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From contesting and approving claims to knowing the effect of claims on business taxes, this guide will help employers understand how it works when laid-off employees file. — Getty Images/FG Trade

No company ever wants to lay off employees, but it’s sometimes necessary to keep businesses functioning. This has especially been true in 2020, with the COVID-19 pandemic creating painful conditions that have pushed businesses to let employees go.

While letting employees go is a normal function of a business, it can sometimes be challenging to understand exactly how the process is supposed to work, what responsibilities employers have, what taxes are owed and more. Here are questions and answers to help employers better understand what happens when former (or furloughed) employees file for unemployment claims.

What is unemployment insurance?

First, let’s discuss the basics of unemployment in order to give clarity before going a little deeper. Unemployment insurance effectively provides payments to workers who have been let go due to a factor out of their control, usually when they have been laid off, lost seasonal work or have been furloughed. In most states, laid-off workers can receive 26 weeks of unemployment benefits and will receive a set percentage of their average annual pay.

Programs to provide unemployment payments are managed at both the federal and state levels, and businesses fund these programs by paying state and federal taxes. In some states, employees also pay a state-level tax to contribute to unemployment funds they may one day use themselves.

Can a fired employee collect unemployment?

Generally speaking, unemployment is only available for employees who have been laid off through no fault of their own. If an employee was fired for misconduct or company policy violations, they are likely ineligible to collect benefits.

What is an unemployment claim?

When an employee has been let go or furloughed, they may file an unemployment claim with the state they live in. This claim is basically a notification to the state, the federal government, and the previous employer that they are seeking unemployment insurance benefits.

What should a business expect after an unemployment claim is filed?

When a person files an unemployment claim, the former employer will receive a notice that this person filed the claim. They will then be expected to validate the claim by providing details, such as:

  • Whether the employee is working full-time, part-time or not at all.
  • Why the worker left, including whether they were laid off (lack of work), voluntarily quit, were fired or left because of a trade/strike dispute.
  • Whether they refused employment.
  • Is legally able to work in the U.S.
  • Is receiving any form of compensation, such as a pension or severance pay.

If the worker’s claim is valid, you can simply accept the claim. But if they are making an invalid or misleading claim, you can contest it.

What happens when you contest an unemployment claim?

If a former employee has submitted an inaccurate claim, you will likely want to contest it via the first notice that the state sends regarding the claim. Claims in most states should be contested within 10 days to avoid penalties or potential tax increases. If a company is contesting a claim for an employee who was fired with cause, they will need to provide proof that the employee violated company policies. Once the claim has been contested, both you and the claimant will receive a “Notice of Determination” that will show whether the unemployment claim has been accepted or not by the state. Even if the employee loses the determination, they may still be able to appeal the decision, so keep that in mind.

How do unemployment claims impact business taxes?

As mentioned above, unemployment insurance funds are derived from state and federal taxes that are paid for mostly by businesses. Most businesses pay both Federal Unemployment Tax Act (FUTA) taxes and State Unemployment Tax Act (SUTA) taxes.

No matter what state you are located in, you’ll need to pay set FUTA taxes, which amount to 6% of the first $7,000 each employee earns per calendar year. This means the maximum you’ll pay per employee is $420. In some states, you’ll be eligible to receive a tax credit later where you’ll get some of these payments back.

When it comes to SUTA taxes, how much you owe is usually based on how many employees you have, how much you’ve already paid into the unemployment insurance system and the number of your former employees that have claimed unemployment benefits. Each state has its own calculations. To find out the detailed rules surrounding your state’s unemployment taxes, contact your state government labor office.

Has COVID-19 changed employer responsibility for unemployment insurance?

Finally, one last thing that’s good to understand is how the COVID-19 pandemic has changed the unemployment landscape. In most states, employers still have the same responsibilities and tax obligations. One exception is Georgia, where employers must now file a report of what workers have been furloughed or had hours partially reduced.

However, while employers may not need to change how they normally deal with unemployment claims, they should be aware that the Coronavirus Aid, Relief, and Economic Security (CARES) Act changed unemployment rules for 2020. One of the big changes was the federal government providing an extra $600 a week through the end of July 2020 to those receiving normal unemployment benefits. One additional thing that the CARES Act did was adding Pandemic Unemployment Assistance (PUA), which makes it possible for people not normally eligible for unemployment to apply for benefits through the end of 2020, including business owners, self-employed workers, and 1099 earners.

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Published June 01, 2020