Who Pays Unemployment Benefits? MythBusters for Employer Liability

When the federal unemployment tax act (FUTA) was first launched in the 1930s, some members of Congress argued that setting up this type of a system would “weaken workers’ willingness to work.” While it was designed to protect workers who become involuntarily unemployed at no fault of their own, there have always been concerns about workers receiving unemployment insurance (UI) benefits when they should instead be part of the workforce. 

To ensure the system is utilized for those who genuinely qualify, companies have the financial obligation to follow proper procedures to prove the employee’s termination was the worker’s fault. If not, the company is deemed culpable, and their state unemployment tax (SUTA) rate will eventually increase due to utilization. 

After decades of helping clients prepare and defend themselves in unemployment hearings, here is our list of unemployment myths and how to prevent culpability from increasing your SUTA rate. 

Unemployment Myth: An employee who voluntarily quits is ineligible for unemployment. 

It Depends. In most cases, an employee who voluntarily quits is ineligible for unemployment because it shows they had power and control to continue working at your company but chose to quit. If this is the heart of the matter, then yes, they are ineligible for unemployment benefits. 

However, there may be extenuating circumstances that make an employee who quit eligible for UI benefits. For example, if the employee had a conflict with their manager or the company neglected to take steps to investigate the employee’s concerns, they may qualify for benefits.  

Also, if you do not document that the employee chose to quit and instead indicate it was a “layoff” in your records and have no proof otherwise, you will be held culpable for unemployment benefits paid and will eventually pay higher unemployment taxes. Best practice is to request a resignation letter or email to include in the employee’s records for documentation. 

Unemployment Myth: An employee who does not meet their sales quota does not have grounds to be fired. 

It Depends. In most cases, if an employee is not meeting performance requirements, this is cause to separate them from employment and makes them ineligible for UI benefits.  

However, if an employee is taking all the right steps by following instructions and guidance to try and meet their sales quota, they can build a case that they did everything as instructed and the rest was beyond their control. In this case, they may qualify for benefits. 

To avoid culpability, you must show that the employee knew their performance expectations and they did not heed your instructions or guidance. You must carefully document the expectations (preferably with an employee signature), warnings (verbal and written), review periods, what was discussed in follow-up meetings, and the ultimate reason for termination.  

Even companies that reside in at-will employment states should always be able to justify their reason for termination to avoid unemployment insurance culpability. 

Unemployment Myth: Only HR (Human Resources) needs to attend the unemployment hearing. 

False. Anyone with first-hand knowledge should plan to attend the unemployment hearing. This includes managers or supervisors who worked with the former employee.

If the HR manager did not interact with the employee in some way during the termination process, they will not be considered as having firsthand knowledge.

Unemployment Myth: If I fight an unemployment claim, the person who filed for unemployment will not receive UI benefits. 

Neither True nor False. Fighting unemployment claims does not mean former employees will not receive benefits; it simply means your company will not be held liable for UI wages paid. In many cases, former workers may genuinely qualify for UI benefits due to a layoff or some other situation while working for another company. You were simply contacted during the “look back” period to accept or fight culpability, which will determine your future state unemployment tax rate. 

Unemployment Myth: Firing a new employee within the 90-day “probationary period” makes them ineligible for unemployment benefits. 

False. There are several things to consider with a probationary period. The first is that having a probationary period in general creates an “implied contract” or expectation on behalf of the employee that they will be there for at least 90 days, regardless of performance. 

In the event benefits are offered after 90 days (and the primary reason for having a probationary period), you may consider adding the following to your handbook: 

"Completion of the trial period does not entitle you to remain employed by the company for any definite period of time. Both you and the company are free, at any time, with or without notice and with or without cause, to end the employment relationship. After completion of the trial period, eligible employees will receive the benefits described in this handbook." Source: SHRM 

If your company operates in an at-will state and you have not established (or documented) rules or expectations, and the employee is unaware of performance standards, the unemployment agency will always view them as eligible for unemployment insurance benefits, despite the length of time they have worked. It is your responsibility as the employer to set the employee up for success. 

Having said that, if you can see early on that a new employee is not going to work out, terminating the worker within the first 90 days reduces your potential liability for unemployment wages. 

Unemployment Myth: If I warn an employee about performance, I can terminate them at any point and not be held liable for unemployment benefits. 

False. You must stick to any timelines outlined in warnings. 

If you specify that a review will happen in 30 days, it must happen within 5 days of the 30-day timeline. When you do not follow up within the timeline specified in the warning, it will show a lack of importance to the manager and undermine its value to the employee. 

In the event performance does not improve after you issued the warning, you still must uphold any time frames outlined and document your follow-up reviews. This will help you avoid being culpable for UI benefits. 

Unemployment Myth: Paying severance to a termed employee will prevent them from being eligible for UI benefits. 

False. Paying severance may only delay the date that the worker becomes eligible for unemployment benefits. 

In most cases, severance packages are offered to employees due to overstaffing or some other separation like a layoff, which would trigger benefits for unemployment once the pay has stopped. But there may be performance-related issues involved when an employee is terminated and offered severance. Contact your certified HR expert for advice on how to handle offering severance in this scenario to avoid the appearance of company fault for termination. 

Unemployment Myth: Firing an employee for any performance issues will ensure the company is not culpable for unemployment benefits. 

False. You need to be able to prove that the employee’s actions were harmful to the company.  

When a culmination of minor errors is the reason an employee is terminated and you cannot prove that any of those errors harmed the company, your company will likely be culpable for unemployment compensation. Why? Because it is not enough to show just cause for termination. 

To prevent this situation from affecting your company, you either need to demonstrate harm caused by the employee’s performance issues or improve your hiring practices to avoid hiring an unqualified employee. 

Unemployment Myth: If the employee goes on a rampage after being fired and destroys company property, they will be denied unemployment benefits. 

False. Anything that happens after an employee is told they are termed does not impact the claim.  

If the employee’s reaction to being fired results in them trashing the office, deleting files, or harming the company in any way, their reactions will not impact their eligibility for unemployment insurance benefits because none of those actions happened before they were termed.  

Prior to firing the employee, you must have sufficient documentation to justify the termination to avoid being culpable for benefits. 

Also, it is always good business practice to have a way to quickly block digital access once an employee is termed. In addition, if you have reason to believe an employee may become upset or likely to cause damage, plan to escort the worker out after termination. 

Unemployment Myth: If it comes down to “he said, she said,” the state will side with the employer. 

False. In nearly all cases, the state will side with the employee when there is no documentation to back the employer’s actions. To prevent culpability, you must document details to show just cause for terminating the worker. 

Unemployment Myth: Requiring an employee to return to work in the office and them quitting in response will prevent them from qualifying for UI benefits. 

False. Changing the employee’s work conditions will make the person eligible for UI benefits, even though it was a voluntary quit. 

Final Tips to Avoid Unemployment Culpability 

Be consistent and thorough with your documentation. It is better to spend three minutes writing details of a conversation or a verbal warning than it is to spend hours trying to trigger your memory, pull up records, ask direct supervisors, and participate in an unemployment hearing in a year from now. 

For more information about UI benefits culpability or potential employee eligibility, please contact your certified HR expert. Not a current Stratus HR client? Book a free consultation and our team will contact you shortly.