What Business Owners Need To Know About Unemployment & COVID-19

Empty office space after layoffs

Changes in any small business are inevitable. Whether the business is experiencing rapid growth or there is a simply steady stream of customers lining up outside its doors, every day brings interesting and new challenges. Those times are exciting, and the adventure of owning a business feels like it may never end. Other times, we find ourselves in positions where growth has slowed, money is tight, and there are tough decisions to be made. This can mean making various cuts, and can include cuts to the team.

No employer enjoys letting go of employees, but it’s especially tough when the team is small and employees feel like family. Employees leaving a business is an unfortunate reality, and if you find yourself in this position there are some steps you need to follow, a number of ways you can help them. And if you’re in this predicament because of the COVID-19 crisis there are some extra things you should know. 

Unemployment Benefits & Small Business Owners

When any full-time employee is let go from their job because of circumstances out of their control, they’re able to apply for unemployment benefits through their state government, assuming they meet certain eligibility requirements. Once they do this, they’re given a percentage of their salary to hold them over until they find a new job. This entire process is facilitated by the state, and, as a business owner, you won’t need to do anything except respond to the claim.

Where Does Unemployment Money Come From?

This is where you, the business owner, come in. Unemployment responsibilities actually begin when you make the hire—which might seem a little counterintuitive. When you hire someone, you’re required to report it to the state, and their headcount is added to your unemployment tax obligation. Should an ex-employee file for unemployment, the money paid out to them actually comes from the pool of money you have been paying into through these taxes. 

Unemployment taxes are made up of Federal Unemployment Tax Act (FUTA) tax and a State Unemployment Tax Act (SUTA) tax, which is the tax your business is paying into for the benefit of your employees. 

FUTA is a 6% tax on the first $7,000 your employee makes, which means you’ll pay $420 at most for each employee you hire. Typically, you’ll receive up to a 5.4% credit for paying state unemployment taxes. If your business qualifies for the highest credit your FUTA tax rate would be decreased to 0.6% meaning your FUTA payment for each employee will drop to just $42.

Your Unemployment Tax Rate

Each year in the fall, the unemployment office calculates next year’s unemployment tax rate for each business and sends them a notice. You’ll receive this new rate by January 31st of the following year. The exact calculation varies by state, but it looks at the total tax paid into the system against the total benefits paid out for that employing entity. If claims against your business go up, your rate will go up.

In other words, if you keep a steady headcount, you’re more likely to pay a lower unemployment tax rate. 

Unemployment Insurance vs. Unemployment Tax

Unemployment insurance and unemployment tax are sometimes used interchangeably, but (while the difference between them is subtle) they’re not technically the same thing. The unemployment tax your business pays funds the unemployment insurance paid to the ex-employee by the government. 

Someone Filed for Unemployment. Now What?

When an ex-employee files an unemployment claim with the state, they are automatically assigned a case worker who will reach out to your company by mail to verify that all of the information the employee gave the state in their unemployment claim is true. 

You should expect to answer how long the employee was with you, how much money they made, and if they were fired for cause, lost their job in a layoff, or if they just quit. You can contest the unemployment claim by providing information if you fired the employee for cause, if the employee quit on their own accord, or if the employee was actually a contractor

Business Owners Can Help or Hinder Ex-Employees

As a best practice, you should not interact with any of your ex-employees until they sign a separation agreement. Once a separation agreement is signed, you can help them find new jobs and can even give them recommendations for new roles. 

Keep in mind, if you’re trying to help employees out by giving them some hours, you may not really be helping them. Because of strict rules surrounding claiming unemployment benefits, those ex-employees must accept any jobs or hours offered to them and then claim those hours. So picking up a few hours might make them ineligible for unemployment benefits. Be realistic about what you can offer and weigh whether it’s more valuable than full unemployment benefits. If not, don’t offer. 

Personal Liability

There are some instances when you’ll need to proceed with caution while helping your ex-team members. If, for example, you’re used as a reference and during the conversation your reaction to a question prevents that ex-employee from being hired, you are opening yourself up to legal trouble. Avoid this by providing a reference that simply confirms employment dates, titles, and if that person is eligible for rehire at your company.

If an employee was let go from your business over any safety concerns, do not recommend that employee to other businesses—we can’t stress this enough. If anything with that employee should happen in the future and you recommended them, you might find yourself in a legal pinch. 

When It Comes to Furloughing Employees

Furloughing your employees is similar to laying them off except they’re still eligible for the benefits provided by your company, like health care. Because of the cost of keeping up their benefits, it doesn’t usually make sense for small businesses to furlough their employees. Generally speaking, larger corporations are more likely to take this path because they have the funds to continue to provide employee benefits, even if they aren’t paying their team members a paycheck. 

If you have very specific roles that are hard to train or hire for, you might consider furloughing your employees. Keep in mind that if your employees are on furlough they can’t access their email, contact customers, answer any business questions, or do any other tasks that would amount to a single minute of work. Treat furloughed employees like they’re on a remote vacation with no access to WiFi. 

Changes In The Days of COVID-19

As part of the CARES Act, the $2 trillion coronavirus stimulus bill that passed on March 25, 2020, unemployment benefits are being extended to all workers including freelancers, gig-economy workers, and other independent contractors. 

Normally, if an ex-employee files for unemployment benefits with the state the amount of money your business will be taxed would increase the following year, as we covered above. But the stimulus bill makes an exception for the time being. 

Unemployment benefits are also extended to employees who have only been with your company for a short amount of time, where typically they must be employed by your business for anywhere from 12 to 18 months to qualify (depending on which state you’re located in).

Small Business Funding Available

For small business owners, the federal loan programs announced as part of the CARES Act primarily focus on keeping Americans employed. For that reason, the Economic Injury Disaster Loan offers an advance of $1,000 per employee, up to $10,000. 

The Payroll Protection Plan is the most popular option for small businesses because it’s the only one to offer loan forgiveness. However, the only way to be eligible for loan forgiveness is to spend the funds primarily on payroll expenses. 

This means that if you receive the funds, you’ll need to prove your efforts to keep employees on the payroll. Already laid off some of your team? Don’t worry. As long as you can bring your headcount and payroll expenses back up to previous levels by June 30, 2020, you’ll still be eligible for forgiveness. 

Standby Period

Due to the COVID-19 crisis, there is now a twelve-week standby period during which an ex-employee won’t need to prove they are trying to find work (like they normally would when claiming unemployment benefits). If you’re planning to rehire an employee on the other side of this crisis and it takes longer than twelve weeks, you can request an extension of the standby period for them with your state government—they can’t request this extension on their own. For example, Washington State lists the email address employers can reach out to in their COVID-19 newsroom.

No one wants to lay off valued team members, and we don’t want you to either. That’s why we’ve built a free calculator to help business owners apply for the EIDL and Paycheck Protection Plan loans, which we hope will allow you to keep your team members right where they belong. It only takes a few minutes and you’ll breathe easier knowing your numbers are based on the information in your accounting file. 

If your business needs other assistance during this difficult time, visit our COVID-19 resources page.

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