The Employer Side Of Unemployment

November 11, 2019

How does unemployment insurance work for employers?

 

Most of us have worked for somebody along the way and may have at one point or another felt fortunate to collect unemployment when we were laid off in the past. But where does the money come from?

Well….I’m here to tell you that it comes from employers.There are thousands of employers across your state that all contribute to their own fund. Your state takes all of these little funds, puts them into one big fund and then distributes benefits to all of the qualified unemployed in your state. Some companies are wonderful employers and never lay off an employee. Others are horrible employers, unemploy workers constantly and overuse the fund.

In an attempt to reward the good and punish the bad, your state manipulates the rate that each employer pays based on their fund usage. In theory, riskier employers pay a larger percentage and safer ones pay less.

How is the amount of unemployment contribution calculated?

While there are pages and pages written about exactly how this rate is calculated, for the sake of our overview, there are 3 factors that determine an employer’s total yearly contribution.

1)     Total amount of Employees

2)     % paid based on previous years risk to unemploy their staff

3)     Fixed amount of payroll that your state requires you to pay on.

While all states have their own laws, they are very similar.In the state of Pennsylvania Beginning on January 1st of each calendar year, the employer pays x% of the first 10,000 in wages to EACH SSN who works for them during the year. If you have 15 employees that make more than 10,000 and pay 5%, your total yearly contribution will be 15 x 10,000 x 5%= 7,500 with one caveat.

Here’s the rub

If you have a business that tends to be transient such as a restaurant, you pay the 5% rate on ALL SSN’s that work for you during the year.If an employee works for you for 6 months, moves away and is replaced for the last 6 months by a new employee, you pay twice. You pay 5% on the first 10,000 and then 5% on the next persons 10,000. At the end of the year you may find that you have actually paid 10,000 – 15,000 to the UC fund due to employee movements that have nothing to do with your responsible business leadership.

On the plus side, you have now grown your unemployment fund balance by 10,000 – 15,000 which you will never get back or have access to. On the downside, this money is now not yours to grow your business and will grow at a 0% interest rate.  

While each state has their own stipulations and requirements, the average small business owner will find the following statement to be true:

Regardless of whether you have a good or bad track record, you will always pay. While it is possible that you will survive long enough to eventually amass a bank large enough to reduce your charge to 0%, the reality is that it will take you 20 years to reach that level. As most small businesses don’t survive past year 10, I can comfortably assert that the great majority will be out of business long before they ever approach a 0% payment level. Remember, since most small businesses don’t last long term, there is a good chance that their entire staff will at one point or another end up collecting from the fund. That’s a wonderful protection for all of the companies that don’t succeed. Unfortunately, it’s those that are doing a wonderful job that end up footing the bill for all of the others failures.

So since we all pay and will never stop paying, the name of the game is to reduce the amount we pay. Think about it, if a small business pays an additional 5,000 per year in costs, there is a significant opportunity cost in this capital. You do not get a medal for contributing to a 0% interest fund as rapidly as possible.

Let’s assume that you have a small business loan of 100,000 at a 10% interest rate. Let’s also assume that we could devote the 5,000 gifted to the state to pay for the unemployed of everybody else and devote it directly to your business loan over a 10 year period  

How much better off would you be if this was the reality? How valuable is 5,000 in cash per year over a 10 year period?

There are 2 ways to look at this.

1)     You would pay off your loan in 7 years vs. 10 years which would free up your payments in year 8-10 and would total about 80,000

2)     You would have 50,000 more in your pocket that could have been invested at 10% which would generate approximately 30,000 over 10 years for a total of 80,000

 

So it’s not just 5,000 out of pocket. It’s really 8,000.What did your 80,000 opportunity cost purchase? I would argue that you basically received nothing.

While we as business owners can empathize with the plight of an employee who has been unemployed through “no fault of their own”, I can honestly say that in 12 years of business, we have NEVER unemployed somebody through “no fault of their own”

There are absolutely legitimate occasions where this happens to people. Some business’s are seasonal and choose to lay off staff during slow months. Some larger corporations may close a factory or move operations from one city to another. It’s not too difficult to fathom that a business or two may have folded when Wal-Mart moved to town. However, most small businesses know the value of their employees and will cut off their left arm to keep profitable through all ups and downs.

Based on the letter of the law, it could be argued that the system is as fair as it can possibly be. Employers who do a poor job and take advantage of the system pay more and those that do not pay less. Sounds like a wonderful dream.

Real world unemployment story time

Let’s take a minute for story time. I can recall 4 separate instances over the past 5 years where our business was drawn into the unemployment process.

