Face the unemployment insurance challenge

When an employer opens a quarterly statement of benefit charges and discovers the unemployment insurance account was docked for a claim from an employee who quit more than a year before, anger and confusion usually result.

It’s not an unusual scenario. ABC Company hires an employee only to have the employee quit for one reason or another. The employee goes to work for a XYZ Corporation, is separated from the new employer and files an unemployment insurance claim. The employee is unemployed, and ABC Company is responsible for a hefty unemployment claim. That put ABC Company’s account in deficit and threatened to drive up their unemployment insurance tax rate — even though the former employee left the company voluntarily.

Most employers pay attention to budgets. So when a claim like this comes, they ask whether or not they really want to hire new employees.

Many small business owners and managers struggle to understand how unemployment insurance premiums are determined. The system is anything but simple and varies by state, but can be mastered and managed. Above all, owners should know the more unemployment claims a company generates, the more it has to pay into the system.

The federal government charges employers a base rate of 0.6 percent of the first $7,000 of each employee’s wages each year. That federal money is used to cover the administrative costs for state unemployment programs, a loan program for states that don’t have enough in their unemployment trust funds to pay claims and extended unemployment benefits during economic downturns. When a state doesn’t repay its loans, the federal government raises the employer tax rate in annual increments of 0.3 percentage points.

While employers have no control over federal unemployment insurance rates, they can mitigate state costs. In general, states charge an unemployment insurance tax on part of each employee’s income based on the company’s unemployment history. Most states calculate a business’s tax rate each year based on a formula that considers payroll size, the amount the company has paid into the system and amount of unemployment benefits former employees have collected. That means a worker who collects unemployment can push his former employer — or multiple former employers when there are several over the state’s base period — into a higher unemployment insurance tax bracket, often for several years. A typical unemployment claim against a business increases the amount that business pays in state premiums in a range of $4,000 to $7,000 over a three-year period. But it can be much worse.

Most employers have a computed rate based on the experience of the business. New businesses (non-construction) have a beginning rate of .0170 base rate and .0043 bond principal rate for a combined rate of .0213. Construction and trades have a higher base and bond principal rate.

The premium rate for most employers that aren’t new employers is primarily a function of three components:

Premiums paid — all contributions made by the employer over the life of the account.

Benefits charged — All benefits charged to the employer over the life of the account.

Average annual payroll — The average annual chargeable wages reported during the previous three state fiscal years.

Ensuring accurate and proper payments is important for all employers, but is especially significant for small to midsize employers because of the effect on smaller businesses when payments aren’t made properly.

Due to economies of scale, the account and rate for smaller employers can be more heavily affected by benefits charges than that of larger employers. However, it is the responsibility of all parties, regardless of business size, to engage in accurate reporting.

Hiring the right people is the first step in managing unemployment costs. But if you make a mistake, act quickly. In Colorado, an employer becomes liable for unemployment benefits after paying $1,500 of wages in a calendar quarter or employing one person for any part of a day in a 20-week period.

If you recognize you’ve made a bad hire, the sooner you fire them, the better.

After an employee starts, he or she must be treated according to the employee manual. Any problems should be handled within a system of well-documented progressive discipline: warnings, suspensions and termination. Theft and violence should lead to immediate termination.  Unemployment adjudicators want to see that people had a chance to change.

Each warning should be written to show the employee broke a rule he knew about, not that he performed poorly. An employee fired for misconduct can be denied unemployment benefits. One fired for incompetence can collect.

Workers who quit voluntarily should be asked to give written notice of the reason for their departure to avoid a later claim. Documentation is critical to success in every claim. Every discussion you have with an employee should be written down, and employees should sign any warnings. It can get kind of ridiculous, but will be very helpful when a claim is filed.

The many levels of appeals can eat up time, and small businesses often lose claims because they don’t have the manpower or endurance to keep up with the paperwork and hearings. Some businesses hire specialists to monitor their claims and help fight those they want contested.

We often hear this type of story: “When I first came into this business 35 years ago, I thought I was smart enough and could do it all myself. I went to a few unemployment claims hearings and realized it was a game, and you have to play it on a regular basis to have a chance to win every once in a while.”

For those who go it alone, the most important thing is to return all required forms on time and attend every hearing, bringing written documentation. Failure to do so will typically lead to an automatic win for the former employee.

Finally, small business owners should monitor their insurance statements to catch errors and verify they aren’t being charged for ex-employees who lost claims.

A lot of errors are made by state departments of labor, so it’s important to audit. Government numbers show that in 2010, 11.2 percent of unemployment insurance outlays were done improperly.