The Unemployment Fraud Investigation Process

After the onset of the COVID-19 pandemic, unemployment fraud cases began to rise. As millions of Americans lost their jobs due to business closures and layoffs, state unemployment systems became overwhelmed. Scammers took advantage of everyday Americans by filing unemployment claims even if they didn’t qualify, or sometimes under false names. In this guide, we’ll explain the unemployment fraud investigation process, the different types of unemployment fraud, tips for spotting fraudulent activities and more. Continue reading below to ensure you’re equipped with the knowledge and best practices to safeguard your organization from unemployment fraud and tips for protecting your employees. 

Understanding Unemployment Systems

There are state and federal unemployment systems that work together to provide financial assistance to individuals who have lost their jobs through no fault of their own. Whether it’s from a layoff or company closure, unemployment insurance is a social program aimed at helping workers cover their expenses when they’re out of work. Below is a general overview of how unemployment systems work:

• Employer contributions: The Federal Unemployment Tax Act (FUTA) is a federal law in the United States that was established in 1939 to provide funds for state unemployment compensation programs, requiring employers to pay federal unemployment taxes on a portion of their employees’ wages, known as the FUTA tax.

• Taxable wage base: The FUTA tax rate is 6 percent, which is applied to the first $7,000 paid to each employee during the year. However, many employers can receive a tax credit of up to 5.4 percent of FUTA taxable wages if they pay into their state unemployment funds, dropping their federal tax rate to 0.6 percent. However, if a state is responsible for paying a federal loan for its unemployment fund and has not paid it, the credit can be reduced, turning this state into a credit-reduction state. In turn, employers in that state might face a higher effective federal tax rate.

• State unemployment programs: As stated, federal and state unemployment programs work together. The State Unemployment Tax Act (SUTA) is another payroll tax employers must pay, and the SUTA tax rate varies by state. SUTA taxes help fund a state’s unemployment fund. Each state manages its own unemployment benefits program and can set its own benefits, eligibility criteria and administrative processes. Federal funds are used to supplement state resources when needed, which was seen by many states during the COVID-19 pandemic when unemployment programs became overwhelmed.

• Eligibility: To claim unemployment benefits, workers need to meet their state’s eligibility requirements. While each state has its own eligibility criteria, there are some general guidelines, such as an employee losing their job through no fault of their own. Additionally, many states require eligible participants to meet work and wage requirements for wages earned or time worked during a specified period. For unemployed workers, find information on your own state’s program.

• Unemployment program administration: The federal unemployment program is administered by the U.S. Department of Labor and works with the Internal Revenue Service (IRS), where employers must use IRS Form 940 to report and pay their federal unemployment taxes. Each state’s labor agency manages state unemployment programs.

• Exemptions: Not every business is required to pay unemployment taxes. Nonprofit organizations exempt from income tax under 501(c)(3) of the Internal Revenue Code are exempt from paying FUTA taxes, as well as certain government entities and agricultural employers. These entities typically reimburse state agencies dollar for dollar, for any unemployment benefits paid to their former employees.

Now that you have a basic understanding of unemployment systems and how they work, let’s dive into the different types of unemployment fraud and how they can impact you.

Types of Unemployment Fraud

Unemployment fraud occurs when an individual provides false information while filing for unemployment insurance benefits. The individual may attempt unemployment fraud using his or her own information, or someone else’s. There are different types of unemployment fraud to be aware of, such as: 

• Providing false information: In certain fraud cases, individuals may give false information on their unemployment insurance claims, where they may misrepresent their employment history, income or the reason for their job separation.

• Claiming benefits after returning to work: If an employee lost their job and claimed unemployment benefits, fraud can occur if they continue certifying for unemployment benefits after returning to work.

• Identity theft: In today’s digital age, identity theft is becoming more common. When this occurs, fraudsters can use stolen or fake identities to file false unemployment claims and receive benefits.

• Failing to report earnings: If an individual earns money through temporary work or a part-time job, they must report their earnings to their state’s unemployment department. Failing to report earnings when certifying for unemployment benefits is a form of fraud.

• Failing to seek work: Searching for work is a requirement of continuous certification and receipt of unemployment benefits. If an individual certifies that they are actively seeking work, but fail to do so, this is a form of fraud. States are beginning to analyze those that do search for work but fail to show up for interviews (“ghosting” a prospective employer) as another potential fraud mechanism.

These are some of the various forms unemployment fraud can take. As an employer, having a strong unemployment fraud investigation process can ensure unemployment benefits aren’t being falsely claimed on your behalf. Continue reading to learn more about how to detect fraudulent activities when it comes to unemployment benefits.

Detecting Fraudulent Activities

As an employer, understanding how to spot cases of unemployment fraud is crucial, as it helps maintain the integrity of the unemployment benefits system while also protecting your bottom line, as unemployment claims can increase your tax rate as an employer.

One of the first ways an employer or individual will be able to detect fraudulent activities is if an employee received a notification from their employer or their state’s unemployment benefits office that a claim was filed in their name. If a claim is filed in your name and you never applied for unemployment benefits, you might be a victim of unemployment fraud.

Another way unemployment fraud is often detected is if an individual files for unemployment benefits and notices a claim has already been made. If you find yourself in this situation, remedying the problem can take weeks or months and, if ignored, can have lasting impacts. Knowing how to detect fraudulent activities and reporting them right away is imperative.

