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In States Where Unemployment Rates Rise, Employer Costs May Follow

According to the most recent Regional and State Employment and Unemployment Summary from the Bureau of Labor Statistics, state and regional unemployment rates continued their upward climb throughout the month of March. Forty-six states reported unemployment rate increases in March, and all 50 states and the District of Columbia have higher rates than they did one year ago. Arizona, Michigan, Florida, Nevada, and Oregon were among the states with the largest jobless rate increases over the past year and, as of the end of March, eight states were reporting double-digit unemployment rates.

The difficulties of the economic recession are being felt heavily by many employers and, from this, many of their now-former employees. The national unemployment rate reached 8.9 percent in April, over three and a half percent higher than one year ago. As a result, according to the U.S. Department of Labor (DOL), the number of people receiving unemployment benefits (as a proportion of the workforce) is at its highest level in over 25 years, with over 6 million people drawing benefits.

What’s more, this number doesn’t include the additional 1.4 million people who are receiving extended benefits under the Emergency Unemployment Compensation program, which Congress passed last June. That program provides additional weeks (now up to 20 nationwide with a second tier of 13 more weeks for individuals in states with high unemployment rates) of unemployment benefits to qualifying individuals.

These numbers are certainly grim enough, yet their impact may be further felt by employers in the months to come. Unemployment systems are funded by employer contributions in the form of unemployment compensation taxes, and each employer’s tax rate will increase or decrease depending on the employer’s individual “experience rating,” which is based in part on the number of previous claims filed against an employer.

The experience rating measures whether the employer is a “heavy user” of the unemployment system and whether the employer’s former employees collect a significant amount of benefits. The more an employer (via unemployment claims by its former employees) uses the resources of the unemployment compensation system, the higher its taxes will be. Thus, it is important for employers to know and understand the essential elements of the unemployment insurance system so that they may ensure that only eligible former employees are permitted to collect benefits.

State-by-state comparison of 50 employment laws in all 50 states, including unemployment compensation

The basics of unemployment insurance
Our current unemployment insurance system took root within sections of the Social Security Act of 1935. The late years of the Great Depression saw national unemployment rates as high as 25 percent, and the government sought to create a program funded by employer contributions that would provide wage replacement to eligible workers who had become unemployed through no fault of their own. This federal foundation would soon recruit state participation within the provisions of the Federal Unemployment Tax Act of 1939 (FUTA) and today all 50 states, the District of Columbia, Puerto Rico, and the Virgin Islands operate unemployment insurance (UI) programs in cooperation with the requirements of FUTA.

The requirements of FUTA with regard to state UI program eligibility are minimal, and states otherwise have wide discretion in the administration of their UI programs. For this reason, state laws vary widely in their determinations of eligibility, definitions of “no fault unemployment,” benefit levels, duration, and other specific factors. The law of the state in which wages were paid for the work performed is the law that will govern claims for unemployment compensation.

Despite this variation, there are some general elements of the unemployment insurance scheme that remain constant. For example, all states require benefit recipients to have earned a certain amount of wages, to have worked for a certain length of time, or both, in order to qualify for unemployment compensation. (Note that workers who have worked in more than one state and who do not qualify for unemployment benefits with the work performed in a single state may file a combined claim under a single state’s law.)

Because UI is meant to provide wage replacement, the benefit amount is not a constant number for all claimants. Rather, benefits are typically based upon a percentage of an individual’s earnings over the most recent benefit year, up to a maximum amount determined by the state law (generally the state’s average weekly wage). At this point, the similarities among state UI programs effectively end. In the following segment we have provided some of the key provisions of unemployment compensation laws in those states most heavily affected by unemployment.

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Bottom line
The current economic times may require employers to consider temporary solutions to financial challenges, including short-term layoffs, periodic plant closures, and reduced workweeks. However, know that these actions may affect an employee’s eligibility to receive unemployment compensation. Thus, an employer must consider the actual savings of taking temporary action. One important consideration is how reductions, layoffs, and shutdowns may cost you in terms of unemployment compensation.

For example, an employer can’t always avoid paying unemployment benefits by simply reducing employees’ schedules in lieu of laying them off. Even “partially unemployed” workers — full-time employees working part-time because of lack of work — may be eligible for unemployment benefits. On the other hand, temporary closures or employee furloughs, particularly if your state implements a one-week benefit waiting period, may be a better option to consider.

If you are forced to lay off employees, work hard to ensure that only eligible employees receive unemployment compensation. Unemployment insurance tax rates vary, and minimizing the number of unemployment claims on your company’s “experience rating” account can dramatically reduce your rate. If you have reason to believe that a former employee is fraudulently drawing benefits, contact the appropriate state agency with information.

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