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Q: What To Do When An Employee Files An Unemployment Claim?

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.”

Now what? 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 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 executed. 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 it have 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 on 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:

  • 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:  

  1. Was the employee actually fired? If you fired an employee for serious misconduct, your chances are fairly solid.
  2. 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.
  3. 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 as the employer (or your lawyer) will need to go to the hearing. 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.

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