The rules surrounding unemployment insurance (UI) benefits can be confusing at times to all employers, including cities. The League of Minnesota Cities recently asked the state Department of Employment and Economic Development (DEED) to answer some UI questions for cities.
How are UI benefits funded?
All unemployment benefits are paid from the Minnesota UI Trust Fund. The Trust Fund must carry a balance sufficient to meet a one-year projected payout in the event of a downturn in the economy. Payroll taxes and fund reimbursements are structured— above all else—to maintain the solvency of the fund.
In general, taxes and reimbursements are higher for those employers more often associated with the payment of unemployment benefits. However, as with any insurance system, maintenance of overall fund solvency is distributed across all employers. A UI funding mechanism that only “charged” employers for the unemployment they “caused” would not be workable and would be immediately insolvent.
The general rule is that all employers repay the UI Trust Fund for any unemployment benefits paid to their recently separated employees. There are two distinct employer categories: reimbursing employers and taxpaying employers. The difference between the two main types of employers is the mechanism by which they repay and the time frame in which the repayment takes place.
Do employers ever have to pay for unemployment benefits that they did not “cause” themselves?
Yes. Employers that “cause” unemployment benefits to be paid sometimes cease to exist before they repay the UI Trust Fund for those costs (for example, a business lays off half its workers and shuts down several months later). When that occurs, the unrecovered costs are distributed among other employers collectively. These unrecovered costs are borne by taxpaying employers.
There is one narrow scenario in which reimbursing employers may be charged for unemployment benefits caused by another employer. Consider the following hypothetical case:
An employee quits her job with Employer A to take a job with Employer B. After a short period of time, the employee gets laid off from Employer B. The laid off employee submits an application for unemployment benefits and is determined eligible.
If Employer A in this scenario is a reimbursing employer, it will be required to repay a portion of the unemployment benefits paid to the employee (proportionate to the amount of wages it paid the employee in the previous four quarters).
The reason for this is that a worker’s maximum unemployment benefit amount is based on all the wages earned in the worker’s “base period” (meaning the wages from both Employer A and Employer B). If Employer A is not charged for its portion of the benefits, those costs would have to be distributed to all taxpaying employers via the UI Trust Fund—further increasing the “unrecovered costs” taxpaying employers are expected to bear.
Since there is no mechanism by which reimbursing employers contribute to otherwise unrecovered costs to the UI Trust Fund, they are not allowed to increase that cost for other employers.
How can reimbursing employers manage their UI costs?
Reimbursing employers—including local government entities—have the option to become taxpaying employers. This typically increases UI costs, but may make them easier to budget over time. A reimbursing employer can also simply budget for the likely cost of future UI benefits.
Both taxpaying and reimbursing employers can “raise an issue” when they believe their former employee should not be eligible for unemployment benefits, or when they believe the unemployment benefits paid to their former employee should not impact their account.
Other considerations for managing unemployment costs:
- Avoid significant changes in staffing and employee hours, when possible.
- Be aware that seasonal, part-time, or temporary hires can impact your UI liability. We have observed that a number of municipalities make these kinds of hiring decisions without consideration of the possible downstream impact.
- Quickly remove poor performers to minimize your liability or responsibility for UI benefit charges.
- Review written work rules with your new hires, give them a copy, and have them acknowledge by signing.
- Use progressive discipline and provide written warnings.
- Document performance issues, disciplinary actions, and reasons for tardiness/absences.
Visit www.uimn.org for additional information about how to manage your unemployment insurance account and avoid unnecessary costs.
Special thanks to DEED staff for responding to these questions and providing additional insight into unemployment benefits.