HOW DO UNEMPLOYMENT CLAIMS AFFECT AN EMPLOYER?
February 26, 2010
Below is a good outline on how unemployment effects the employer.
Unemployment insurance (UI) claims all have some effect on an employer, but the effect will be small or major, depending upon the circumstances. The main determinants of how a UI claim will affect a given employer are:
- the type of employing unit involved;
- the type of worker involved;
- the date of the initial claim;
- the length of time worked by the claimant prior to the initial claim;
- the amount of wages reported for the claimant prior to the initial claim;
- whether the employer was the only base period employer;
- the amount of benefits paid to the claimant;
- the nature of the work separation; and
- the number of employees the company has.
- Types of Employing Units
While anyone who pays a worker for personal services is an “employing unit” under the law, not all employers are liable for unemployment taxes. By the same token, not all money paid for personal services falls under the definition of “wages” that are subject to reporting and UI taxation. For example, a person or company that engages an outside attorney to provide occasional legal advice is an “employing unit”, but does not thereby become an “employer” liable to report the attorney’s fees to TWC as wages and pay UI tax on such earnings. Likewise, some organizations are exempted from wage reporting and tax liability by virtue of special exemptions in the law. Organizations that are liable for wage reporting and UI payments either pay quarterly UI taxes (determined by applying the employer’s tax rate to the first $9,000 of each employee’s earnings in a calendar year) or have reimbursing status (they reimburse TWC dollar for dollar for any UI benefits paid out that are based on wages reported for the claimant). The following list indicates the most common categories of employing units and whether they are or are not liable for wage reporting and UI tax or reimbursement liability:
- Customers/clients of independent contractors: such employing units do not report the money they pay to the independent contractors, owe no UI tax on such payments, and have no financial involvement in any UI claims that might be filed by such workers.
- Some employing units are too small or pay insufficient wages to be liable under the UI system. For example, a private-sector employing unit that pays less than $1500 in wages in a calendar quarter is exempt (for household/domestic employers, the threshold is $1000 in a calendar quarter). A tax-exempt non-profit organization with fewer than four employees is also exempt from liability. During the period of non-liability, such employing units are treated like the employing units in the first category.
- Some employing units have some exempt and some non-exempt employees. For the exempt employees, they are treated just like the employing units in the first category above. For the non-exempt employees, they are treated like any other liable employer – see below. Some organizations, such as churches, have nothing but exempt employees and are non-liable. For a complete list of UI exemptions, see the Texas Labor Code, Chapter 201, Sections 201.042-.078, starting at
- Private taxed employers report their employees’ wages, pay quarterly UI tax on such wages (up to the first $9,000 of each employee’s earnings in a calendar year), and have potential financial involvement (chargeback liability) in any UI claims that might be filed by such workers.
- Reimbursing employers report their employees’ wages, pay no quarterly UI tax on such wages, and have potential financial involvement (reimbursement liability) in any UI claims that might be filed by such workers.
- Taxed group account employers are in a large pool of similar governmental employing units and are treated like private taxed employers, except that any chargebacks are pooled and result in a pooled (shared) UI tax rate.
- Non-profit organizations can elect either private taxed employer or reimbursing employer status.
- Type of Worker Involved
As noted above, some workers (independent contractors and employees whose services are exempt from the definition of “employment”) will not involve their employing units financially in a UI claim. All other types of workers have the potential to involve their employing units financially, depending upon whether a particular employing unit reported wages for the claimant during the base period of the claim. Here is a summary of the potential claim liabilities:
Independent contractors – no wage reporting; no tax, chargeback, or reimbursement liability
- UI-exempt employees – no wage reporting; no tax, chargeback, or reimbursement liability
- All other workers* – wage reporting; tax liability if the employing unit is not a reimbursing employer; potential chargeback/reimbursement liability depending upon the base period
None of the three categories above affects the right to file an unemployment claim. Any worker who is no longer performing services for pay can file an unemployment claim. Of course, whether the claimant can actually go on from there and draw benefits depends upon whether the claimant meets the monetary eligibility, work separation, and continuing eligibility requirements under the law.
* The term “all other workers” includes anyone who is not either (a) accurately classified as an independent contractor or (b) an employee whose services are specifically exempted under the UI law. Since there are so many names applied to workers who perform services for pay, it would be impractical to list them all. To illustrate, such a list would include, but not be limited to, probationary employees, new hires, trainees, trial employees, introductory employees, day labor workers, casual employees, temporary employees who are not acquired through a staffing firm, “1099 employees”, “contract labor” workers who are really only misclassified employees, regular employees, full-time employees, part-time employees, PRN staff, “permanent” employees, and seasonal employees. The legal presumption in Texas is that all services are in “employment” and are subject to wage reporting and taxation or reimbursement liability, and the burden of proof is on the employer to show that a particular worker is not in employment.
However, the term “all other workers” does not include employees of independent contractors, because those workers are employed by the independent contractor, and any UI claims they might file will involve the independent contractor. It also does not include temporary staff assigned by a temporary staffing firm or leased employees assigned by a professional employer organization (PEO, also known as an employee leasing firm), since such employees are employed by the staffing firms that assign them to clients, and any unemployment claims they might file will be the responsibility of those firms. See “Alternatives to Hiring Employees Directly” in Part I of this book.
