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Is Unemployment Really the Expense You Think It Is?

hr best practices hr compliance hr department hr essentials hr for small business hr management Jun 15, 2021

Unemployment expense is a line item in all businesses. What some managers don’t realize however is that unemployment is essentially an insurance product. The business is only responsible for a small amount paid per employee as an insurance premium. This then pays out to the unemployed with no additional cost to most businesses. As such, the cost to a business for a proper termination is not an overwhelming financial impact and should not be considered if it’s time to make a change.

How is unemployment calculated?

Unemployment insurance differs greatly from one state to another in the administration. The program itself is mandated by the Federal Government but regulated by the individual states.

Evaluate your current unemployment rate. You can find this number by looking at the tax rate in your payroll system. The rate you pay is a combination of the range your state sets, and the experience you have had with claims. The more claims you have, the higher your rate will be.  But if you manage your termination you’ll generally find the rate is fairly low.  Make sure to also know the salary cap for your state.  This is the salary at which the expense will stop.  So if your state has a salary cap of $15,000, you only pay unemployment on the first $15,000 of salary paid to each employee.

If you have a great deal of turnover, your cost of unemployment insurance will increase. Each state has a salary cap on the insurance, so the more people that are hired and starting at zero the higher your total expense at year end. Likely, you will have to pay unemployment taxes on some employees that do not stay with your company all year and contribute to your high unemployment. For this reason, we recommend you to look at the total W2’s issued last year for analysis.

What can you do about unemployment insurance?

Fighting unemployment claims is a frustrating and time-consuming activity. Consider the impact if you can reduce your rate by even 1 %. If it is a significant number to your organization, we encourage you to engage the activities below. If the number is not a driver in your operation, then unemployment may not be worth a great deal of attention.

To reduce unemployment expense, consider these actions:

  • Improved hiring; check out a past blog post on recruiting.
  • Know the amount of time your state allows you to "test" an employee. This IS NOT your introductory period in your handbook. Many states will allow a period of time you can separate an employee and not be responsible for the unemployment.
  • Document the issues with performance and have employee sign notices of poor performance.
  • Provide a suspension without pay prior to termination.

Whether you determine unemployment tax is critical to your business or not, as a leader and/or HR professional, understanding how the number is calculated is an important part of running your business.

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