Initiating an Investigation

When initiating an investigation regarding unemployment fraud, the process typically starts with your respective state unemployment agency. The steps for an unemployment fraud investigation process will vary by state, but there are general steps employers or individuals can follow to rectify the situation. Below are some of the general steps for initiating the unemployment fraud investigation process:

1. Identify suspected fraud: The first step in the unemployment fraud investigation process is identifying the suspected fraud, which includes employers or employees gathering evidence related to their fraud case, which may include information like the individual’s employment status, job search activities or any other fraudulent behavior.

2. Contact the state unemployment agency: Once fraud is suspected and evidence is gathered, the next step is contacting the relevant state unemployment agency responsible for managing unemployment benefits.

3. Submit fraud cases through the online reporting system: Many states have their own online reporting system that individuals and employers can use to file unemployment fraud cases, where information and details on fraudulent activities can be submitted.

4. Provide detailed information: When submitting fraud cases, personal information will often need to be submitted, such as the individual’s Social Security number, name, address, employment history and any other supporting documentation.

5. State unemployment agency conducts investigation: Once evidence is provided, the state unemployment agency will begin its unemployment fraud investigation process. They will review the reported information, conduct an investigation by verifying the accuracy of the information provided, gather additional evidence and take action based on their findings.

6. Legal action: If unemployment fraud is confirmed, the relevant authorities will take legal action against the individual or entities involved. Legal actions can include penalties, fines, and, in more serious cases, criminal charges.

It’s important to note that the unemployment fraud investigation process and procedures will vary by state and that employers and individuals should refer to their state’s unemployment agency for guidance on how to handle fraudulent unemployment claims.

Investigative Techniques

How long do unemployment fraud investigations take? The time can vary by jurisdiction and investigative techniques used to spot the fraud. Because an unemployment fraud investigation process varies on a case-by-case basis, having proper methods in place within an organization can help expedite the process. One of the first investigative techniques that can be implemented is cross-checking information, such as payroll records with unemployment claims, to ensure the information provided by former employees on their claims aligns with your internal records. 

Another key investigative technique is verifying the employment status by responding swiftly to requests for employment status verification from your state’s unemployment agency. Other measures include keeping track of employees who have returned to work after filing for unemployment claims and implementing internal controls to prevent collusion between employees and management in fraudulent activities.

Legal Ramifications

Unemployment fraud can pose a wide range of legal ramifications. Whether you’re an employee or a fraudster engaging in unemployment scams, you can face various consequences ranging from penalties and fines to imprisonment. Below are some of the potential legal ramifications of unemployment fraud:

• Fines: Individuals or entities engaging in unemployment fraud can face expensive fines for engaging in this unlawful behavior. The Department of Labor states that individuals engaging in fraud are subject to a monetary penalty of no less than 15 percent of the unemployment benefits paid.

• Restitution: Along with fines, courts may order individuals to pay restitution to their respective state unemployment agency for the amount of benefits they falsely claimed to compensate the state for the financial losses they incurred. Some states add a percentage multiplier to this restitution as a penalty.

• Penalties: In addition to monetary fines, fraudsters can face a wide range of other penalties. For example, individuals committing unemployment fraud can become ineligible for future unemployment benefits, and this exclusion can extend for a specified period until the individual demonstrates their eligibility for unemployment benefits.

• Criminal charges: In some jurisdictions and in serious cases or for serial repeaters, unemployment fraud can lead to criminal charges, such as probation, community service or imprisonment.

Combating Unemployment Fraud: Best Practices

As an employer, taking preventative measures to combat unemployment fraud can help ensure your employees and bottom line are safe. By initiating a comprehensive unemployment fraud investigation process and embodying a proactive approach to prevent, detect and report fraudulent activities, you can protect the integrity of your organization. Below are several best practices you and your HR and payroll teams can follow to combat unemployment fraud:

• Stay informed: One of the top best practices is staying informed on how the federal unemployment system and your state’s unemployment work, including eligibility criteria, reporting requirements and any changes in regulations that can affect unemployment claims.

• Educate employees: In some cases, employees may be responsible for committing unemployment fraud by illegally claiming benefits when they don’t qualify. Ensure employees understand the importance of providing accurate information when filing for unemployment benefits and that they understand the consequences of fraudulent activities.

• Monitor payroll records: Keeping a keen eye on your organization’s payroll records and regularly cross-checking these records with unemployment claims can ensure all claims are accurate.

• Report employee separations quickly: When an employee is separated from a company, make sure to notify your state’s unemployment office promptly with detailed information on the reason for separation, whether a resignation, termination or layoff.

• Collaborate with state agencies: Working closely with your state’s unemployment agency and participating in initiatives to combat fraud can help you stay current on the latest regulations and best practices while ensuring investigations go smoothly.

• Use technology and data analytics: In today’s digital world, there are countless ways technology and data analytics solutions can help you protect your organization. Unemployment management services can help you recover overpayments, prepare for hearings and remain compliant with local and federal regulations.

These are some of the many ways you, your HR and payroll teams can stay vigilant against unemployment fraud and protect your business and employees. Falling victim to unemployment fraud can raise your tax rate, which means more money out of your bottom line. Taking a proactive approach and having a comprehensive unemployment fraud investigation process in place can help protect your organization from fraudulent activities.