Federal and state unemployment compensation programs are intended to provide partial wage replacement to certain unemployed workers. In addition, the programs provide employers the benefit of maintaining a trained workforce in the local labor market, available to return to work when needed. Here are some key facts about the programs that every employer should know.
Structure
Each state designs its own unemployment compensation program within the framework of the federal requirements. State law sets the benefit structure (e.g., eligibility/disqualification provisions, benefit amount) and the state tax structure (e.g., state taxable wage base and tax rates).
Most states currently pay a maximum of 20 to 26 weeks in unemployment compensation, although Massachusetts pays up to 30 weeks. A few states predicate the maximum number of weeks payable on the state’s unemployment rate. In periods of very high and rising unemployment in individual states, benefits are payable for up to 13 additional weeks (20 in some cases), up to a maximum of 39 weeks (or 46 in some cases).
Funding
With the exception of three states, unemployment benefits are funded exclusively by a tax imposed on employers. The three remaining states (Alaska, New Jersey, and Pennsylvania) require both employer and (minimal) employee contributions.
Most employers are required to pay both federal and state taxes to fund unemployment insurance programs. The Federal Unemployment Tax Act (FUTA) authorizes the collection of federal unemployment insurance taxes. For 2024, the FUTA tax rate is six percent. The federal tax applies to the first $7,000 you pay to each employee as wages during the year.
Experience rating
State law typically determines each state's unemployment insurance tax rates based upon their experience in the unemployment compensation system; that is, the length of time they have operated in the state, the amount of unemployment tax paid, the amount of unemployment benefits paid to their workers, and the employer’s industry. This is known as an experience rating.
The more charges an employer experiences against its unemployment account, the higher the rate will likely be. States maintain their own formulas for determining an employer's experience rating.
If an employer has paid wages for a relatively short time, and does not qualify for an experience rating, the state may assign a new account rate to the employer. State tax rates may also be affected by the overall condition of the unemployment insurance fund.
States typically give non-profit organizations the option of using the reimbursable method of contributing. Under this method, the non-profit organization must reimburse the state unemployment program for the amount of benefits charged to their account, instead of being subject to a state tax.
Note: Some states allow employers to make additional contributions to buy down their unemployment insurance rate.
Eligibility
Most employees are covered by unemployment compensation through state or federal law, with a few exceptions. While eligibility requirements for unemployment compensation vary by state, most states' eligibility criteria center on the amount of time worked, the amount of wages earned, and the reason the employee is no longer employed. Ongoing eligibility requirements include being able to work, available for work, and actively searching for work.
Time worked and wages earned
To be eligible for unemployment compensation, individuals must meet the state’s requirements for time worked and wages earned during a specified period of time called the base period. Generally, the base period is the first four of the last five completed calendar quarters.
Note: If there are insufficient wages to establish a claim using the base period, an alternative base period may be used. The alternative base period is the last four completed quarters immediately preceding the effective date of the claim.
Reason for termination
To be eligible for unemployment compensation, individuals must also be free from disqualification for such acts as voluntary leaving without good cause, discharge for misconduct connected with the work, and refusal of suitable work.
In most cases, employees who experience a company-initiated termination are eligible for unemployment benefits. However, in most states, if the employee was terminated due to "gross misconduct" (as defined by state law), they may be denied unemployment benefits. Eligibility rules vary, so check your state law for details.
While most employees who quit aren't eligible for unemployment benefits, the fact that an employee quits doesn't always disqualify them. To receive benefits, employees who resign must generally show that they quit for "good cause" (typically attributable to the employer).
While "good cause" varies by state, employees who quit because of retaliation, harassment, medical reasons, relocations for domestic violence, or a significant reduction in hours/pay, for example, may be eligible for unemployment benefits.
Ready, willing, and able to work
Workers must also be ready, willing, and able to work, and actively looking for work, in order to collect unemployment benefits. If an employee is unable to work for some reason, such as an employee going on unpaid pregnancy leave, the employee wouldn’t be eligible for unemployment benefits.
Note: Some states allow employees to collect temporary disability and/or paid family leave benefits for pregnancy and childbirth.
The process
Several states require employers to provide a separation notice detailing, among other things, the reason for, and date of, the separation. In some cases, these notices are given to the employee, but some states require employers to send the notices directly to the state unemployment agency.
Some states also require employers to provide written information about unemployment insurance benefits or an unemployment insurance pamphlet to employees at the time of separation. Additionally, most states require employers to display an unemployment insurance notice in the workplace. Check your state requirements to ensure compliance.
When claims are filed, employees are asked questions about their residence and former employment. Employment-related questions address: the length of employment with their previous employer, the reason for leaving their previous job, and wages earned.
When an individual files a claim for unemployment benefits, the state unemployment insurance agency will generally notify the last employer and provide that employer with the reported reason for separation. If the employee worked for an employer during the base period, employers will receive a base period claim with the opportunity to request relief of charges, if the separation is protestable.
Responding to claims
If you receive notice that a former employee has filed an unemployment claim, review it carefully to determine whether a response is required, such as you have reason to challenge the employee's claim or the state requires additional information from you.
Always respond to such notices promptly and in the time frame required. Once the agency has gathered the information it needs, it will make a determination as to the individual's eligibility for benefits. This determination can be appealed by either the individual applying for unemployment benefits or the employer. If it is appealed, a hearing will be held.
Employers should keep track of the facts and documentation surrounding each separation, including disciplinary notices, resignation letters, and other evidence demonstrating the reason for termination.
Conclusion
Make sure you understand and comply with the unemployment rules that apply to your company.