Unemployment Compensation Manual

:: Unemployment Compensation Manual :: General Overview ::

CAVEAT: SPECIFIC LAWS AND REGULATIONS VARY WIDELY FROM STATE TO STATE. THESE ARE ONLY GENERAL REMARKS. UNEMPLOYMENT TAX ADVISORY CORPORATION DOES NOT RECOMMEND NOR ADVISE ANY MATERIAL CONDUCT ON THE BASIS OF THESE REMARKS. FOR ADVICE RELATING TO YOUR SPECIFIC CIRCUMSTANCES, CALL UTA AT 1 800 998 8822.
 

GENERAL PROGRAM DESCRIPTION

Unemployment Compensation is designed to provide a temporary stipend to workers during periods of unemployment. The criteria is that a worker who has lost his job through no fault of his own shall be paid weekly benefits for a limited period to help tide him over until he can find new employment. Unemployment Compensation generally pays the worker about half the weekly wage he is accustomed to earning, up to a modest ceiling, for up to half a year. This period may be extended when unemployment rates reach a trigger threshold.

Unemployment Compensation is regulated by the federal government but administered by the various state governments.

The federal portion of this cooperative effort begins with compulsion. The federal government of course promulgates ample regulations regarding how the states shall run their programs; especially regarding benefit payment standards. If any state does not institute an approved unemployment program, the federal government will slap a 5.6% tax on the first $7,000 that each job in the state earns each year. But if an approved unemployment compensation program is run in that state, then the federal tax reduces to 0.6% (before surcharges). This is the FUTA tax. Most of the FUTA tax is supposed to be returned to the states to defray the expense of administering their unemployment systems. But the states will tell you that, instead of disbursing it, the federal government keeps the bulk of this money in Washington, as one of the ways in which they can pretend to have reduced their deficit. Efforts have been under way for years to force the feds to obey their own laws and return this money. Legislation has even been passed to force them to do so. Nothing seems to make it happen.

The states actually do the work. They tax employers, build a reserve fund to pay benefits, determine who is eligible, and pay the benefits. And they also spend a good deal of effort on job search programs in order to get these clients off their books and re-employed as soon as possible. In fact, most states would claim that this re-employment effort is their real brief. This is why they frequently name their state unemployment compensation agencies some such upbeat euphemism as "Re-Employment Department" or the most popular "Employment Security Department" rather than "Unemployment Department", as though an unemployment check somehow enhances employment security.

Most unemployment law is therefore state law, and because of this, it varies widely from state to state. For this reason, the remarks contained in this unemployment compensation manual can only be a general discussion, and should not be taken as specific to your state.

A few introductory remarks on this page will summarize some tax matters, outline coverage provisions, and distinguish between qualification and disqualification requirements.

The bulk of this manual deals with thorny eligibility considerations.


Unemployment compensation law and regulation is composed of five elements:

  1. Tax
  2. Coverage
  3. Eligibilty
  4. Qualification
  5. Disqualification
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TAXES

Only a handful of states ever tax the employee for unemployment at all. And when they do, it is because reserves are critically low. And even then, the rate of taxation is only a few hundredths of a percent, just a token amount. For all practical purposes, the employer pays the whole freight of unemployment taxes everywhere. The unemployment tax which the employer pays is a variable rate of taxation, based more or less loosely upon the experience of unemployment which this employer has had and is expected to have.

The tax should be paid to the state in which the work is done. If an employer does work in several states, he must establish an account for each state. If an employee lives in state X and the company is in state Y and the job site is in state Z, then the tax is to be paid to state Z.

Important: If you send workers to job sites in multiple states, then there is a very good likelihoiod that you are double or triple paying your unemployment taxes. You should read the War Story immediately following this.

