Changes in any small business are inevitable. Whether the business is experiencing rapid growth or there is a simple steady stream of customers lining up outside its doors, every day brings interesting and new challenges. Those times are exciting, and the adventure of owning a business feels like it may never end. Other times, we find ourselves in positions where growth has slowed, money is tight, and there are tough decisions to be made. This can mean making various cuts and can include cuts to the team.
No employer enjoys letting go of employees, but it’s especially tough when the team is small, and employees feel like family. Employees leaving a business is an unfortunate reality, and if you find yourself in this position there are some steps you need to follow, a number of ways you can help them.
What exactly is unemployment insurance?
Unemployment insurance can be one of the most confusing and potentially difficult issues for a new business owner or emerging entrepreneur to navigate.
Unemployment insurance is a program supported by state and local governments to protect full-time workers who lose their jobs through no fault of their own. In the event of involuntary job loss (i.e., layoffs, downsizing), unemployment insurance helps temporarily offset the workers’ lost income. These payments are not intended to equal the workers’ standard wages—they are typically around half of the workers’ take-home pay. Additionally, these payments are provided only for a limited amount of time, often determined by the state. The average period is 26 weeks, and the worker is required to be actively job-seeking at the time.
Extensions may be given beyond the established period, but only under certain conditions, such as when the economy is down and the worker has been making — without success — a consistent, good faith effort to find employment.
Where Does Unemployment Money Come From?
The entire process of unemployment insurance is facilitated by the state, and, as a business owner, you won’t need to do anything except respond to the claim. But in the real sense, unemployment responsibilities begin when you make the hire—which might seem a little counterintuitive. When you hire someone, you’re required to report it to the state, and their headcount is added to your unemployment tax obligation. Should an ex-employee file for unemployment, the money paid out to them comes from the pool of money you have been paying into through these taxes.
Unemployment taxes are made up of Federal Unemployment Tax Act (FUTA) tax and a State Unemployment Tax Act (SUTA) tax, which is the tax your business is paying into for the benefit of your employees.
FUTA is a 6% tax on the first $7,000 your employee makes, which means you’ll pay $420 at most for each employee you hire. Typically, you’ll receive up to a 5.4% credit for paying state unemployment taxes. If your business qualifies for the highest credit your FUTA tax rate would be decreased to 0.6% meaning your FUTA payment for each employee will drop to just $42.
What should a business owner expect after an unemployment claim is filed?
When a person files an unemployment claim with the state, they are automatically assigned a caseworker who will reach out to your company by mail to verify that all the information the employee gave the state in their unemployment claim is true. the former employer will be expected to validate the claim by providing details, such as:
- Whether the employee is working full-time, part-time or not at all.
- Why the worker left, including whether they were laid off (lack of work), voluntarily quit, were fired or left because of a trade/strike dispute.
- Whether they refused employment.
- Is legally able to work in the U.S.
- Is receiving any form of compensation, such as a pension or severance pay.
If the worker’s claim is valid, the employer can simply accept the claim. But if they are making an invalid or misleading claim, then the employer can contest it via the first notice that the state sends regarding the claim. Claims in most states should be contested within 10 days to avoid penalties or potential tax increases.
Tips for minimizing your business’ unemployment tax rate
According to the laws in your state, if your employees qualify for unemployment insurance, then there is not much you can do legally to avoid paying these taxes. However, there is a lot you can do to minimize the cost of unemployment insurance and claims.
So, here are a few tips to keep those unemployment taxes under control:
- Avoid layoffs and downsizing if possible:
This means planning staffing needs carefully and strategically. Never hire more permanent workers than your business can reasonably be expected to accommodate for the long haul. Reducing employee turnover is also key to minimizing unemployment costs. - Make company policies clear and follow them religiously:
Ensure that you have a clear, well-defined description of every job role which the worker must sign off on when s/he is hired. Ensure that company policies are clear and detailed and that all employees have acknowledged in writing their full knowledge, understanding, and acceptance of these policies, especially those relating to terminable offenses. - Don’t overcorrect to avoid unemployment costs:
As we’ve already seen, some employees won’t qualify for unemployment insurance. Who these workers vary from state to state, but in general these are part-time, seasonal, or contract workers—those who do not qualify for benefits (i.e., health insurance, retirement, etc.). If you want to minimize your unemployment insurance costs, you can fill your staff with these provisional workers. But you do so at your own risk because a less-than-stellar job offer often means attracting less-than-stellar talent. In the business world, the adage “You get what you pay for” is often true—and never more so than when it comes time to invest in your company’s most important commodity: your workers.
Bottom Line
Unemployment insurance may not be glamorous. It’s not going to be the best or most interesting part of your day as a business owner—but it may well be among the most important. After all, unemployment insurance ensures you are in good standing with the law and helps you to attract the talent you desire, and your company deserves.
SW HR Consulting has been helping companies to build their teams and values for over 10 years. Contact us to find out more about our unique hr outsourcing services and see how our expertise can benefit you.
