What Employers Should Know About Who Pays for Unemployment

Money may not be able to buy happiness, but it can buy food, shelter, medicine, and all of those little things that contribute to a person’s wellbeing. This makes unexpected unemployment unpleasant news for workers to receive and an unfortunate message for HR representatives to deliver.

When their paycheck disappears, workers may turn to unemployment insurance (UI). This government program can help cushion the blow of job loss for certain workers, as it allows them to continue receiving a consistent payment, at least for a while.

But who is funding those payments? And if you’re contacted about a former employee’s unemployment insurance claim, are you expected to cover the cost? 

Here’s what you need to know about unemployment insurance, from who pays to what happens when a former employee submits a UI claim.

What Is Unemployment Insurance? 

Unemployment insurance is a federal and state government program to support some workers who lose their job. As explained by the U.S. Department of Labor, it provides “temporary financial assistance to unemployed workers who are unemployed through no fault of their own.” This typically means people who are laid off, not who quit or are fired. 

Each state runs its own unemployment insurance program within federal guidelines, so the payouts provided and criteria workers must meet to be eligible for the program varies from state to state. Workers that qualify within their state receive a percentage of their former salary for a set period of time for 12 to 30 weeks. The insurance recipients are typically required to be actively searching for work to continue receiving the payments.

Unemployment insurance is a social insurance program, as opposed to a social welfare program. The ability to participate in a welfare program is predicated on income levels, while criteria like age or employment status shapes somebody’s eligibility to enroll in an insurance program.

Who Pays for Unemployment Benefits?

Companies contribute to unemployment insurance through state and federal taxes.  This sets it apart from programs like Social Security or Medicare, which rely on funds paid into by employees. Alaska, New Jersey, and Pennsylvania are the only states that also have limited employee taxes contributing to unemployment programs.

The two main taxes that generate UI funding are:

• The Federal Unemployment Tax Act (FUTA): Employers pay FUTA taxes on the first $7,000 of each employee's earnings. The tax rate is 6% of the taxable wages, but employers can also receive a credit of up to 5.4% if they pay their state unemployment taxes on time (potentially bringing the FUTA tax rate down to 0.6%). 
• The State Unemployment Tax Act (SUTA): Employers must pay a tax on a percentage of each employee's earnings, the rate of which varies state-to-state. Companies can find their SUTA rate on their state’s Department of Labor website or by contacting their state’s unemployment insurance information and assistance representatives. 

Together, the SUTA and FUTA create a fund that provides support to your employees if they are impacted by a downsizing.

What Benefits Are Included in Unemployment Insurance?

UI allows recently-employed individuals to continue to receive a portion of their salary for a set period of time. The length of time payments are issued depends on state-level criteria. Giving people the opportunity to collect roughly half of their previous salary can help mitigate the financial impact of unemployment as they search for a new job. On average, unemployment benefits come out to a little over $400 per week. 

Who Qualifies for Unemployment Insurance Payments?

Unemployment insurance is for those who lose their jobs as a result of circumstances that are beyond their control. This usually means their job was eliminated during a company restructuring or downsizing, so the termination of their employment had nothing to do with their behavior or performance.

If an employee gets dismissed for misconduct, for example, they are unlikely to qualify for UI payments. The same goes for if they choose to leave their position. Unemployment insurance benefits also do not extend to independent contractors and those who elect not to be a part of the workforce, like stay-at-home parents.

What Happens When an Employee Files an Unemployment Claim?

An unemployment claim usually unfolds in the stages:

1. The recently dismissed employee files an unemployment claim with the state unemployment insurance program offices.
2. The employer receives a notice explaining the claim and providing a deadline to contest it.
3. If the employer does not believe that the former employee is eligible for benefits, they can provide evidence (such as documentation showing that the employee was fired for misconduct or violation of company policy) to their state's unemployment department. 
4. The state unemployment department will review the evidence and make a final decision about whether the former employee will or will not receive unemployment benefits.

How Can Employers Lower Unemployment Costs?

While companies cannot mitigate their base tax obligations to UI, you can take steps to limit your obligation from increasing. A significant number of claims tied to an organization can lead to an increase in its SUTA tax rate, so avoiding claims can limit the company’s costs. 