The initial claim filing date determines two very important things: the benefit year during which the claimant may file weekly claims, and the base period of the claim. The base period in turn determines the wages that will be used to compute the claimant’s weekly and maximum benefit amounts and which employers will have potential chargeback or reimbursement liability for any benefits paid to the claimant. Below is a chart showing what the base period looks like. Only base period employers have potential financial involvement in a UI claim; non-base period employers have no such liability.
|Lag Quarter||Quarter In Progress When
Claim Is Filed
|Included||Included||Included||Included||Not Included||Not Included|
As an example, if an employer hires an employee in February, and lets the employee go after 30 days, and the claimant files an initial claim prior to April 1, then the base period would not include the first quarter of that year (the quarter in progress), nor the fourth quarter of the preceding year (the lag quarter), but would consist of the fourth quarter of the year before the year preceding the current year, and the first three quarters of the year preceding the current year. Since the employer did not report wages during that base period, it will have no financial involvement in the claim. The same would apply if the claimant waited until April, May, or June to file the initial claim – in that case, the base period would omit the second quarter of the current year, the first quarter of the current year, and consist of the four quarters of the preceding year. If the ex-employee files an initial claim after June 30 of the current year, then the employer could be a base period employer, but its chargeback liability would be limited due to having paid only 30 days’ worth of wages (see the next topic).
The length of time worked by the claimant prior to the initial claim is important to an employer’s potential financial liability because it helps determine whether the employer falls into the base period of the claim. Generally, if an employee works a short period of time, and files a UI claim fairly soon after losing that short-term job, the employer will not fall into the base period of the claim. The longer the employee works for the employer, the greater the chance is that a subsequent UI claim will involve the employer in the base period. In addition, since an employer’s chargeback liability is directly proportional to the amount of wages it reported during the claimant’s base period, the longer the employee works, the more wages will be reported, and the higher the potential chargeback liability will be. That is why, as a general matter, it is better to separate a clearly unsuitable employee from the company as soon as it becomes clear that the employee will not work out in the long term.
This factor is closely tied to the concept of a “probationary period”. Although letting someone go during a probationary period will not affect their right to file an unemployment claim by itself, it can help lower the chance that the unemployment claim will involve the employer financially. For more information on probationary periods, see
“Probationary Periods” in Part II of this book.
This factor is very closely related to the length of time worked by the claimant prior to the initial claim. The higher the wage amount for the claimant during the base period is, the higher the potential chargeback liability will be.
Chargeback/reimbursement liability also depends upon whether an employer was the only employer that reported wages for the claimant, or was one of two or more base period employers. An employer’s chargeback liability percentage is directly proportional to the amount of wages it reported for the claimant during the base period, measured against the total wages reported by all employers during the base period. As an example, if employer A paid 100% of the base period wages, it will have 100% of the chargeback/reimbursement liability. If A paid one-third of the wages, it will have one-third of the liability.
This factor, along with an employer’s chargeback percentage as explained above, determines the amount of the actual chargebacks. To determine the amount, TWC multiplies the chargeback percentage by the amount of benefits the claimant ultimately draws. If the claimant draws half of the potential maximum benefit amount, each base period employer’s liability will be half of what it could have been, had the claimant drawn the maximum potential amount.
Nature of the Work Separation Top of Page
The nature of the work separation goes directly to the issue of whether the claimant will be qualified or disqualified for UI benefits. If the work separation was disqualifying, the claimant will not be able to draw UI benefits, which of course will affect the employer’s financial liability for the claim. The first thing TWC does in every UI claim (after determining monetary eligibility) is determine the issue of whether the work separation was voluntary or involuntary, and then whether it was qualifying or disqualifying. A voluntary work separation is one that was initiated by the employee, and an involuntary work separation is one that was initiated by the employer. The burden of proof on the work separation issue depends upon who initiated the work separation. For a detailed look at how TWC analyzes work separations, see “Types of Work Separations” in Part III of this book.
In a case involving a voluntary work separation, the claimant will try to prove that he or she had good cause connected with the work to quit, and the employer must be prepared to show that continued work was available when the claimant left and that a reasonable employee would not have quit for such a reason. In a case with an involuntary work separation, the employer has the burden of proving two main things: that the discharge resulted from a specific act of misconduct connected with the work that happened close in time to the discharge, and that the claimant either knew or should have known that discharge could occur for such a reason.
For private taxed employers, the number of employees is important because it determines the size of the employer’s taxable wage base, which is generally the number of employees multiplied by $9,000 (the figure could be lower if some employees do not earn at least that much in the calendar year). A small company will have a small taxable wage base and will experience a proportionally higher impact from a single UI claim than a larger employer with more employees and a higher taxable wage base. For details on how TWC calculates UI tax rates for private taxed employers (the vast majority of employers in Texas), see this Web page:
It should be clear from the above information that there are many factors that determine how a given UI claim will impact a particular employer. While some are more under the control of employers than others, all of them are important to understand. Each claim has the potential to affect an employer’s financial bottom line, and an employer interested in controlling its labor costs will pay attention to every detail.
As published in Especially for Texas Employers