Unemployment insurance provides temporary income to individuals who become unemployed through no fault of their own and meet state eligibility requirements. Each state administers its own unemployment insurance program, following guidelines established by federal law. The following are answers to commonly asked questions about unemployment insurance.
Q: How is an unemployment insurance program funded?
A: 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 2019, the FUTA tax rate is 6%. The federal tax applies to the first $7,000 you pay to each employee as wages during the year. State law determines each state's unemployment insurance tax rates.
Q: How is my company's state unemployment insurance tax rate determined?
A: For more established employers (usually those in business for at least three years), states will assign a tax rate based, at least in part, on the history of unemployment charges to that employer's account. This is known as an experience rating. The more charges an employer experiences against its unemployment account, the higher the rate will 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. Note: Some states allow employers to make additional contributions to buy down their unemployment insurance rate.
Q: What if we are a non-profit organization?
A: 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.
Q: Are independent contractors able to collect unemployment benefits?
A: No, bona fide independent contractors are generally ineligible for unemployment benefits.
Q: My company is facing high unemployment insurance costs. Can I simply reclassify my employees as independent contractors to avoid these costs?
A: Workers are presumed to be employees and cannot be classified as independent contractors unless they meet specific criteria set by federal and state law. The federal government and many states have tests to determine whether a worker is an employee or independent contractor for the purpose of unemployment insurance. These tests evaluate factors such as the amount of control the business has over the worker, whether the worker's services are an integral part of the business, and whether the worker makes their services available to other businesses. Only a small fraction of workers qualify for independent contractor status and the penalties for misclassification can be significant. Before you classify any worker as an independent contractor, make sure you have met all applicable tests. If you are unsure, err on the side of caution and classify the worker as an employee.
Q: When an employee leaves my company, do I have to provide them with unemployment paperwork?
A: 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.
Q: I'm new to owning a business and have never handled an unemployment insurance claim before. What is the process like?
A: 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 you receive such a notice, 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.
Q: We're experiencing a slowdown in our business and thinking of furloughing employees for a week. Would they be eligible for unemployment benefits?
A: Depending on the state, the length of the furlough, and the employee's work history, a furloughed employee may be eligible for unemployment benefits. For example, some states have waiting periods before individuals are paid unemployment benefits. In these states, the employees wouldn't be able to collect unemployment benefits unless the furlough is longer than the waiting period. Check your state law to see when an employee may be eligible for unemployment benefits because of a furlough.
Q: What if we implement a reduction in hours instead?
A: Employees who have their hours reduced may be eligible for partial unemployment benefits, typically a portion of the pay that they would have received if they were fully unemployed. Keep in mind that employees who quit as a result of a significant reduction in hours/pay may also be eligible for unemployment benefits. Check your state law for details.
Q: We just received notice that two of our former employees filed for unemployment benefits. One quit and the other one was fired for violating our conduct policy. Are they entitled to benefits?
A: 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.
In most cases, employees who experience a company-initiated termination are eligible for unemployment. However, in most states, if the employee was terminated due to "gross misconduct" (as defined by state law), he or she may be denied unemployment benefits. Eligibility rules vary, so check your state law for details.
Q: An employee is going on unpaid pregnancy leave and asked if she could collect unemployment benefits while on leave. Is she eligible for unemployment benefits?
A: Workers must 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 because of pregnancy, or any other reason, the employee would not be eligible for unemployment benefits. Note: Some states allow employees to collect temporary disability and/or paid family leave benefits for pregnancy and childbirth.
Make sure you understand and comply with the unemployment rules that apply to your company.