Letting employees go is never easy. But if you’re dealing with staggering profits or unproductive workers, you might not have a choice.
When your employees become unemployed, they may be eligible to receive unemployment benefits. As their most recent employer, you will receive a notice that a claim was filed. How should you handle unemployment claims?
About unemployment insurance
Unemployed individuals can apply to receive unemployment insurance benefits if they are laid off through no fault of their own.
What is unemployment insurance? Unemployment benefits are portions of the former employee’s compensation they receive while they look for new work.
If you are thinking about letting employees go because you can’t afford payroll during the coronavirus pandemic, you might consider applying for a Paycheck Protection Program loan instead. Check out our article, “Paycheck Protection Program: How to Apply for a Forgivable Loan During COVID-19,” for more information.
Employer responsibility for unemployment benefits
As an employer, your responsibility for unemployment benefits begins when you hire an employee, not when you terminate employment.
When you hire new employees, you must report them to your state. Unemployment insurance is funded by federal and state unemployment taxes. Pay unemployment taxes for each employee you have.
Federal Unemployment Tax Act (FUTA) tax is an employer-only tax. It is 6% on the first $7,000 each employee earns in a year, meaning you will pay a maximum of $420 per employee per year. Most employers receive a tax credit of up to 5.4%, meaning your FUTA tax rate would be 0.6%. With the maximum tax credit, your FUTA tax liability would be $42 per employee per year.
State Unemployment Tax Act (SUTA) tax is generally an employer-only tax, but some states require employee contributions, too. Tax rates vary by state, and each state also sets its own wage base. Generally, your SUTA tax rate is determined by factors like your experience, industry, and how many former employees claimed unemployment benefits.
Independent contractors are not eligible to receive unemployment benefits because you do not pay unemployment taxes on their pay. Only employees whom you’ve paid FUTA and SUTA taxes for are eligible to receive these benefits.
How unemployment claims affect you
Does claiming unemployment affect employer? Yes, unemployment claims do affect you.
Former employees claiming unemployment must file with their state unemployment office. When they claim unemployment benefits, you will receive a “Notice of Unemployment Insurance Claim Filed.” The state sends this letter to the employee’s most recent employer.
If former employees file for unemployment insurance, you will (indirectly) be the one footing the bill. Benefit payments are charged to your employer tax account, which results in increased state tax rates. The more unemployment claims the state approves, the more you will contribute for unemployment taxes.
**Keep in mind that there may be exceptions. For example, mass layoffs due to the coronavirus do not affect employer SUTA tax accounts in some states (e.g., Ohio). Consult your state for more information to receive a special coronavirus mass-layoff number.
What to do when you receive unemployment claims
When you receive an unemployment claim notice, you need to take action. The action you take depends on whether you want to contest the claim or not.
Take a look at your responsibilities for accepting or contesting claims, as well as reasons why you might accept or contest claims.
What to do if you accept unemployment claims
If the information your previous employee included is factual and they have a legitimate unemployment claim, you probably don’t want to contest it.
Here are some reasons for legitimate unemployment claims:
- You laid off the employee due to a lack of work
- You laid off the employee because of financial constraints
- The employee was terminated or quit because of something you did wrong
Deciding to accept unemployment claims generally means you do not need to take further action.
Accepting an unemployment claim doesn’t guarantee the former employee will receive benefits. The decision is ultimately the state’s, and their decision can be influenced by factors like whether the worker reached the minimum amount of work to obtain benefits or whether the worker’s application was completed correctly.
Employers and claimants will receive a determination letter from the state that details why the decision was made and any charges to your account. Claimants have the right to appeal the decision if the state denies them unemployment insurance.
What to do if you contest unemployment claim
In some cases, you will need to contest unemployment claims. Although this will take more time and effort on your end, it will prevent your tax rate from rising if you win.
Here are some reasons a worker is ineligible for unemployment benefits:
- The employee was fired for misconduct
- The employee quit to take another job that fell through
- The employee included false information on their claim form
- The worker was an independent contractor, not an employee
If you are contesting a claim or if there is false information in the claim, you will need to respond to the state unemployment department. You must provide details such as why the former employee was terminated; their compensation, job title, and dates of employment; and information about your business.
Failing to respond within the timeframe listed on the notice (generally 10 days), could result in an increased unemployment tax rate and penalties.
If you decide to contest the claim, you will need to be as detailed in your reasoning and provide as much proof as possible. This is one of the reasons you should maintain employment and payroll records, even after an employee is terminated.
Let’s say you’re contesting the claim because the employee was fired for misconduct. You could show copies of HR meetings with the employee to back up your claim.
When you contest unemployment claims, the state may contact you by phone or letter to ask additional information.
After the state makes a decision, you will receive a determination letter. If you previously contested the claim and disagree with the determination letter, you have a period of time to appeal it. Your former employee also has the right to appeal the decision.
If you provide false information or withhold information during the process, you may be charged penalties in addition to an increased tax rate. Contesting an unemployment claim can also result in the former employee suing you. Be sure you have all your facts in order before contesting an unemployment claim.
Unemployment claims and worker misclassification
Bigger issues could come to light during unemployment claim processes. Again, independent contractors are not eligible for unemployment benefits. But what if you misclassified the worker as an independent contractor when they really should have been an employee?
When you misclassify an employee as an independent contractor, you deny them the option of enrolling in benefits programs, like health insurance and retirement plans. And, you fail to provide overtime wages and withhold and contribute necessary payroll taxes.
If you misclassify workers, you will be forced to pay back taxes, penalties, and interest. States will require you to pay back payments for unemployment insurance and workers’ compensation premiums.
Avoid misclassifying workers by understanding the difference between an independent contractor vs. employee.
|Looking for more coronavirus-related info? Check out our COVID-19 Resources Center.|
Make sure you contribute federal and state unemployment taxes for each employee. Patriot’s online payroll software will accurately calculate your tax liability. And if you opt for our Full Service payroll services, we will deposit and file taxes on your behalf. Get your free trial today!
This is not intended as legal advice; for more information, please click here.