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Taxable Wages:
Not all wages are taxed. Only the first so many dollars of wages paid to each worker each year at each place he works are taxed. Those are his taxable wages. Thus, if a worker earns $10,000 at each of three successive employers in a year, and the taxable wage base in that state is $8,000, then, in all, employers will have paid taxes on $24,000 of his wages. On the other hand, if he stays all year at one employer, then taxes will have been paid on only $8,000.
Reserve Ratio:
About two-thirds of the states calculate unemployment tax rates based upon a reserve ratio method. Each individual employer establishes a reserve account in their name (this account is only virtual -- no money is actually in it). The reserve account amounts to the sum of all the unemployment taxes which the employer has paid over the years, minus any benefits which may have been paid to ex-employees over the years. This reserve is divided by the average annual taxable wages over a period of years, (usually the last three years). The resulting ratio is applied to tables from which are derived the tax rates. Socialization cost factors are usually built into the tables, but more may also be added to the rate.

The general idea is to have a certain sum of money "in the bank" for each employee, already prepared to pay unemployment claims when needed.

This method is very popular with the states, first because they get the money up front, and second because their socialization cost factors are built into mysterious tables which hide them.

Benefit Ratio:
About a third of the states calculate unemployment tax rates based upon a benefit ratio. This ratio is derived very simply: The amount of benefits which have been paid to former employees over several years is divided by the amount of taxable wages paid to employees over several years. Certain socialization cost factors are added. The resulting tax rate is then applied to the taxable wages next year.

The general idea is that if the benefits divided by the wages equals this tax rate, then this tax rate times the wages will in turn defray the benefits.

This is a very simple, common-sense approach, but has two disadvantages to the states: First, it is reactive, since the state must pay the benefits up front, before they are defrayed; and, second, any socialization cost factors are plainly visible.

Benefit Wage Ratio:
Two states calculate unemployment tax rates based upon the opaquely termed benefit wage ratio method. It is similar to the benefit ratio method, except that, instead of totaling the real amount of benefits paid to former employees, then dividing by the taxable wages, the total of taxable wages paid to former employees who collected anything at all is summed, regardless how much or how little these persons actually collected, and then this total is divided by the taxable wages. At this point, the benefit wage method begins to resemble the reserve ratio method, for now the ratio is applied to a mysterious table to derive the tax rate. So if the taxable wage base is $8,000 and the worker collects five cents, the employer's account appears to have been charged $8,000.

The general idea is to tax the employer according to the number of former employees who collect.

This approach has the advantage of defying criticism by defying understanding.

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Reimbursable Methods:
Non-profit (501C3) employers are frequently eligible for a special unemployment tax status. Essentially, rather than being taxed at an earned rate like other employers, they may elect to reimburse the state for benefits paid on former employees. Depending on their unemployment history, such an election may or may not save considerable sums. The reimbursable employer may also have to give up certain advantages, however, such as relief from charges.

The biggest advantage of this approach is that the reimbursable employer does not have to pay for any socialization cost factors. All he pays is what he costs the state.

Raising Taxes:
There are two methods of raising taxes. One is to raise the tax rate. This is not popular, because most people, when they see a higher tax rate, may catch on that taxes have been raised, which is not something a politician is wont to brag about. The other method is to raise the taxable wage base. This method is much more palatable, because the tax rate remains the same, even while the amount of tax collected increases. Many states have even enacted statutory automatic annual taxable wage base increases, by tying the wage base to the average wage paid in the state. This way, the tax receipts go up every year, while rates remain the same, and no legislator must admit to having voted to do it.
Independent Contractors:
Employers frequently attempt to escape taxes on workers of all sorts, from masons to ecdesiasts, by claiming that these workers are independent contractors. The case law is full of state agencies taking these employers to court to collect the taxes. The employers almost never ever win. The rules governing who is or isn't an independent contractor are many, subjective, and vague. If, out of the many rules, one vague rule can conceivably subjectively hold the employer liable for taxes, then that is just what will happen. Even a signed agreement between the employer and the worker will not help but in one state.
Employee Leasing:
One of the frequently touted advantages of employee leasing is lower experience rates. A company with high experience rates may lease employees from a firm with lower experience rates, expecting to reap the difference. States are well aware of this strategy to avoid taxes, and have been cracking down on it for several years. Leasing companies and their clients should check into the latest legislation in your state before assuming that lower rates will result.
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COVERAGE PROVISIONS

Generally, all services performed for an employer by an employee for wages are covered under unemployment compensation for tax and benefit purposes unless specifically excluded.

