Small employers face a tight labor market. The unemployment rate remains low and the labor force participation rate hovers near an historic high. During this and similar periods, financial pressure on state Unemployment Insurance (UI) trust funds is modest. Differing from periods of high unemployment and debates over extended unemployment benefits among other things, relatively little controversy now surrounds the program. A modest federal siphon skimming monies from the program to feed the deficit continues to grate, but the lack of current attention and controversy makes the present a good time for the
National Small Business Poll to review an employer-funded part of the social safety net, Unemployment Compensation.
The Unemployment Insurance (UI) system, more popularly known as unemployment compensation, is a joint federal-state program designed to provide people who are unemployed, through no fault of their own, financial support until they can find new employment. Employees losing their jobs are generally eligible for benefits unless they voluntarily quit or were fired for cause. Employer taxes fund the benefits. The amount of unemployment taxes (FUTA) employers’ pay are typically based on the employers’ experience-rating, that is, the frequency and duration of unemployment compensation payments made to the former employee-beneficiaries. Purposefully, experience-rated taxes give employers an incentive to police the system. They offer an incentive to challenge unjustified claims and a disincentive to layoff employees. There are limited exceptions to this tax regimen, particularly involving new businesses. Those firms are administratively-rated, meaning the appropriate state authority arbitrarily establishes rates until a
history or experience can be built.
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Considerable employee turn-over occurs within the small-business population, but the distribution is not even. Forty-nine (49) percent of all small businesses experienced no employee turn-over in the last 12 months (Q#5). Thirteen (13) percent lost just one employee during the year and another 11 percent lost two. Fifteen (15) percent experienced between three and five leaving. However, the average number turning over in the past year was 5.9 employees per small firm experiencing turn-over and 3.0 employees among all small businesses.
The most frequent reason that employees left was a voluntary quit. Still, 59 percent of small employers experienced no quits in the prior 12 months and another 13 percent experienced only one (Q#2). Among those experiencing at least one quit, an average of 4.5 employees per firm voluntarily left their jobs during the year. That figure translates into 1.8 employees across all small businesses.
The second greatest number of employees leaving were involuntarily terminated, that is to say, they were fired. Twenty-seven (27) percent of small employers fired at least one employee in the last 12 months, but almost half of that number (13%) fired just one (Q#3). An average of 2.9 employees per firm left under those circumstances. The average across all small businesses, however, was 0.6 employees per small business.
There are many possible reasons for firing an employee. Two of the more high-profile reasons and causes for which employers can be sued for negligence are employee harassment of other employees on the basis of sex, race, etc., and unsafe work practices, practices that potentially endanger other employees. Two percent of all small employers who fired someone for cause in the last year, or less than one percent of all small employers, fired one or more employees for harassment (Q#3a). However, 22 percent of all small employers who fired someone for cause in the last year, or six percent of all small employers, fired one or more employees for unsafe work practices (Q#3b).
The third reason to leave, and the one for which unemployment compensation is principally intended to address, is a layoff or dismissal for economic reasons. Thirteen (13) percent of small firms laid-off one or more employees for economic reasons in the last year (Q#4). The average number of layoffs per small business with at least one was 4.3 or 0.6 employees across all small businesses. But these numbers are significant undercounts because they exclude employees who left because a small business did not survive. That fact raises the number of firms that let employees go for economic reasons notably. It also substantially increases the number of employees laid-off per firm.
Not all employees who leave their jobs are eligible for unemployment benefits. Not all departing employees who are eligible for benefits file for them. Still, 41 percent of small employers who saw one or more employees leave in the last year or 22 percent of all small employers had at least one former employee who attempted to collect unemployment benefits (Q#6). Fifty-five (55) percent who had one or more employee(s) leave did not experience such an attempt and the remainder did not know or refused to answer.
Those small employers who experienced an unemployment claim in the last year typically experienced just one (44%) or two (20%) (Q#6a). The average among those experiencing at least one claim was just 2.9 claims per firm. There was a notable disparity by size of firm as expected with larger firms experiencing them more frequently than smaller ones, 2.1 claims for firms employing less than 10 people compared to 5.4 for those employing 20 people or more. Thus, the typical small firm appears to experience about 0.6 claims per year.
One non-intuitive aspect of the unemployment compensation program allows an employee who is released by one employer to draw benefits on the account of his previous employer. This situation can occur when the employee is terminated (without cause) soon after accepting a new position. The employee is eligible for benefits because he is terminated at the present job without cause, but can’t claim benefits against his current employer’s account; he has not worked for that employer long enough; so, the unemployed worker can claim unemployment benefits on the account of his prior employer, even if he would not have been previously eligible. This situation is not a rarity, either. Twenty-nine (29) percent of small employers with an unemployment claim in the last year (6% of the total population) indicate they had at least one claim of this nature. Another 20 percent did not know suggesting that a number of others encountered a similar situation (Q#6b).
a. Challenging Unemployment Claims
Employers can and do challenge unemployment claims that they believe are unjustified. Fifty-three (53) percent of small employers who experienced one or more claims in the last year made at least one challenge (Q#6c). That does not mean small employers challenged 53 percent of claims made, however. The percent of claims challenged is likely smaller given that more than one claim can be filed against them. However, the precise number of challenges was not captured by the survey.
