Understanding Unemployment and Its Impact on Employers

When we think of unemployment, most of the focus tends to be on the individual who’s out of work. But what many don’t realize is that unemployment also affects the employer operationally and financially. From tax implications to claim disputes, businesses have a lot at stake when former employees file for unemployment benefits.

What Role Does the Employer Play in Unemployment?

When an employee is laid off or let go, the employer plays a key role in the unemployment process. Here’s how:

1. Responding to Claims Promptly and Accurately

After a former employee files for unemployment benefits, the state’s unemployment office usually contacts the employer to verify details such as:

● The reason for separation

● Last day of work

● Wages earned

It’s crucial that employers respond quickly and truthfully. Delays or inaccurate information can slow down the process for the former employee or lead to disputes.

2. Providing Proper Documentation

Employers should maintain accurate records of:

● Employment dates

● Pay history

● Disciplinary actions or performance issues (if relevant to the claim)

This documentation helps in determining eligibility and protects the business if there's a dispute.

3. Paying Into the Unemployment Insurance System

Unemployment benefits are funded through employer-paid payroll taxes, not employee

contributions. These taxes go into state and federal unemployment insurance funds. If a business lays off many workers or has a high turnover rate, its unemployment insurance tax rate may increase.

Common Misconceptions About Unemployment and Employers

Let’s clear up a few widespread misunderstandings that often cause confusion for business owners:

● “If someone files for unemployment, they’re guaranteed to collect.”

Not always. Eligibility is determined by the state and depends on several factors,

including the reason for separation, previous earnings and whether the employee is

actively seeking work.

● “The payroll clerk controls the unemployment rate.”

False. While payroll clerks handle reporting and paperwork, they do not set or influence

unemployment insurance rates. Rates are determined by the state and federal

governments based on specific formulas.

● “The state has fixed unemployment rates.”

Not exactly. State unemployment insurance (SUI) rates fluctuate depending on how

often your former employees file claims. A high turnover rate or frequent layoffs may

result in increased SUI tax rates for your business.

● “The federal government decides all unemployment rates.”

While there is a federal unemployment tax (FUTA) with a set rate, each state sets its

own SUI rate. Employers must pay into both systems, and it's the state rate that’s often

most affected by your business’s unemployment claim history.

● “More turnover means higher rates—automatically.”

Generally true, but not in every case. Rates are impacted by chargeable claims and

other factors, such as how the separation occurred or if claims were successfully

contested. With all of this in mind, it’s essential that employers understand their responsibilities in the unemployment process.

Why This Matters for Your Business

Improper handling of unemployment claims, or simply misunderstanding how the system works, can cost your business in more ways than one—whether through increased tax rates, legal issues, or administrative burden.

If you’re unsure how your unemployment insurance rates are calculated or want to better manage costs, Terranova & Associates, LLC is here to help! We specialize in payroll and employer compliance and are available to consult on these topics with clarity and accuracy.

Want to learn about unemployment from the employees perspective? Click Here

Please feel free to share this with your relatives and friends and remember we are here to help our clients.

Terranova & Associates, LLC.

Thomas D. Terranova, Jr., CPA, PFS, CITP