Yeah my boyfriend broke in and stole money....what's the big deal?

We had an administrative woman who had been with us for a couple of years. On New Year’s Eve, we had a break in. Somebody climbed the fire escape, smashed a window, crawled in across broken glass,broke into the office and stole $300 in petty cash. A grainy photo was taken of the man so we had a little bit of evidence to go on. The police were called,fingerprinted the office and questioned the locals. After a couple of hours,the police came to me and reported that the man was the boyfriend of our admin and therefore had inside knowledge about how to break in and find money. When questioned, she claimed to have no idea what we were talking about.

Because we had only circumstantial evidence our employee was involved, we continued to employ her for a period of time. After a few more months went by, we decided that she was a serious risk to the business and decided to lay her off to reduce risk to the business.This person ended up getting another job relatively quickly but this would have been an unemployment claim that we would have lost as this person was unemployed “through no fault of her own”.

A few months after laying her off, we received a call from the police. They had found the man who broke in and matched his prints. It turns out he had a record and had done this on many occasions....and

Wait for it....

Was in fact the man who had been dating our former employee. I know. It's shocking right?

F%^& you and this job. I'm quitting and filing for unemployment

We had a hair stylist who had a volatile personality. We had various issues with him over time but were working to continue to coach him to become a wonderful profitable member of our business. After working for us for about 18 months, we hired a new manager who we really needed for the health of the business due to their experience. Due to her experience and other expectations in her job description, we offered her a larger commission percentage than the rest of the staff. Somebody decided to leak the information which angered the other stylist. Upon arriving for work on a Saturday he packed up his tools and told my manager to F%^& herself on his way out the door.

I received paperwork from the unemployment commission regarding his eligibility. I filled out the paperwork in full and mailed it the day I received it. About a month later I received a letter saying that we had not responded so they had decided to grant unemployment to the former employee. I immediately took action, made a phone call and generated a counter claim based on the fact that they had claimed not to receive my information. A hearing was scheduled where the facts of what had happened were brought to light. After hearing that the employee had voluntarily left and told us to F*&% ourselves, he was granted unemployment because they claimed they had not received the proper paperwork.

How could they possibly have ranted this? Well, essentially he claimed that he had been unemployed “through no fault of his own”. Really?

What's wrong with a 2 hour haircut between friends?

We had a younger hair stylist who was a good employee. She did have some issues. We were working through them because we envisioned her as an eventual asset once we smoothed out the rough spots. Her specific issue was that it took her about 2 hours to do a 45 minute service.This was a serious issue in our market because most of our clients are business people on a lunch break or otherwise in a hurry.

About a year into her stay with us, she began to have serious mental issues. She took about 2 months off, was placed on serious medication and then returned to work. We again began to work with her on her timing and fine points of becoming a very productive hairstylist. It became evident after another few months she just wasn’t going to make it happen due to her existing issues and additional mental issues that occurred after she was in our employ.

We were forced to lay her off“through no fault of her own” because our reputation was beginning to suffer and the rest of the salon was beginning to suffer due to her inadequacies that were not improving.

She was found worthy of unemployment as she was unemployed “through no fault of her own”

You seriously fired me for missing work on 40 of 80 scheduled days? That can't be a rule!!

We hired a technician a couple of years ago. He was in his 30’s had been a successful stylist for years in another city. He was in town because he had developed a serious drug problem and was recovering. He had been clean for years, had good technical skill and was working to get his life back together. We took a chance on him because everybody makes mistakes and deserve a second chance if they are seriously changing for the better.

He had been on the job for about 2 days and we had a fire at the business which caused us to close for 74 days to rebuild. Our insurance policy covered labor expenses during that period which meant we paid him for all 74 days even though he was not required to come to work. These payments included his base promised pay PLUS assumed tips on the amount of work that we had assumed he would perform.

After reopening we began to have issues with him. He was part of the 20% of our staff that caused 80% of our issues. He constantly changed his schedule due to his other issues. We were constantly rearranging his schedule to accommodate meetings he had to have due to his previous issue. We understood his situation and were happy to accommodate to help him.

However, after about 6 months, the legitimate reasons were replaced by bad behavior. In fact, he showed up late, left early or called off 40 times in his last 80 days of employment. This behavior culminated with him being arrested in a domestic dispute.

We were forced to let him go for a multitude of reasons. He was backsliding, causing issues for the rest of our staff based on his bad example and he wasn’t profitable because his clients couldn’t count on him to show up.

