Any company with employees has to pay Unemployment Insurance. Uninformed business owners look at this like “just another tax”, and don’t manage their claims. However, companies that develop systems and practices for managing their workforce — or who hire experts to do it for them — see substantial savings in their unemployment insurance payments. What’s more, these same measures help decrease retention, and lower your risk of a lawsuit.
Unemployment is fairly simple to calculate. Take the total in claims paid to your former employees for the last three years, and divide it by your total payrolls for the last three years. In Connecticut, this number is capped at 5.4%. Even if your rate is 10%, you won’t pay more than 5.4% (unfortunately, there’s an additional surcharge of 1.4% that’s levied on all employers at the moment, bringing the total effective rate to 6.8%).
The good news here is that it isn’t a tax of 6.8% on your total payroll. Employers only pay unemployment taxes based on the first $7,000 that a new employee earns in a year. After the employee has earned $7,000, there’s no more tax assessed.
Reducing the Payment
In order to reduce the number that your business pays in unemployment, you have to change the numbers going into the unemployment formula. If your payroll increases, your overall unemployment insurance rate will go down. However, the part of the equation that you control is the expense of previous employees collecting unemployment.
The unemployment system lets employers challenge their former employees from collecting unemployment. If you can prove that the employee was fired for a good reason, you can win, and pay nothing on that claim. However, the unemployment system is like a court with its own strange rules, and its reasonably hard for a first time employer to navigate. Additionally, employers need very clearly defined rules and policies in order to win an unemployment hearing. When these are in place, it becomes substantially easier for the employer to show that an employee broke a rule that they knew existed, and therefore win the case. More wins, in unemployment, means lower unemployment taxes.
What to Do?
Any employer can become an expert in the unemployment system. After ten or fifteen hearings, you get a good sense of how the system works, and start to naturally change your processes to address the issues that unemployment judges cite you for. However, if you don’t have the time to spend writing policies and sitting in hearings, you can bring in experts. Give OEM a call, and we can put you on the path to lowering your unemployment taxes.