Not everyone is covered by unemployment compensation, however. Some of those who are not covered simply are not included in the scheme of the thing at all, such as employees of the federal government. They simply do not participate in the same scheme. Many, however, are not covered in a virtual sense, such as pensioners. Yes, they work for en employer who is included in the scheme. Yes, they have had taxes paid on their wages. Yes, they may apply for unemployment benefits. Yes, they may even qualify for the benefits. But their pension is deducted from their benefit, so that they may never actually collect a dime. They are, to all intents and purposes, not covered, in a virtual sense.

Federal Government:
Federal government frequently exempts itself from onerous laws or regulations which it imposes on the rest of society, and unemployment compensation is no exception to this rule. So employees of federal government simply are not covered by regular unemployment compensation. (There is a separate federal program which may cover them.) Employees of states and municipalities generally are covered.
Religious Organizations:
Employees of churches and religious organizations in some states are simply not covered. On the other hand, even in those states where specifically excluded from taxation, the states will frequently grasp at pretexts on which to tax the organization. For example, the state may say that a soup kitchen operated by a church is not a religious but a charitable function, and therefore taxes should be paid on the employees of the kitchen.
Farm Workers:
Agricultural workers, especially at small farms, are generally simply not covered.
Servants:
So-called "domestic employees" are generally simply not covered when they do not earn more than a certain amount.
Business Owners:
Business owners, depending on the state, may be either simply not covered or else virtually not covered by unemployment compensation, even though they may still have to pay the tax on their own wages. This may also extend to partners, spouses, family, officers, even to policy makers.
Self-Employed:
The self employed are generally not covered by unemployment compensation in the virtual sense. Any period during which they have neither work nor earnings is considered to be part and parcel of their self-employment. Looking for new business is considered part of their business. And so they virtually cannot collect benefits.
Pensioners:
Unemployment compensation benefits pay about half a worker's usual weekly income, up to a modest ceiling. Any earnings while unemployed are deducted either dollar for dollar or in some pro-rated fashion from the benefit. If a pension, when deducted in this fashion from his benefit, leaves no remainder for the pensioner to collect, then the pensioner is virtually not covered by unemployment. This includes social security recipients. And, yes, the state will still gaily collect the tax to defray a benefit which it will never in fact pay.
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Independent Contractors:
Employers may not exclude workers, nor may employers agree with workers to exclude themselves, from coverage when the workers services fall within their state's statutory test for coverage. Simply designating the workers as independent contractors does not make them so. Any agreements or contracts between employer and worker which attempt this will fail.

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ELIGIBILITY PROVISIONS

To be eligible to collect unemployment compensation, a covered worker must meet certain work and earnings requirements.

Base Period:
With few exceptions, a worker's base period is defined as the first four of the last five completed calendar quarters. So, for example, from right now, if you go back to the end of the last quarter, then go back from there five quarters, you will be at the beginning of your base period. Come forward four quarters; that is the end of your base period. Your base period is those four quarters. This period obviously shifts forward each three months.

The worker must meet certain work week and / or earnings requirements during his base period in order to be eligible for unemployment compensation benefits.

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Base Period Weeks:
Many states require a certain amount of weeks of employment during the base period. The exact number of weeks varies so widely that it cannot be summarized.
Base Period Earnings:
All states require a certain amount of earnings during the base period. The exact amount varies so widely that it cannot be summarized. These earnings may also have to be spread over two separate quarters in a certain proportion.
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QUALIFICATION PROVISIONS

To qualify for unemployment benefits, a covered and eligible worker must generally be unemployed through no fault of his own, as well as able, available, and searching for work. Nearly every word of this last statement has a particular meaning, various ramifications, and peculiar exceptions, all of which lead us far astray from the plain English meaning of what qualifies a claimant.

