Managing Unemployment Insurance Cost

Published: March 21, 2023 by Wayne Rottger

An increasing number of unemployment claims and rising unemployment insurance rates can pose a serious threat to any company’s bottom line. Even though this cost of doing business is inevitable, the rate a company pays can dramatically increase with just one unemployment claim. Thus, it is important for employers to fully understand the cause-and-effect connection between their unemployment insurance cost and the decisions they make when hiring, when anticipating layoffs, along with the other matters of which a company’s HR is in charge.

Companies may struggle with unemployment claims management, as it is a rather daunting and time-consuming process that takes up a lot of resources. It requires a careful and responsible approach to their unemployment insurance-related obligations, especially if they are determined to remain in control of this type of expense.

A Hiring Strategy Can Help Manage Unemployment Insurance Cost

Unemployment insurance (UI) is a federally mandated program that provides a temporary source of payment to people who lost their jobs through no fault of their own. The federal portion of the UI tax, as determined by the Federal Unemployment Tax Act (FUTA) is capped at 6% of the first $7,000 of an employee’s wages and often reduced to 0.6% if the employers take care to timely submit their tax returns. The state-mandated source of UI, the SUTA tax, is calculated in a more complex way, specific to the state in which the business is based. More importantly, this tax can vary, as it depends on various factors. Some examples of this are the business structure and size and takes into consideration the history of claims paid to former employees for up to 5 years back in some states. Therefore, it is worth looking into the ways this tax can be reduced even before the possibility of getting the claim notice arises.

For an employer, the first big opportunity to successfully manage unemployment insurance cost starts with hiring, or even before it, with planning the workforce they need and desire to employ. The good practices suggest companies make sure the new hire:

  • Fits the company’s culture; and
  • Has versatile skills and can easily adapt to changing business needs.

Failing to check any of the boxes for an employee in consideration might lead to termination due to a factor outside of the employee’s work style or capabilities, or make them redundant in cases when they cannot fill a different position and theirs got eliminated. In such cases, the payments of benefits will be easily granted, influencing consequently the tax level rise for a company.

HR Strategies Safeguarding Working Environment

Once the employee is hired, and the working relationship is established, it is vital to introduce the standards and policies determining the everyday matters of importance, as outlined in the company’s handbook. The expectations should be set in a clear, unambiguous way, and employers should provide regular, actionable feedback and follow their policies consistently.

Investing in staff training is sure to provide a return on investment in the long run and could prove crucial in case of market turbulence offsetting the costs of UI claims in ways that are far from insignificant, by keeping jobs and maintaining necessary business activities.

Good documentation practices deserve an important mention when talking about prudent HR operations to prevent job terminations as well as contested claims losses. Having everything in writing, from job descriptions and contracts to disciplinary actions and termination letters makes an exemplary strategy worth adhering to in every aspect.

Minimize Losses When Jobs End Up Being Lost

Despite all the best practices and efforts made to retain the workforce, sometimes terminations are inevitable. What is not inevitable is the cost rising, especially when the employer is doing their best to manage UI costs in an economic and sensible manner.

A cautious approach to claims for benefits employees file upon termination can turn out to be the best way to control UI costs from increasing. An employer should not shy away from examining every claim received and reacting promptly, providing available documentation and reasoning behind the termination. Simply put, this is a way of preventing money from being charged to their accounts and it is more than their business sense that dictates this practice – if a fraudulent or a groundless claim has been made, contesting it will help prevent overpayments not just for their own account, but to the benefit of their state budgets as well.

In some cases, a way to manage UI costs and reduce SUTA tax is deciding to pay severance to the departing employees for a certain period of time. This could reduce the time the employees will be able to collect benefits, and in turn, improve employers’ experience rating during the lookback period.

Manage UI Costs According to Specific Circumstances and Business Needs

Smart employers are always on the lookout for the best ways to manage UI costs in their specific states. As every state has different requirements and offers various possibilities that may help reduce UI costs, the legal side of the management is not to be neglected. For instance, some states allow voluntary contributions to UI funds which affects the experience rate and reduces the state tax.

Legislation is an issue of complexity and importance in determining the best course of action for an employer when dealing with unemployment insurance costs. It is not uncommon that a lack of awareness prevents a business from taking advantage of the opportunities to control a rising state tax by reducing employee turnover through a work-sharing program, among other ways worth examining.

Outsourcing the UI management is advised for every business that is making an effort to keep unemployment payments at a reasonable level. The benefits of automating this part of operations encompass legal considerations and enable paperless documentation throughout the entire employee lifecycle, helping employers win groundless claims and improve their experience rating.

Speed up the unemployment management process with an automated solution to achieve high efficiency and notable cost savings.

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