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A rising number of unemployment claims can impact any organization’s bottom line, which is why unemployment cost management should be a top priority for employers. While unemployment claims are inevitable, even one unemployment claim can dramatically increase the rate a company pays. Fortunately, there are several actionable ways to manage unemployment costs, from forging a positive work environment to hiring the right team.
Organizations of all sizes operating in every industry may struggle with managing unemployment insurance costs, as this is a time-consuming process that requires expertise and the right resources. But, being proactive and taking a calculated approach when hiring or anticipating layoffs can help you maintain control of these sometimes costly expenses. In this guide, you’ll learn what it takes to manage unemployment costs.
Understanding Unemployment Costs
Understanding unemployment costs requires employers to grasp several key aspects of how unemployment insurance (UI) works. Unemployment insurance is a federal and state-administered program that provides temporary financial assistance to eligible workers who lose their jobs through no fault of their own, such as being laid off. However, employees who were terminated due to events like gross negligence, poor performance, or harassment are typically ineligible for collecting unemployment benefits.
Generally, employers are required to pay both federal and state unemployment taxes. The Federal Unemployment Tax Act (FUTA) established federal unemployment taxes, known as the FUTA tax. The FUTA tax rate is 6% on the first $7,000 of each employee’s wages, which is known as the FUTA wage base. However, many employers qualify for a credit of up to 5.4%, reducing their FUTA taxes to 0.6%, if they pay state unemployment taxes when filing Form 940. State unemployment taxes, known as SUTA taxes, may have a different wage base depending on that state’s specific rules and regulations. The amount an employer pays in SUTA taxes often varies based on factors like their industry and the size of their payroll.
Understanding Unemployment Costs (cont.)
A key component of managing unemployment costs is maintaining a strong experience rating. An employer’s unemployment tax rate is often dependent on their experience rating, which reflects their history of unemployment claims. Typically, employers with a higher number of unemployment claims pay higher rates, whereas those with lower unemployment claims have a more favorable rate. The idea of an employer’s experience rating is to encourage companies to keep staff on their payroll to reduce the number of workers relying on unemployment benefits and draining the reserves in state unemployment trust funds.
If a state’s unemployment trust fund becomes depleted, several measures may be taken. In some cases, states may take out a federal loan under Title XII of the Social Security Act to continue paying unemployment taxes. In others, states may increase their unemployment insurance tax rates for employers or impose special assessments to replenish their unemployment trust fund. For states that have an outstanding federal loan for two consecutive years, employers may be faced with a reduction in the FUTA tax credit, meaning employers in that state will have a higher FUTA tax rate.
Key Strategies for Minimizing Unemployment Costs
Facing an abundance of unemployment claims can negatively impact your bottom line due to having to pay a higher unemployment tax rate. Along with higher unemployment costs, a history of layoffs can also damage your reputation, impacting your organization’s financial health even more. With that said, managing unemployment costs is crucial to running a financially strong business. Take a look at the key strategies for minimizing unemployment costs below.
Proactive Strategies to Reduce Unemployment Claims
Taking proactive measures to reduce the number of unemployment claims is imperative for managing unemployment costs. Proactive strategies to reduce unemployment claims include:
- Improve hiring practices: Conducting background checks, comprehensive interviews, and skill assessments can ensure candidates are a strong fit for their roles and company culture.
- Enhance employee engagement and retention: Invest in professional development opportunities that help employees to grow in their roles to enhance job satisfaction, and regularly recognize staff for their contributions to reduce turnover and boost morale.
- Avoid discharges: Rather than letting go of an employee right away, take time to consider other available options, such as transitioning an employee to a new job within the company to avoid a layoff.
- Follow internal policies closely: When a decision has to be made to terminate an employee due to repeated or willful misconduct, make sure to follow internal policies closely with proper documentation and witnesses to serve as evidence.
- Contest unwarranted claims: In some cases, unemployment claims may be fraudulent or unwarranted. Vigilant monitoring and consulting with legal professionals can ensure claims are handled properly.
Addressing Performance Issues Before They Lead to Claims
What many employers may fail to realize is that employees terminated for poor performance can be eligible to claim unemployment benefits. In order for an employee to not receive unemployment benefits, they must be terminated for willful misconduct. However, if an employee is let go due to inexperience, honest mistakes, or a lack of knowledge, this doesn’t constitute willful misconduct, even though these actions can be seen as poor performance.
To simplify unemployment cost management, addressing performance issues before they turn into a claim is essential. Actions such as conducting regular performance reviews, setting SMART goals, providing resources and training, and placing an employee on a performance improvement plan (PIP) can help evaluate their performance through measurable objectives and goals. With clear documentation in place with dates, times, and details of unsatisfactory performance, employers can have the evidence they need to support a termination for poor performance that revokes an employee’s right to unemployment benefits.
Utilizing Effective Documentation to Mitigate Claims
Effective documentation is vital to reduce your unemployment insurance cost. To start, always document events during the moment, as recollections can fade and critical details might not be captured. When documenting a case, ensure specific details are included with dates and information of any witnesses present.
Additionally, ensure all warnings given to an employee are recorded with the exact details of the incident that led to the warning or termination. In this warning, outline the specific company policy that was violated, along with the measurable actions given to the employee in order for them to avoid disciplinary action in the future.
Differentiating Between Layoffs and Terminations for Cost Management
A key component of managing unemployment costs is understanding the difference between layoffs and terminations. The primary difference between these two forms of employment separation lies in whether a company is responsible for paying unemployment benefits. When an employee is laid off through no fault of their own, such as a company downsizing during turbulent economic times or an act of inability, they are entitled to unemployment benefits. However, if an employee is terminated due to willful misconduct, such as violating a company policy, gross misconduct, or attendance issues, their ability to claim unemployment benefits is revoked.
Best Practices for Managing Unemployment Insurance Costs
Employers can follow several best practices when managing unemployment insurance costs to protect their bottom line and reputation. These strategies include:
- Hiring the right staff: Make sure each new hire is intentional and carefully considered. Choose candidates with a good culture fit and versatile skills to adapt to changing business needs can help prevent layoffs in the future.
- Onboarding new hires: When onboarding new hires, ensure they’re informed of company policies and standards in the company handbook. Setting clear expectations and offering training can help employees settle in quickly.
- Examining claims: It’s crucial to take a close look at every unemployment claim that lands on HR’s desk and respond swiftly. Ensuring each claim is valid allows you to prevent overpayments that can cost you money.
Partner With Experian Employer Services for Stress-Free Unemployment Cost Management
Unemployment cost management can be complex and time-consuming. At Experian Employer Services, our unemployment cost and claims management services help reduce the risk, cost, and burden of handling unemployment claims. From recovering overpayments to providing hearings representation, our team can help you with managing unemployment costs. Schedule a call today to learn more.