And then….he filed for unemployment because he had been unemployed “through no fault of his own”. After contesting the claim, a hearing was scheduled. The hearing was cancelled and rescheduled the morning of the meeting because he couldn’t attend. Two weeks later, he did not attend the second hearing. The arbiter asked me if I had anything to say on behalf of the business. I responded by saying we had fired him for lack of attendance……my evidence was that he was unable to attend his own hearing. If this had been a murder trial and the prosecution didn’t show up, the judge would dismiss the case and a murderer would go free. Unfortunately, the unemployment commission doesn’t live on our planet and doesn’t seem to be bound to the same due process as a murder trial. In this case, my former employee filed a further complaint claiming we hadn’t warned him that he could lose his job for not coming to work on 40 out of 80 days. As of today, the case is still in the hands of the UC.

Summing up story time

It's very simple to see what side the UC is rooting for. Employers are guilty until proven innocent. They claimed to not receive a letter from me and awarded unemployment yet have been more than happy to reschedule hearing after hearing for a former employee who was let go for not coming to work.

Essentially the process funnels funds away from a business that should be used to grow opportunities for the hard working employees who are doing their job.

Instead, it's 99% slanted towards rewarding bad behavior

And BTW, in over 12 years of business I'm 99% certain that I have never had an employee take a new job while still on unemployment. Instead, they ride it out on the couch or find a cash under the table job so they can double dip on the system.

Now take a minute to consider this process as pertains to the employer:

  • Cash flow is taken from a small business to cover unemployment claims and unless you are in business for 20 years or more, you’ll never stop paying
  • In our example above, it was stated that approximately 80K free cash flow would be removed from a business that employs 15 people over 10 year period.
  • The 80K that could have been used to market, purchase equipment or employ others is then often awarded to people who exemplify the 4 examples above instead of focusing the resources on those that are honestly earning it.


So what can an employer do to reduce unemployment costs to his business?

Since you can’t stop paying into the fund and there’s only so much you can do about employees desires to change jobs or move out of the state, I would recommend the following:

1)     Contest ALL unemployment claims that you feel to be false in a timely fashion. There’s one rule of thumb that covers most cases.Was this person unemployed “through no fault of their own”. Remember, your % of payroll you pay is based on your history of utilization. If you never have a claim paid, you will pay the lowest possible percentage per year. I’ve personally seen rates between 3% and 8% though I’m sure there are higher percentages. Even a 5% savings on a 15 person payroll could save you 7,500 per year which equates to over 100,000 in 10 years if time value of money is factored in.

 

2)     Have very clear hiring paperwork including an initialed employee handbook for each employee. Handbooks tend to have fun facts like….you have to attend work or not rob you. While these ideas seem like common sense, the Unemployment Commission doesn’t always find in your favor unless you have been very clear with employees that these behaviors are frowned upon.

 

3)     Warn employees in writing when serious circumstances occur. I hate this suggestion but it’s true and necessary. The owner never wants to strain their relationship with employees through discipline but it’s often necessary to keep morale up and the owners behind covered in a UC claim. In larger companies, human resources gets to handle the paperwork and be the bad guy. In a small business, you as the owner get to be he bad guy and then turn the page and get back to working with said employee who’s been tasked with making money for your company. This works with your kids because they can’t run away. This is very challenging with your staff because they can.  

 

4)     Carefully vet interviewees regarding their near term intentions. Continual turnover is a massive time waster and then as a bonus you get to pay into 2 different unemployment funds for the year. Look for things like a history of moving from place to place or upcoming major life events like plans to get married, have kids or other family obligations. It is very common to find that an interviewee who promises to be an asset for you for 3-5 years reduces that timeline to 3-5 months when their life changes. While we as owners have to understand that those items cannot be controlled, we have to also be aware there are costs associated with decisions made that have nothing to do with us.

 

5)     Build the UC payment into your financial model.If you are planning to have 15 employees making over 10K per year at 5%, write it right into your cost of labor and understand that you have to build a model that makes money in spite of this cost. It may seem like 5K-10K per year for a large business isn’t a large number. However, 10 years at 10K at 10% interest s 175,000 in free cash flow!!

OK I feel a little better now that I got that off of my chest. If you are feeling stuck, and looking for a boost, I'd love to hear from you. If you've been following along the whole time, you should realize by now that there are a ton of little things that add up to a lot without understanding and maintenance. Things DON'T have to be this way. They can be better and you deserve it for putting yourself on the line for your business. I've set aside time in my schedule over the next couple of weeks. Just click the link below and book your complimentary strategy session.

               CLAIM YOUR FREE 60-MINUTE STRATEGY SESSION

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