You will find more discussion concerning these provisions in the remaining pages of the manual, and especially here and here.
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DISQUALIFICATION PROVISIONS

To qualify for unemployment benefits, a covered, eligible, and qualified worker must not be subject to disqualification.

Disqualification may occur as a result of a number of different special circumstances. For example, a worker who qualifies in every other regard may be denied benefits as a penalty for fraud.

You will find more discussion on these topics in the remaining pages of this manual, and especially here.
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BENEFIT CHARGES

It's not who gets the money; it's who pays the money.

Employers too frequently fixate upon the issue of eligibility. They may fight a completely hopeless case tooth and nail to prevent a claimant from collecting benefits, when it would have been a rather simple matter for them to just get out of paying for the benefits which the claimant will inevitably collect. Worse yet, with some of these cases, they may never have been charged at all anyway; so they are completely wasting time and effort.

Let us carefully distinguish between eligibility and chargeability.

Eligibility:
Eligibility determines whether a claimant collects benefits.

The bulk of this manual deals with many of the endless ramifications affecting eligibility issues, such as misconduct, voluntary quits, work search requirements, etc. This is a complex subject where every rule entails numerous exceptions, twists, and turns. A general overview of eligibility is offered here

Chargeability:
Charegeability determines who pays the freight.

This part of the equation is relatively simple. Generally speaking, the account of the employer for whom the claimant worked during his base period will be charged for benefits paid to the claimant. This means that, if a worker files a claim for unemployment benefits today, and your company is an employer for whom the claimant worked during the first four of the last five completed calendar quarters, then your company's unemployment compensation account will be charged. This will happen even if your company is not the employer who discharged the worker. If he only worked for your company during part of this period, then usually only part of his benefits will be charged to your company's account.

Relief From Charges:
Most states offer a way to escape these charges under certain conditions. This escape is generally termed "relief from charges". For example, if a worker employed by your company for two years quit voluntarily to take a better job at another company, but was laid off from that other employment five months later, your company would be charged as a base period employer. However, since your company is not the one who laid him off, your company could in all likelihood apply to be relieved of those charges.

Relief from charges does not affect eligibility. The claimant still collects. The signal difference is that your company does not pay. Again, he collects; you do not pay. This is the best of both worlds.

Separate Departments:
The department which decides whether the applicant collects unemployment benefits is not the department which decides which company shall be charged for the unemployment benefits. The eligibility department is the local job service or unemployment department, possibly in the same town as the employer, almost certainly found in the blue pages of the phone book, almost certainly found on the notice of claim sent to the employer. The chargeability department is apt to be in the state capitol and not at all likely to be found in the phone book nor on the notice of claim. The chances that this local claim department will ever recognize and report facts affecting chargeability to that charge department is remote at best. These two offices may never talk to one another.

Here is a common example: A worker employed by company A for two years then quits voluntarily to take a better job at company B, but is laid off from company B five months later. Company A is charged as a base period employer. Company A complains to the local unemployment office that this worker should not collect because he quit voluntarily from his employment with company A. The local unemployment office determines that the worker is, indeed, eligible for benefits because he has been separated from his employment through no fault of his own. Company A's account is debited for the charges. Nobody at the local unemployment office calls up the state capitol to inform the charge office that company A should be relieved from charges. It's not their job. Company A gives up, thinking they have lost the case.

Re-iterating:
Again, do not assume that because a claimant collects benefits your company will have to pay. Neither should you assume that in order to avoid charges you must prevent the claimant from collecting. Depending upon your state and the circumstances, there may be any number of scenarios whereby your company can escape the charges while the claimant collects.
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CAVEAT: SPECIFIC LAWS AND REGULATIONS VARY WIDELY FROM STATE TO STATE. THESE ARE ONLY GENERAL REMARKS. UNEMPLOYMENT TAX ADVISORY CORPORATION DOES NOT RECOMMEND NOR ADVISE ANY MATERIAL CONDUCT ON THE BASIS OF THESE REMARKS. FOR ADVICE RELATING TO YOUR SPECIFIC CIRCUMSTANCES, CALL UTA AT 1 800 998 8822.