SI Review: November 2012


Benefit of Counsel

The Hidden Tax Burden

Employers could pay big federal penalties around unemployment claims

By Brian Nugent

Employers pay unemployment taxes (in some states referred to as contributions or premiums) on their employees pursuant to a federal program that is administered by the states. Each state has enacted unemployment statutes within the overall structure of the federal program and the authority of the federal unemployment act, which is actually a part of the Social Security Act. The tax rate varies by state and by each employer’s history of unemployment. As states’ unemployment trust funds have dwindled due to the Great Recession and its high unemployment levels, many states have been forced to raise employers’ rates.

But there’s more to come. In late 2011, Congress issued a largely overlooked mandate on states and employers. Per the mandate, which was part of the Trade Adjustment Assistance Extension Act, employers must respond timely and accurately to requests for information from state unemployment offices relating to claims for benefits. (Each state decides — usually by rule — the response time required for employers operating in their state.) Employers that fail to comply forfeit their right to contest benefit payments that were paid, but based on later information deemed to be erroneous.

The mandate requires each state to enact legislation by Oct. 21, 2013, that denies an employer relief from erroneous benefit charges assessed against it if the employer:

  1. Was at fault for failing to respond timely or adequately to the request of the state agency for information relating to a claim for unemployment benefits that was subsequently overpaid; and
  2. Has established a pattern of failing to respond timely or adequately to requests from the state agency for information relating to claims for unemployment benefits.

It is clear the mandate applies only to the failure of an employer to respond to a request for information from a state unemployment agency in response to a benefits claim. What is not particularly clear is what constitutes a “pattern” of failing to respond timely and the extent of the remedy or penalty that a state may impose. (The U.S. Department of Labor previously issued guidance stating that a state could impose penalties based on only one failure to respond timely or adequately.)

The first state to comply with the mandate is Minnesota. Its statute provides that when an employer’s failure to respond timely and adequately to information requests results in an erroneous payment of unemployment benefits, and where there is a pattern of such failures, the employer must repay the state the amount of overpaid unemployment benefits used, which will be used to compute the employer’s future unemployment tax rate. (In the case of nonprofit or government employers, the amount that was charged to the reimbursable account.)

The Minnesota statute also defines a “pattern of failing to respond timely or adequately” as either the failure to respond to two or more requests, or two percent of all requests in the past six months, whichever is greater. It is unclear how Minnesota intends to track how employers are responding to requests for information. This is an issue each state will need to address.

Note that the Minnesota law imposes a penalty that goes beyond requiring an employer to accept benefit charges for claims that are later determined to have been improper, and requires the employer to repay to the state’s trust fund the amount of overpaid unemployment benefits. In essence, this is a double penalty. The benefit charges will adversely affect the employer’s future tax rate and the employer must also pay back the overpayments.

In anticipation of 49 other state laws, and to comply with Minnesota’s statute, employers will need to examine their process for responding to unemployment claims, and in particular, whether the processes comply with each state’s requirements for timeliness and adequacy imposed by the federal law. The consequences for not reviewing such processes could be rather costly.

Brian Nugent, an attorney, has extensive experience representing staffing firms. He can be reached at


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