Unemployment insurance is a two-fold regulated and financed payroll tax component. While its federal source has a fixed rate, there is fluctuation in the unemployment tax rates depending on the state in which a company operates. In addition, this tax rate may be unique depending on the company since it is set according to the so-called “experience rating,” i.e. the number of unemployment claims and benefits successfully awarded to its former employees. The obvious conclusion is this: companies that lay off or separate more employees through no fault of their own will likely have to pay more in unemployment tax than those with higher retention levels.
Every employer should seek to find an efficient solution to address the risks brought on by unemployment claims leading to higher tax liability. A comprehensive unemployment insurance compliance strategy is a tool to establish and adhere to, covering all the aspects of human resource management from day one of a new hire. Its purpose is not only to avoid excessive unemployment insurance costs but also to prevent unnecessary benefit payments, remain compliant with various unemployment insurance regulations and best practices, and save thousands of dollars per year.
Unemployment Insurance Taxes
Unemployment benefits are secured and administered through federal and state legislation, where each state is in control of its unemployment insurance program and may impose different requirements and regulations.
The taxes employers pay into the unemployment funds stem from stipulations of the Federal Unemployment Tax Act (FUTA) and the State Unemployment Tax Act (SUTA). FUTA tax amounts to 6% of the first $7,000 an employee earns and allows the employers who pay their state unemployment taxes on time to reduce this liability to 0.6% of the $7,000 wage, which means that FUTA may ideally amount to $42 per year.
This makes the federal unemployment insurance rate a symbolic cost. On the other hand, the legislation in individual states may impose different SUTA criteria on employers and minimum eligibility for workers, as well as the level of taxation, duration of benefits, and other requirements. For companies that are spread over multiple states, there are additional considerations and possibly additional unemployment-related taxes. In three states, the unemployment tax is imposed on both employers and employees. Some entities may be exempt from SUTA, including non-profit, religious, and educational organizations.
Key Components of an Unemployment Insurance Compliance Strategy
The complexity and variations of unemployment insurance make it a rather demanding task for employers to confidently master. With the ultimate goal of running a successful business in mind, companies should be in control of their tax liabilities to avoid the impact of erroneous unemployment insurance (UI) claims, while remaining in absolute compliance with unemployment regulations.
This challenge is best addressed through a comprehensive and systemic approach by establishing an unemployment insurance compliance strategy on the basis of solid and up-to-date information and regulations applicable in a particular state.
By carefully considering all the elements that go into the management of the unemployment insurance program, any company can limit unemployment insurance risks and protect its bottom line. Some of the key components of the unemployment insurance compliance strategy are listed below.
Communicate Company Rules and Regulations to Employees from Day One
Every hire needs to be aware of the organization’s rules, regulations, and expectations set by the employer, including possible disciplinary measures that may preclude termination. By providing them with a written set of policies, employers are securing effective communication that leaves no space for misunderstandings from day one.
These rules should be consistently applied. Expectations and rules are the same for everyone, at all times. Employees must also acknowledge that they have received a copy of the rules and regulations document by providing their signature to be kept in their personnel file. In case they refuse to sign this acknowledgment or refuse to sign any disciplinary warning at any time, employers are advised to file a note of it and have a secondary witness sign the document to acknowledge the refusal.
Document Everything and Document Properly
This guideline for managing unemployment insurance may seem like a tough one to follow because it is time demanding and can be tedious. However, it may make a huge difference in the case of an unemployment dispute. It can help employers win the case by simply providing a document required to prove their stand.
This should be reason enough to motivate employers to document every step of the employment relationship. Starting from employment policies, job descriptions, offers, and contracts, through pay scales and performance evaluations, to possible policy changes, warnings, resignation and termination letters, and witness statements, the employee file should contain everything of relevance.
Do Not Discharge Employees Without Issuing a Prior Warning
However stressful and unpleasant the act of discharge is for all parties involved, it is vital for employers to take the necessary steps leading to it in order to protect the company and avoid overpayments to claimants not entitled to unemployment. With the exception of cases where a violation of company rules or regulations justifies immediate termination, there should be feedback provided to an employee and a warning issued advising the employee that their job is in jeopardy. This should be completed prior to the employee being fired and in line with guidelines set and known to the employees.
Have a Thorough Understanding of Unemployment Insurance System State Specifics
Understanding how the individual state unemployment system functions set the solid groundwork for every efficient unemployment insurance compliance strategy.
The specifics of the state legislation may refer to numerous aspects of the unemployment system. For instance, some states have set a minimum duration of employment as a criterion for eligibility to receive unemployment benefits. In some states, the minimum to be fulfilled is related only to a certain amount of compensation to be earned. It is the employer’s responsibility to understand these regulations and observe them at all times by promptly filing all the hiring and separation documentation. Under the UI Integrity Law, the employer must respond timely to the state workforce agency’s requests and must submit complete and accurate information regarding the reason for separation so that the State may determine the separation causes and issue a determination as to whether a former employee is entitled to unemployment benefits.
Unemployment Insurance Compliance Strategy in Practice
Creating an unemployment insurance compliance strategy requires an investment in time and a significant effort. Its achievements are reflected in a reduced or maintained SUTA rate, success in managing unemployment claims, additional savings, and an overall smoother unemployment management process.
Besides careful and prudent hiring, employers have many measures at their disposal to ensure the success of the strategy. Additionally, employers can explore partnering with an experienced unemployment cost management provider for error-free processing of claims, better compliance, and eliminating the associated operational risks.
Fiona Moran is an unemployment compensation expert with Experian Employer Services who has been helping clients maximize success and minimize unemployment costs for 35+ years. Her extensive knowledge and experience allows her to assess unemployment management procedures and workflows to improve quality and efficiency. As Vice President of Unemployment Service & Delivery, Moran analyzes needs to install the correct service team and develop customized partnerships, providing quality work and superior customer service. Moran has improved unemployment operations for clients during her time with several employer solution providers including Corporate Cost Control, TALX Corporation (subsequently Equifax), and Jon-Jay Associates.