Small employers have different policies about challenging unemployment claims. Five percent challenge all claims as a matter of policy (Q#6d). Another 11 percent challenge all but the most legitimate claims. Sixteen (16) percent selectively challenge them. Twelve (12) percent do not usually challenge claims and 5 percent never challenge them. However, 47 percent of small employers report that they have not had an unemployment claim; they therefore have no policy.
The significant portion never having experienced a claim seems suspect. But a careful review of the data suggest that 56percent of those employing fewer than 10 employees fall into this group compared to 9 percent of those with 20 or more. Moreover, the datum is consistent with others collected by the survey. It is also likely that a small percentage assumed that the question covered only the last year.
b. Most Recent Unemployment Claim
Sixty-two (62) percent of small businesses who experienced a claim have had a claim for unemployment compensation filed against their account in the last three years (Q#7). Another 29 percent have had at least one filed against them, but it was filed more than three years ago. Five percent, who have a policy about unemployment compensation claims, have not had one filed against them.
The survey probed the most recent claim more carefully if filed in the last three years. The first issue in the most recent claim is whether the small employer thinks the claim is justified. The employer’s attitude on the issue should be associated with his subsequent behavior. Forty-three (43) percent did, in fact, think the former employee’s claim was justified, though 15 percent did not think so strongly (Q#7a). Fifty-three (53) percent, in contrast, did not think the claim was justified, virtually all of which believed that strongly.
The number of small employers who decided to challenge the most recent claim filed against them (51%) is almost identical to the portion who thought the claim unjustified (Q#7b). The most common reason for a challenge was that the employee was fired for cause. Just over half (51%) of those who challenged the claim offered cause as the primary reason (Q#7c). The second most frequently cited reason for challenging a claim was that the employee voluntarily quit (36%). Five percent indicated the employee filing a claim abandoned the job, which is another version of a voluntary quit. Thus, firing for cause and voluntary quits were the basis for over 90 percent of challenges. Other reasons for a challenge occur infrequently.
The most common medium of challenge was a letter or similar form of written communication. Seventy-eight (78) percent made their challenge in writing only (Q#7c1). In about one of 10 cases (11%), the employer or an employee on the employer’s behalf appeared at the hearing to challenge a former employee’s claim. A lawyer appeared on the employer’s behalf in only 5 percent of cases.
Challenging claims can pay for a small employer. Small employers won decisions in 55 percent of the most recent cases they challenged (Q#7c2). The claimant won in32 percent of cases. Twelve (12) percent of challenging small employers did not know the outcome. A few of those challenges could be pending and some had agents making the challenge. It is otherwise difficult to understand why small employers would not know its outcome.
Though just over half challenged the most recent unemployment compensation claim made against them, 46 percent did not. The reason for not challenging in 70 percent of those instances was the belief that the employee had a legitimate claim (Q#7d). The second most frequent reason (16%) was that challenging a claim is not worth the cost and hassle. The defeatist “employers never win” reason was cited by 6 percent.
c. Steps to Control UC Costs
Small employers can take a variety of steps to control their unemployment compensation costs. Most are common sense, but a few require an understanding of the system and how it works.
One step simply involves periodically verifying the firm’s account with the state unemployment compensation authority to ensure its records are correct. For example, a claim may have been erroneously charged to the firm’s account. Fifty-nine (59) percent of small employers check their account annually (Q#9A). Those operating larger, small firms, more likely to experience claims, are also more likely to annually check. Still, only 73 percent of those employing 20 or more people do so.
An indirect technique that is likely to be more effective in larger, small firms is to periodically explore the reasons for employee turnover. The purpose of the measure is to identify causes for turn-over and subsequently take steps to reduce it. Draws on the firm’s unemployment account should thereby decline causing costs (taxes), in turn, to fall. Thirty-five (35) percent of small employers claim to make such reviews periodically (Q#9B). Sixty-four (64) percent of those employing 20 or more people do so.
Some states give discounts for prepayment of unemployment taxes. If a state allows prepayment, cash flow is good, and the firm has a strong likelihood of surviving the year, prepayment may be advisable. However, just 18 percent use the tactic (Q#7C).
Voluntary quits are not typically eligible for unemployment benefits. Therefore, employment of “job-hoppers” should not affect an employer’s unemployment account. But as a practical matter it may because the line between discharge and quit is not always clear. Possible unemployment consequences, therefore, become yet another reason not to hire job-hoppers. Still, just 31 percent of small employers follow this course (Q#7D), likely due to the difficulty of locating employees with a record of greater stability.
A seemingly elementary step to control unemployment compensation costs is to examine all unemployment claims carefully. Examination of a claim is not tantamount to challenging it. Rather the step is a way to weed out unjustified claims. Fifty-nine (59) percent take it, including 84 percent of those employing 20 or more people (Q#7E).