Steps companies can take to avoid claims include: 

1. Growing Intentionally to Limit Layoffs: A strategic and stable growth plan can help you reduce the likelihood that your company will have to use layoffs to downsize or restructure. Of course unexpected crises happen that are out of your control and drive extensive layoffs (like a global pandemic). But this is not the same thing as over-hiring or creating positions that are misaligned with your long-term needs.
2. Contenting Ineligible Claims: Companies can dispute a former employee’s UI claim if they believe the worker is not eligible to participate in the program. Contesting a claim requires submitting evidence of their ineligibility, such as proof they did not work at the company for long enough or chose to leave their position. Limiting payouts to valid claims can restrict the number of claims tied to your organization. 
3. Retraining During a Restructuring: Instead of letting people go as your organization’s needs change, consider investing in on-the-job training (OTJ), professional development, and other upskilling programs that help your current employees meet your company’s evolving needs. Not only does this limit the number of potential UI claims, it can reduce the cost of hiring talent for your company’s new structure. After all, hiring internally is cheaper than a full-on external talent search. 

Taking Care of Your Employees, Start to Finish

Unemployment insurance helps people bridge the financial gap between one job and the next, but it’s not the only way companies can support valued team members. A strong benefits package is an important part of any talent management strategy, and you can choose to offer additional offboarding support like severance pay or several months of healthcare coverage. Taking care of your employees from hiring to parting can improve your employer brand, further bolstering your talent acquisition and retention work.

This is all part of taking care of your workforce, which pays powerful dividends. Companies leveraging the right wellbeing strategies are more than twice as likely to exceed their financial targets and more than five times as likely to have low healthcare claim costs. Workforce wellness is what we do at Wellhub, so speak with a Wellbeing Specialist today to learn how we can help you take care of your employees!

References

• CareerOneStop. Unemployment Benefits Finder. Retrieved May 1, 2023 from https://www.careeronestop.org/LocalHelp/UnemploymentBenefits/find-unemployment-benefits.aspx. 
• Center on Budget and Policy Priorities. (2023, May 1). Policy Basics: How Many Weeks of Unemployment Compensation Are Available? Retrieved May 1, 2023 from https://www.cbpp.org/research/economy/how-many-weeks-of-unemployment-compensation-are-available. 
• Cornell Law School. (2022, January). Federal Unemployment Tax Act (FUTA). Retrieved May 1, 2023 from https://www.law.cornell.edu/wex/federalunemployment_tax_act(futa).
• The Josh Bersin Company (2021, October 26). The Definitive Guide to Wellbeing: The Healthy Organization. JoshBersin.com. Retrieved May 12, 2023, from https://joshbersin.com/wp-content/uploads/2021/10/HW-21_10-DefGuide-The-Healthy-Organization-Defintive-Guide-.pdf
• Lester, Gretchen V. et al. (2020, August 28). Employer-Sponsored Benefits in the United States: The Past, Present, and Future. Compens Benefits Rev. Retrieved May 1, 2023 from https://www.ncbi.nlm.nih.gov/pmc/articles/PMC8689109/. 
• SHRM. (n.d.-b). What impact will unemployment claim shave on our business? - SHRM. https://shrm.org/ResourcesAndTools/tools-and-samples/hr-qa/Pages/whatimpactwillunemploymentclaimshaveonourbusiness.aspx  
• United States Department of Labor. Contacts for State UI Tax Information and Assistance. Retrieved May 1, 2023 from https://oui.doleta.gov/unemploy/agencies.asp. 
• United States Department of Labor. (2023, April 12). Unemployment Insurance Data. Retrieved May 1, 2023 from https://oui.doleta.gov/unemploy/DataDashboard.asp. 
• United States Department of Labor. Unemployment Insurance. Retrieved May 1, 2023 from https://oui.doleta.gov/unemploy/docs/factsheet/UI_Program_FactSheet.pdf. 
• United States Census Bureau. (2022, October 3). About program income and public assistance. Census.gov. https://www.census.gov/topics/income-poverty/public-assistance/about.html