How Does Unemployment Insurance Work? A Guide for C-Suite Executives

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Over the last year, unemployment insurance has become very important to Americans who were thrown out of work as the economy took a nosedive in response to the coronavirus pandemic.

Even companies that had historically low rates of unemployment were forced to deal with the reality of massive layoffs because various segments of the national economy had shut down.

Then too, supply chains were disrupted all over the country, and this added to the unemployment crisis. In 2021, it is hoped that the economy will begin to recover, as more businesses are able to open up again.

However, that will likely be a slow process, and it certainly won’t happen in a week or even a month. In the meantime, it may be wise to update yourself on just how unemployment insurance works, and how it impacts both you the employer and your employees.

The Federal/State Unemployment Insurance Program

This program was signed into federal law in 1935 and was designed to replace at least some portion of the wages that an employee was earning before he or she was laid off.

The program requires that the person must be unemployed through no fault of their own, eligible to work, and actively seeking gainful employment during the layoff period.

Each state has its own policy regarding unemployment insurance benefits, but most states provide up to 26 weeks (one half-year) of weekly benefits to employees who have been laid off from work.

These 26 weeks are considered the base period and can be extended in specific instances. In most cases, the reimbursement through unemployment insurance (UI) covers about half of what an employee was earning while still working.

Most major layoffs occur during general downturns of the economy, so providing laid-off workers with a portion of their wages acts as a stimulus to the economy and helps to keep commerce going (relatively) strong.

Who Pays for Unemployment Insurance?

In ordinary times, unemployment insurance is paid for by a tax that is levied on employers by the specific state they operate in and by the Federal Unemployment Tax Act (FUTA). This amounts to 6% of the first $7,000 earned by any employee.

State spending on unemployment insurance is exempt from balanced budget rules, and states are allowed to take loans out from the Federal Treasury in the event that their own reserves become exhausted.

However, any state borrowing from the Treasury is obliged to repay that sum within three years, or the federal government will automatically increase taxes on those companies until the debt has been repaid.

The federal government does not impose standards on how much money laid-off workers should be entitled to, and that leaves a broad range for states to interpret and make their own determination on reimbursements.

All states are allowed to impose their own level of unemployment tax rates on employers, as well as the amount of reimbursement, and the duration of benefits supplied.

States are also free to establish their own eligibility requirements, for instance, the period of time that someone must be employed prior to being laid off.

Recommended Read How Pandemic Unemployment Is Impacting Business Owners

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Eligibility for unemployment insurance benefits

In ordinary times, the majority of unemployed workers do not receive UI benefits. This is because unemployment insurance does not cover situations where a person is looking for their very first job, nor does it cover individuals who voluntarily leave their jobs.

It also does not cover people who intend to re-enter the workforce after having voluntarily left it. In addition, students, self-employed workers, undocumented workers, and gig workers are not eligible to receive benefits under current guidelines.

Depending on the state, workers are required to have been gainfully employed for a minimum amount of time prior to being laid off.

For instance, if your state requires that people be employed for at least six months prior to a layoff, and a person has only worked for three months, they would not be eligible for unemployment benefits.

Furthermore, many states also have minimum requirements for wages earned prior to a layoff, so if the threshold in your state is $10,000, and an employee only earned $5,000 before being laid off, they would again not be eligible for benefits.

This system operates decidedly against low-wage earners because they are the least likely to earn enough to meet the earnings threshold, yet they are the most likely to be laid off.

During the Great Depression, only about 25% of low-wage-earners were actually eligible for unemployment benefits, which meant most had absolutely no income at all.

Recommended Read What Should Employers Do If They Receive False Unemployment Claims?

Improvements to the unemployment benefits system

The extraordinarily high numbers of unemployed workers which the country has seen since the invasion of the coronavirus have pointed out some very obvious deficiencies in the system.

For instance, in the immediate aftermath of COVID-19 early last year, the system was completely swamped with unemployment claims for benefits, and it bogged down the entire system.

Most applicants were paid very late, and in the meantime, they had no income to support themselves.

Only around half of unemployment claims filed in March of last year were paid by the middle of May, and that left millions of Americans with no money to help themselves or their families.

This created hardships all around the country, and it became apparent that an upgrade to the processing system was sorely needed.

It is likely that this will be addressed at the earliest opportunity, and hopefully, that will be before a similar avalanche of claims inundates state processing centers. Another change that has growing support is in the area of eligibility requirements.

There were huge numbers of undocumented workers and individuals seeking their first jobs after graduating from high school or college, who were not eligible to receive benefits over the past year.

While this might be a difficult modification to enact, it seems likely that some tweaking of the eligibility rules might be made to provide at least some level of assistance to individuals falling into these categories.

One last change that might be enacted by the federal government is to relax the current requirement on states to repay money borrowed from the Treasury within three years.

In practice, this has served to raise the burden on employers and hinder the recovery. If this requirement was less stringent, it seems likely that the economy would make a faster recovery, and that there would be less stress on employers.

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Manage your unemployment claims with help from Unemployment Tracker!

For mid-to-large-sized companies, handling all the unemployment claims they receive, especially in the middle of a pandemic can be a huge undertaking. Not to mention all the false claims that employers receive from people trying to take advantage of UI benefits.

Our unemployment tracking software provides you a cost-effective means of managing your unemployment claims in-house. Additionally, we also offer outsourced unemployment management services for those who don’t have the manpower to handle it themselves.

Take a look at our unemployment management services!


Take a look at our unemployment tracking software solutions!

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