How Are Employers Affected by Unemployment?

The first unemployment insurance programs in the United States were established in the 1930s, and they still play an essential role today in providing short-term aid to jobless workers while they seek new employment. While the current program significantly impacts employees, it also affects businesses.

Here are some common questions and answers surrounding how employers are affected by unemployment insurance.

How FUTA and SUTA taxes work 

Employers have a few responsibilities when it comes to unemployment insurance, and the biggest one is financial. Most businesses pay both Federal Unemployment Tax Act (FUTA) taxes and State Unemployment Tax Act (SUTA) taxes, which primarily fund all unemployment programs.

Business owners in every state must pay FUTA taxes. This amounts to 6% of the first $7,000 each employee earns per calendar year, for a maximum annual contribution of $420 per employee. In some cases, you may be eligible to receive some of those payments back later via a tax credit.

As for SUTA, the amount your business will owe depends on the number of employees, how much you’ve already paid into the unemployment system, and how many of your former employees have claimed benefits.

Another rule that could affect you, especially if you have remote employees, is that companies must pay state unemployment taxes to every state in which their employees work. To find out the rules surrounding a given state’s unemployment taxes, contact that state’s government labor office.

How claims affect your rate

Fortunately, there is some crossover between FUTA and SUTA responsibilities. SUTA contributions can reduce your FUTA liabilities. “Employers who pay state unemployment taxes on time and in full can usually claim a credit of up to 5.4% against FUTA,” wrote Deel. “This means most employers pay an effective FUTA rate of just 0.6%.” 

Ultimately, it’s in the employer’s best interests to keep employee turnover low. The more employees leave your company, the higher your SUTA rates will be. States give businesses an experience rating. “The more former employees you have claiming unemployment, the more impact it will have on your experience rating—and the higher your rates will be,” wrote Remote.

How are employers impacted by unemployment claims from former employees?

Unemployment claims impact your business in a few ways. First, when a former employee files a claim for unemployment, your business will be required to validate or contest the claim. As the former employer, you will typically receive a notice from the state or federal unemployment agency when someone files for unemployment. The notice will ask you to validate or correct the details of the claim, 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 or strike dispute.
• Whether they refused employment.
• If the employee is legally able to work in the United States.
• If the employee is receiving any form of compensation, such as a pension or severance pay.

If the worker’s claim is valid, you should accept it. But if the person’s claim is invalid (such as if you fired them with cause or they voluntarily left the company), you can contest it.

Second, unemployment claims can impact the amount you pay in unemployment insurance taxes. Since SUTA tax rates are determined in part by the number of your former employees who have claimed benefits, approved unemployment claims will likely raise your taxes.

[Read more: Can an Employer Deny Unemployment?]

What happens if an employer contests an unemployment claim?

You have some work to do if a former employee submits an inaccurate claim and you want to contest it. Namely, you will need to submit documentation to show why the claim is not accurate. In some cases, you may also need to attend a hearing where you are interviewed about the facts of the claim.

In most states, a business must contest an unemployment claim within ten days of receiving the notice, or face potential penalties or tax increases. Once the claim has been contested, the company and the former employee will each receive a “Notice of Determination” stating whether the claim has been accepted (or not) by the state. Even if the former employee’s claim is denied, they may be able to appeal the decision.

Do employees pay an unemployment tax?

Business owners pay the vast majority of taxes that fund federal and state unemployment programs. However, three states—Arkansas, New Jersey, and Pennsylvania—require employees to pay a small portion of state unemployment insurance taxes.

Can a fired employee collect unemployment?

If you’ve ever wondered whether you should expect unemployment claims from fired employees, the answer is, it depends. Unemployment insurance is generally only available for workers who have been laid off through no fault of their own, such as due to lack of work or a facility closing.

If an employee was fired for misconduct or a company policy violation, they are most likely ineligible to collect benefits. Examples of causes for termination that would exclude an employee from collecting unemployment insurance include:

• Stealing.
• Excessive unexcused absences.
• Falsifying records.
• Sexual harassment.
• Abuse of other employees.
• Criminal behavior.

[Read more: Can Fired Employees Collect Unemployment?]

What to do when a former employee files a claim

When a former employee files a claim through a state unemployment agency, your business will receive a document called “Notice of Unemployment Insurance Claim Filed.” This is to verify the former employee’s reason for no longer being employed. 

Each state’s form varies slightly, but you’ll be asked to verify: 

• Your business name.
• The employee’s reason for separation.
• Compensation information. 

The form will give you a deadline, usually 10 business days, to submit all the relevant information. If you decide to contest the claim, you will also need to do so quickly. That means providing evidence and documentation to back up your case. For example, to contest a claim because the employee was fired with cause, you’ll need to provide documents to show proof of misconduct, such as a performance improvement plan.

Once a claim has been officially evaluated, both the company and the claimant will receive a “Notice of Determination” with the agency’s decision. 

Unemployment FAQs for employers

What is unemployment insurance?

Unemployment insurance provides temporary benefits to eligible workers who lose their jobs through no fault of their own, such as through business closures or layoffs. 

Do employers have to pay unemployment taxes?

Yes, most employers are required to pay unemployment taxes or contributions, though the rules and rates vary by state.

What should I do when an employee is separated?

Document the reason for separation carefully, keep final pay records, and respond promptly to any unemployment claim notices.

Why did I receive a claim notice?

Claim notices are sent to employers to verify wages, job separation details, and possible eligibility issues.

Do I need to respond to the notice?

Yes, usually within the deadline listed on the notice. Failing to respond can affect your tax account or increase the chance that benefits are charged to your account.

What information should I provide?

Typically, the notice will ask employers for the employee’s dates of employment, wage history, job title, reason for separation, and any documentation supporting the employee's misconduct, resignation, layoff, or discharge.

Can former employees still get benefits if they quit or were fired?

Eligibility depends on state law and the reason for separation. Quits, misconduct, and layoffs are handled differently.

What is a benefit charge?

A benefit charge is the amount of unemployment benefits that may be assigned to an employer’s account, depending on state rules and the separation reason.

How can I reduce unemployment claims?

Use clear policies, document performance issues, apply rules consistently, and keep accurate records of separations and warnings.

What records should I keep?

Keep payroll records, schedules, attendance logs, performance reviews, disciplinary notices, resignation letters, and separation paperwork.

Rebecca Rosenberg contributed to this article.

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