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The Real Cost of Unemployment Claims to Companies

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.

  1. I was permanently severanced from my job due to a Co. Reorg & received my last severance pay last week. I called UE & was told that I should now do my application online since I will no longer be getting funds & still without a job & that this coming Sunday regardless of knowing if I will or will not get benefits yet that I should still file a weekly claim in case of UE back pay.
    So my question is, do I still have to report 4 jobs applied to within this week, even if I do not know if I will be approved/denied for benefits until possibly next week anyway?

    1. Lynda,

      You should continue to report the job applications as long as you’ve been asked to do so. There will be a “Waiting Period” and the first payment will take about 7-10 days after which they’ll flow much quicker. Please call the Claims Center for clarification.

  2. I tried to transfer from one state to another. When I left Montana I was told there would be no problem transferring. When I arrived in North Carolina I had trouble reaching the area manager by phone. When he finally called me back he said to meet him for lunch to discuss when and where I would be working. He did not show up for lunch. Then he never returned any of my calls. I went PA to visit a friend a few weeks later and tried there. I met with the hiring manager and was told there should not be a problem doing the transfer since I was still in the system. I called the store a few times and they said it was still pending. Then I was terminated without even a phone call. Am I eligible for unemployment and if so do I file in Montana or North Carolina. I still have a Montana drivers license but I am living in NC.

    1. Stacey,

      As long as you were unemployed involuntarily, you should be able to claim UI benefits. Please consider applying.

  3. I have worked for 32+ years and recently have become unable to work due to health reasons, so I have had to resign from my job. I have contacted SS and will be able to apply for disability but it will take awhile to process. Can I apply for unemployment benefits? I live in WV.

    1. Sandra,

      UI benefits are only extended to claimants who lose their employment due to involuntary reasons. Please reach out to the Unemployment Office for more.

  4. I had to quit my job at Walmart in Fairmont West Virginia and moved back to my home state ky, I’ve got a son with drug problems and 3 older sisters that are not doing so well in health cause of their age. I didn’t understand about the transfer part they had at Walmart that I could put a date when I could start back because of my car problems I thought when I left I had to go in like in s few days, I’ve applied here at Walmart in Winchester ky 40391 two times already plus dollar store, speedway, truck stop, bp, a few other places it’s been going on 7 months without a job I live with my son and its getting harder on him paying rent and utilities and food, not to mention our personal hygiene stuff I really need help I have no income coming in to help him and his wife out I get foodstamps and Medicaid I was praying I could qualify for unemployment PLEASE HELP!!!

    1. Vicky,

      I can understand your situation. Unfortunately, UI benefits are only extended to claimants who lose employment due to involuntary reasons. Please call the Unemployment Office for further clarification.

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