need to be reported with Form 940, which is available on IRS.gov, although you may have to deposit some of your tax payments before filing your return (e.g., at least one quarterly payment if you owe more than $500 in tax liability on total wages for the calendar year). Any amount above the taxable wage base of $7,000 per employee would not be taxable wages for FUTA, and if an employer pays state unemployment taxes by the due date, you could get a 5.4% maximum federal tax credit.
What happens if you receive an unemployment claim?
When a former employee makes a claim through a state unemployment agency, you’ll be contacted to verify their reason for not being employed through something called a “Notice of Unemployment Insurance Claim Filed.”
On this form, you’ll be prompted to verify a number of details, like:
Your company name
Basic information on your former employee, including the reason for separation. These reasons may indicate that it was voluntary, that they quit, were laid off (for lack of work), or that it was due to a trade dispute.
Information about any compensation that you have or will pay.
To get a sense of what you may receive, take a look at this sample UI claim notice from California.
How do you contest an unemployment claim?
So you took a look at the claim, and frankly, you don’t agree with it. If a former employee makes an improper claim for UI (such as if they voluntarily resigned), you can contest it if the information is inaccurate, or if a successful claim will impact your taxes. However, if an employee was forced to resign or quit because of intolerable working conditions or another good cause, they may be able to collect unemployment benefits.
According to Nolo, you also can’t contest the claim if there wasn’t misconduct or if the employee was fired for poor work performance. The Society for HR Management (SHRM) lists some examples of willful misconduct by an employee, which include intentional violation of company policies, failure to follow instructions that were provided (proof of which the employer will need to provide), excessive absence, and failure to follow normal standards (e.g., not sleeping on the job or not stealing).
If you want to contest a claim for someone who was fired with cause, it’s up to you to prove that your decision to terminate that employee was valid. Letting a claim stand if someone has been fired with cause could have an impact on any potential legal action. If you choose to contest it, you will need to inform the unemployment agency quickly.
Here are a few questions to ask yourself before going through the whole contesting process:
Was the employee actually fired? If you fired an employee for serious misconduct, your chances are fairly solid.
Do you have proof to back up your actions? If you say you fired someone with cause, but don’t have the paper trail to back up your claim, you probably won’t emerge victorious. According to SHRM, this evidence can include the following: attendance records, a resignation letter, and/or disciplinary actions related to the conduct that show awareness of it and the opportunity for the employee to correct the behavior.
Is it likely that there’s a lawsuit on the horizon? You’ll need to gather substantial evidence if you think you may end up in court.
You will need to attend the hearing, or you can bring hearing representation in the form of a lawyer. Whatever the decision, both you and the claimant will receive a “Notice of Determination” once a decision is made. If the claim for UI benefit payments is approved, you’ll still have an opportunity to appeal the decision—but you should weigh the pros and cons before pursuing it. An appeal may take more effort than it’s worth.
At this point, you should feel ready to deal with any unemployment claim that comes your way.
Should you consider unemployment claims management services?
If you’re overwhelmed by unemployment claims or encountering some complex cases, it might be worth looking into in-house unemployment claims management services or claims management software. Third-party claims management companies and software platforms help streamline claims administration work, so you can ensure you’re compliant and avoid costly errors and penalties.
If you outsource unemployment claims management to a third-party provider, they’ll typically handle claim verification, liaising with state agencies, appeals, unemployment hearings, and auditing benefit charge statements. Claims management software is more self-service; you’ll log onto a dashboard where you’ll be guided to upload the claim notice and given instructions on how to respond.
FAQs
What is the deadline for employers to respond to a state unemployment claim notice?
Generally, employers have to respond to a state unemployment claim notice within 10 days of the date issued on the notice to avoid penalties and fees. However, some states have slightly different deadlines; Texas, for instance, allows employers 14 days to respond.
What happens to your employee’s healthcare when they file for unemployment?
If a former employee files for unemployment, their employer-sponsored healthcare plan (along with all their employee benefits) ends. You won’t be responsible for paying for their health insurance; instead, they’ll have to buy a new plan on the Health Insurance Marketplace or apply to a state healthcare program.
What type of termination (misconduct, voluntary quit, layoff) disqualifies an employee from receiving benefits?
Employees may not be eligible to receive benefits if they quit without good cause, were fired for misconduct, or have refused opportunities for suitable work (aka work that’s comparable to their prior job in terms of wages, hours, and necessary skillset).
What is unemployment claims management cost control?
Part of effective unemployment claims management is cost control—in other words, thinking about the immediate and long-term costs of your former employees applying for unemployment. After all, claims costs can add up. You can take a proactive approach by improving workplace satisfaction and raising employee retention rates, refining your hiring practices so you find better employee matches from the start, and keeping records throughout each employee’s employment, so you can more accurately contest ineligible unemployment claims.
How does an employer’s State Unemployment Tax Act (SUTA) rate increase or decrease based on claims?
An employer’s SUTA tax rate depends on their experience rating, which takes into account the amount of taxes an employer contributes to their state’s unemployment fund and the amount of benefits the state pays out to that employer’s former employees. In essence, an employer’s unemployment tax rate increases when the number of former employees filing for unemployment benefits exceeds the amount an employer has paid in unemployment taxes. The tax rate decreases when an employer’s unemployment tax contributions outweigh the number of employee unemployment claims. See our state-by-state guide to SUTA tax rates here.
What are the legal risks and penalties for an employer who fails to respond to a claim notice on time?
If an employer doesn’t respond to a claim notice on time, not only could they lose their right to contest the claim, they’ll also be subject to a variety of financial penalties, including waiting time penalties for not issuing final wages on time, civil penalties, and fines. Beyond the monetary hits, employers who don’t respond to claim notices on time are also risking their reputations and could receive lawsuits from a government agency or claimant.
Can an employee still be eligible for benefits if they quit due to “good cause” (e.g., hostile work environment, health issues)?
Yes, employees can still be eligible for benefits if they quit for “good cause.” Good cause has to be compelling and reasonable, and each state has different definitions of what’s considered compelling and reasonable. Some common good cause reasons for leaving a job include personal medical and health issues; fleeing domestic abuse, sexual assault, stalking, or sexual harassment; leaving to care for an ill child or family member; leaving an unsafe work environment; or experiencing a significant deterioration in job quality, due to a hostile workplace, erratic work schedule, or unpredictable cuts to hours and pay.
What is the reimbursable method of paying unemployment insurance benefits?
The reimbursable method is when employers are charged for the exact amount of unemployment insurance benefits paid to their former employees. Only nonprofit organizations and public entities are eligible to use the reimbursable method. If an employer is eligible for this method, they’ll be sent the Statement of Reimbursable Benefit Charges, which breaks down the benefits paid to their former employees, each quarter.
Quick note: This is not to be taken as legal or HR advice. Since employment laws change over time and can vary by location and industry, consult a lawyer or HR expert for specific guidance. Learn about Gusto’s HR services
