Unemployment

Federal law, administered by states

The UC program is a federal-state partnership based upon federal law, but administered by state employees under state law.

Federal law defines certain requirements for the program. The Social Security Act (SSA) and the Federal Unemployment Tax Act (FUTA) set forth broad coverage provisions, some benefit provisions, the federal tax base and rate, and administrative requirements.

Federal role

The major functions of the federal government are to:

• Ensure conformity and substantial compliance of state law, regulations, rules, and operations with federal law;
• Determine administrative fund requirements and provide money to states for proper and efficient administration;
• Set broad overall policy for administration of the program, monitor state performance, and provide technical assistance as necessary; and
• Hold and invest all money in the unemployment trust fund until drawn down by states for the payment of compensation.

States’ role

Each state designs its own UC program within the framework of the federal requirements. The state statute sets forth the benefit structure (e.g., eligibility/disqualification provisions, benefit amount) and the state tax structure (e.g., state tax base and rate).

The primary functions of the state are to:

• Determine operation methods and directly administer the program;
• Take claims from individuals, determine eligibility, and insure timely payment of benefits to workers; and
• Determine employer liability, and assess and collect contributions.

Where does the money come from?

Under the FUTA, a federal tax is levied on covered employers as a percent of wages up to $7,000 a year paid to an employee. The law, however, provides a credit against federal tax liability up to a certain percent to employers who pay state taxes timely under an approved state UC program. This credit is allowed regardless of the amount of the tax paid to the state by the employer.

Accordingly, in states meeting the specified requirements, employers pay an effective federal tax of 0.8 percent, or a maximum $56 per covered employee, per year. Under current law, the 6.2 percent federal tax is scheduled to drop to 6.0 percent beginning with calendar year 2008, and the effective tax to 0.6 percent.

Where does the money go?

This federal tax is used to fund a number of different UC related expenditures:

• All federal and state administrative costs associated with UC programs,
• The federal share of benefits paid under the federal-state Extended Unemployment Compensation Act of 1970,
• The loan fund from which an individual state may borrow (Title XII of the Social Security Act) whenever it lacks funds to pay UC due for any month. and
• Benefits under some of the federal supplemental and emergency programs.

In addition, the FUTA tax is used to fund labor exchange services, employment and training services for veterans and disabled veterans, and some labor market information program activities.

Covered employers

An employer is subject to the federal unemployment tax if, during the current or preceding calendar year, he/she employed one or more individuals in each of at least 20 calendar weeks, or if he/she paid wages of $1,500 or more during any calendar quarter of either such year. Variations on these requirements relate to employers in agriculture and domestic service:

• In agriculture, employers who have at least 10 or more workers in each of at least 20 calendar weeks in the current or preceding calendar year or a cash payroll of at least $20,000 during any calendar quarter in either such year are subject to the tax.
• In domestic service, employers who have a cash payroll of at least $1,000 in any calendar quarter in the current or preceding calendar year are subject to the tax.

Taxable wages are defined as all remuneration from employment in cash or in kind with certain exceptions. The exceptions include earnings in excess of $7,000 in a year, and payments related to retirement, disability, hospital insurance, or similar fringe benefits.

State taxes

All states finance UC primarily through contributions from subject employers on the wages of their covered workers. In addition, three states (Alaska, New Jersey, and Pennsylvania) collect contributions from employees. These taxes are deposited by the state to its account in the UTF in the Federal Treasury, and are withdrawn as needed to pay benefits.

Experience ratings

The system under which employers are assigned tax rates in accordance with their individual experience with unemployment (and subject to the needs of the state program) is referred to as experience rating. Within the confines of the general federal requirements, the experience rating provisions of state laws vary greatly.

All state laws provide for a system of experience rating under which individual employers’ contribution rates vary from the standard rate on the basis of their experience with the amount of unemployment encountered by their employees.

In spite of significant differences, all systems have certain common characteristics. All formulas are devised to establish the relative experience of individual employers with unemployment or with benefit costs. To this end, all have factors for measuring each employer’s experience with unemployment or benefit expenditures, and all compare this experience with a measure of exposure, i.e., payrolls, to establish the relative experience of large and small employers.

Benefit rights

There are no federal standards for benefits in terms of qualifying requirements, benefit amounts, or duration of regular benefits. Hence, there is no common pattern of benefit provisions comparable to that in coverage and financing. The states have developed diverse and complex formulas for determining workers’ benefit rights.

Under all state UC laws, a worker’s benefit rights depend on his/her experience in covered employment in a past period of time, called the base period. The time period during which the weekly rate and the duration of benefits determined for a given worker apply to such worker is called the benefit year.

The qualifying wage or employment provisions attempt to measure the worker’s attachment to the labor force. An insured worker must also be free from disqualification for causes which vary among the states. All but a few states require a claimant to serve a waiting period before his/her unemployment may be compensable.

All states determine an amount payable for a week of total unemployment as defined in the state law. Usually a week of total unemployment is a week in which the claimant performs no work and receives no pay. In most states a worker is partially unemployed in a week of less than full-time work when he/she earns less than his/her weekly benefit amount. The benefit payment for such a week is the difference between the weekly benefit amount and the part-time earnings, usually with a small disregard as a financial inducement to take part-time work.

Qualifying wages and employment

All states require that a claimant must have earned a specified amount of wages or must have worked a certain number of weeks or calendar quarters in covered employment, or must have met some combination of the wage and employment requirements within his/her base period, to qualify for benefits. The purpose of such qualifying requirements is to restrict benefits to covered workers who are genuinely attached to the labor force.

Benefit eligibility and disqualification

All state laws provide that, to receive benefits, a claimant must be able to work and available for work. Also, he/she must be free from disqualification for such acts as voluntary leaving without good cause, discharge for misconduct connected with the work, and refusal of suitable work. The purpose of these provisions is to limit payments to workers unemployed primarily as a result of economic causes.

In all states, claimants who are held ineligible for benefits because of inability to work, unavailability for work, refusal of suitable work, or any other disqualification are entitled to a notice of determination and an appeal of the determination.

Benefit computation

Most states measure unemployment in terms of calendar weeks. Under all state laws a weekly benefit amount, that is, the amount payable for a week of total unemployment, varies with the worker’s past wages within certain minimum and maximum limits. The period of past wages used and the formulas for computing benefits from these past wages vary greatly among the states.