Employees are not assigned to an employer’s unemployment account until completion of a type of probationary period. If an employer terminates an employee before the period expires, the employee is not charged to the employer. Thus, it makes sense to review an employee’s job performance just prior to the probationary period’s end. If the relationship does not appear promising, its immediate termination may be advisable. Twenty-four (24) percent of small employers review a new employee’s job performance at this time (Q#7F).
A sound human resources practice is to have employees departing voluntarily sign a resignation letter. If questions should subsequently arise about the reason for departure, the employer has evidence of its voluntary nature. Still, just 36 percent of small employers use this practice (Q#7G).
Firing for cause can be a difficult situation to prove before unemployment compensation administrative officials. Further, it is unlikely the tribunal’s sympathies will lie with the employer. But the possibility the employer can prove his case rises substantially if events leading to the termination are periodically recorded (or documented). Sixty-seven (67) percent of small employers do so, including 92 percent of those employing 20 or more people (Q#7H).
d. FUTA Taxes
Small employers are remarkably unaware of the unemployment taxes that they pay – both in terms of the amount and the way those taxes are calculated. When asked to estimate the amount of unemployment compensation (FUTA) taxes they paid per employee over the last year, 68 percent could not provide an estimate (Q#1). Another 16 percent paid nothing. That leaves only 16 percent who would make a dollar estimate. The questionnaire followed up by asking those who could not make an estimate if they would make an estimate from broad categories, for example, $100 - $199 per employee or $300 - $399 per employee. Forty-six (46) percent of that group would not make an estimate in this format, either (Q#1a). Thus, 32 percent of the small-employer population cannot estimate the amount of FUTA taxes that they are paying (Q#1b).
The estimates small employers make suggest a considerable divergence in the unemployment compensation premiums they pay. Twenty-eight (28) percent (or 41% of those making an estimate) pay less than $100 per employee/per year. In contrast, 20 percent (or 29% of those making an estimate) pay more than $400. The substantial difference is not surprising given the variation in employee turn-over, and to a lesser extent, state unemployment rates.
Despite the incentives inherent in FUTA’s experience-rated tax regimen, less than half (49%) knew how their tax is calculated (Q#1c). Twenty-seven (27) percent of small employers think that their firms are experience-rated and another 22 percent think that they are administratively-rated. The plurality (48%) simply does not know and 3 percent refused to answer. Perhaps, the terminology used to describe the approach to tax calculation rather than the concept led to such a high number who cannot identify the approach applying to them. But if terminology is not the issue, the incentive structure of the tax cannot be working properly, at least for small employers.
There is a quirk in the FUTA tax system of which many small employers do not appear aware. Small-business owners are sometimes required to pay unemployment compensation taxes on themselves, even if their chances of ever collecting benefits are remote for both social and economic reasons. Thirty-four (34) percent of small employers indicate that owners of their
enterprise pay such taxes (Q#8). Another 16 percent do not know. Again, this is a relatively high percentage of those without knowledge, indicating that this question receives little attention.
Large employing institutions typically have explicit employment policies written and available to employees. The need appears less in smaller organizations where the employer is accessible to answer employment-related questions. Still, 56 percent of small businesses have a written employment policy or policies (Q# 11). The presence of such a written policy is highly related to employee size-of-firm. Ninety-four (94) percent of those small businesses employing 20 or more people have a written policy, while just 48 percent of those employing nine or fewer do.
Employment contracts are often associated with highly skilled and/or compensated employees. However, only 15 percent of small businesses have an employment contract with any employee (Q#10). Employee size-of-business is again closely associated with their presence. A quarter (25%) of small businesses employing 20 or more people has at least one employee under contract, while 13 percent of those employing nine or fewer do.
Few employees working in small businesses are members of trade unions. Three percent of small businesses have any unionized employees (Q#12); virtually no small employer is totally unionized. Nor does it appear at this point that unions are making a concerted effort to organize small employers. Two percent of small employers report one or more attempts to unionize their employees in the last three years (Q#12a). An equivalent number do not know whether an attempt has been made or not. However, organized labor’s current effort to change the basic rules of union certification potentially changes the situation considerably.
Small-business owners traditionally have been very interested in the unemployment compensation program. Whether that interest stems from its employer costs or the injustice of benefits paid to former employees whose reason for leaving is in doubt is not clear. Perhaps a hint is present in the fact that half of small employers strongly believe the last claim filed against them was not justified while one-third cannot even estimate annual FUTA taxes on a per employee basis. The current tight labor market and new policy emphasis seems to have refocused their interest elsewhere. The high unemployment rates of the mid-1970s to the mid-1980s and again in the early 1990s that drove program use and costs are simply no longer relevant. Even the 2003, the post 9-11 unemployment peak, was modest in comparison. In addition, the labor policy agenda has shifted to emphasize legislatively-established (rather than bargaining or market-established) wage and benefit packages as well as new means to organize employees.
Still, small employers retain the idea that their actions matter in unemployment compensation outcomes. They often take steps to reduce their liability to claims, though probably not as often or as widely as they should. Moreover, they almost always challenge claims that they think cannot be justified. Both act as deterrents to abuse of the UI system, making small employers more receptive to it than they otherwise would be.