The CCPA: Unemployment Insurance 101

Unemployment insurance is a big deal when it comes to the benefits your employees get, but it can be a challenge to understand your role in the system as a business owner. Harmony Group is here to help with a rundown on the basics of unemployment insurance, its effects on your business, and what you need to do as an employer.

What is Unemployment Insurance?

Unemployment insurance is like a safety net, a type of program that offers financial help to workers who've lost their jobs through no fault of their own. Unemployment benefits are intended to be a temporary lifeline to give folks a hand while they're looking for new work.

Unemployment insurance is not designed to pay benefits for workers who are voluntarily unemployed, and the unemployment benefits available in most states are designed to be only a fraction of the income earned by a fully employed person. One big misconception held by many small business owners is that they’re responsible for paying wages post-separation - there is no continuing obligation after letting someone go (beyond any potential severance agreement terms). Rather, businesses have already paid into the Unemployment Insurance Fund through taxes paid in the ordinary course of payroll.

Where do the Unemployment Insurance Funds Come From?

The money for unemployment insurance mainly comes from the taxes businesses pay, both at the state and federal levels.

Federal Unemployment Taxes (FUTA) - at the Federal level, employers are subject to a FUTA tax on the first $7,000 of wages paid to each employee, per year. For most employers, this tax rate is 0.6% ($42 per employee, per year). These FUTA taxes provide the Federal pool of funds that can be borrowed from by states for UI support, when necessary, and helps pay for extended unemployment benefits during periods of high unemployment, amongst other things.

State Unemployment Taxes (SUTA or SUI) - like with FUTA, most states collect SUTA taxes by charging a % of a wage base per employee. In the DMV, the wage bases are very similar (DC = $9,000 | MD = $8,500 | VA = $8,000) and the starting rates are also very similar (DC = 2.7% | MD = 2.3% | VA = 2.73%), but the bases and rates vary wildly throughout the US.

A new employer in DC, for example, would budget to pay a max of $243 (2.7% x $9,000) per employee in SUTA taxes. A new employer in New Jersey, however, would budget to pay $1,274.10 per employee (3.1% x $41,100).

How is My Business’s Tax Rate Determined?

Most states apply an initial new employer rate to new businesses starting up in their states for the first several years of operations, while they gather data on the actual habits of the employer. During this introductory period, the tax rate will usually be in the 2-3% range, though each state is different (many states use a new rate for all employers; some use industry specific rates for new employers).

After the first few years, the state will begin to customize your rate based on your experience. The formula for this custom rate calculation usually uses a numerator of how much the state has paid out in claims for employees you fired divided by the amount of taxes you’ve paid in. The formula gets updated based on actual experience each year, so you can influence your rates by preventing unemployment claims from being charged against your company.

The Employer’s Role in Unemployment Insurance

As an employer, you play an important role in the unemployment insurance process - here is a brief breakdown of the business owner’s responsibilities:

Paying Unemployment Taxes: Employers are required to pay federal and state unemployment taxes, which fund the unemployment insurance program. In general, your tax rate will increase if more claims are made against your business.

Reporting New Hires and Job Separations: Employers must report new hires and job separations to their state's employment department. This information is used to verify the eligibility of people applying for unemployment benefits.

Responding to Claims: When an employee files for unemployment benefits, you will receive a notice. It's important to respond promptly to these notices, providing accurate information about the employee's job separation. If you disagree with the claim, you have the right to contest it.

Employee Retention: Helping foster a healthy work environment and happy employees can mitigate high turnover rate and reduce the likelihood of unemployment claims against you. We’ve covered Employee Benefits and Effective Employee Compensation in our other, hospitality-specific blog, Lessons From the Line if you’d like some ideas!

Unemployment Insurance’s Impact on Your Business

Understanding unemployment insurance’s impact on your business can be vital. Here’s a high level breakdown:

Financial Impact: Unemployment tax is one of your business’s basic expenses, so understanding it is as important as understanding any other item on your balance sheet.

Operational Impact: Handling those unemployment claims can be a time suck. Staying on top of paperwork and giving quick responses is key, along with, of course, mitigating claims.

Reputation Impact: It might go without saying, but too many claims can put a dent in your business’s desirability as a place to work, which can make it harder to attract and retain talented workers, which can lead to even more churn.

Minimizing Unemployment Insurance Costs

Paying in for unemployment insurance is part and parcel of being in business, but there are ways to keep costs from getting out of control:

Hire Strategically: Make good hiring decisions to reduce turnover. This includes taking the time to hire employees who are a good fit for the job and your company culture.

Invest in Employee Retention: Creating a workplace where people want to stick around is gold. Fair pay, growth opportunities, benefits, and a simple pat on the back for a job well done can all boost team loyalty and employee morale.

Dot Your i's and Cross Your t's: Keeping meticulous records of hiring, firing, and any disciplinary action pays dividends in the long run. These records are crucial if an employee’s eligibility for unemployment insurance is in question.

Respond Promptly to Claims: Don’t drag your feet on responding to all claims, and utilize the accurate information you’ve been keeping per the above step. If you believe a claim is unfounded, you have the right to contest it, but be certain you have solid evidence to back up your case.

To sum up, unemployment insurance is a vital part of the employment landscape. As a business owner, understanding how it works can help you manage your responsibilities effectively and make strategic decisions to mitigate costs and potential impacts on your business. Stay informed and proactive, ensuring your business navigates the unemployment insurance process with ease and integrity.

Last Bites

August 2023

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