The Real Cost of Unemployment Claims to Companies
Updated : August 27th, 2012
Employers are financially responsible for the unemployment benefits paid to the unemployed. That is, each state taxes its employers for the unemployment benefits it gives out. Not for profit entities often pay on a per claim basis: they pay a tax which equals what claimants receives at the time they receive it. For profit, businesses pay through a payroll tax. Significantly, this tax varies from year to year, depending mostly on the experience an employer has with former employees collecting unemployment benefits.
Many employers figure that unemployment taxes are just a cost of doing business. They don’t realize that many of their former employees are likely ineligible for unemployment benefits. They don’t realize that they can fight many claims and keep their unemployment taxes low by denying unemployment benefits to people who should be judged ineligible for them. Meanwhile, the cost of these claims causes the employers tax rates to rise.
The Costs of Unemployment Claims: Increased Tax Rates
Awarded unemployment claims cause a company’s unemployment tax rate to rise in future years.
Your company’s unemployment tax rate, therefore, is experience rated: it goes up or down over time depending on your company’s history with awarded unemployment claims.
In Illinois, for example, rates vary between 1.0% and 8.2%. The first $12,000 of each employee’s wages will be taxed in 2008. So, a million dollar taxable payroll can have unemployment taxes between $10,000 and $82,000. Obviously, lower tax rates make a difference to your bottom line.
Many companies have very high rates, and even companies with lower rates could pay less unemployment taxes if fewer employees collected benefits that were chargeable to the company.
The actual cost of a claim may vary, since claimants may collect just 2 weeks or 26. The average claim costs an employer $4200 but claims can cost a company in excess of $10,000.
Each claim can affect 3 years of unemployment tax rates since state formulas used to assign rates ordinarily use a 3 year moving period to assign a tax rate. This is one reason why employers don’t realize the expense involved in a single claim. The expense is spread over a three or four year period.
Smaller employers are hit harder by single claims than larger ones, though the different impact of a claim on a tax rate does not change the actual cost to the employer significantly. The average cost, big firm or small, of an unemployment claim is 4200.
Employers can contest the cost of these claims by fighting unwarranted applications for benefits. Employees terminated for misconduct or employees who quit for reasons not attributable to the employer are legally not entitled to unemployment benefits.
Is it Fair for a Business to Deny Unemployment Claims?
The unemployment system basically exists to award benefits to the unemployed but it only wants to give money to people who are unemployed through no fault of their own. If someone is at fault for being unemployed, they should be denied. People are at fault if they have committed misconduct at work or have quit by their own choice.
When people collect benefits after they have been fired for misconduct or quit for personal reasons not attributable to the company, they cost their employer lots of money. It is a fair guess to say that each awarded unemployment claim costs the former employer more than $5,000. That is, the charges for their claims raise an employer’s unemployment taxes unnecessarily.
How much are the Employer Taxes?
Taxable employers pay a certain percentage on the taxable earnings of their employees. Most states tax the first ten or fifteen thousand dollars of earnings. Tax rates often vary between one percent and ten percent. Tax rates are established by a formula that calculates total unemployment charges and compares that to the size of a company’s taxable payroll over a three year period to give a tax rate.
How can a Company Get a Lower Rate?
If a company has a million dollar taxable payroll, a one percent difference in unemployment taxes means a savings of ten thousand dollars. It is in a company’s financial interest to get the lowest rate possible.
In simple English, if a company has fewer unemployment charges, the lower the tax rate. The employer can even get lower charges by fighting unwarranted claims.
If employers do not fight unemployment claims, they are meekly acquiescing to their costs. This permits claimants who behaved badly at work to collect a reward for their bad behavior and it insures that the employer pays an unreasonable tax expense.
If a company fights claims where former employees were fired for misconduct or quit, the company likely will get a lower rate. Often, a company is more successful if it uses a third party claims administrator to do this work. Third party administrators often charge very low fees.
This is a guest post written by David Prosnitz of “Personnel Planners”. His company provides unemployment cost control services to employers. When the claim comes, they write protest letters, make appeals to unemployment hearings, represent at these unemployment hearings, appeal those decisions when they seem reversible and audit the quarterly unemployment charges a company may get for awarded unemployment claims. You can get more information on their website: www.unemploymentclaims.com where there is free information and training on how to make a defensible employee termination.