Unemployment Insurance Basics
While unemployment insurance laws are regulated by states and, therefore, vary from state to state, most employers, whether they are a corporation, government agency or nonprofit organization, must contribute into a state unemployment fund. The amount of this contribution depends on the number and types of workers employed and their wages. In most states, no contribution will be made for contract workers and exempt employees, as defined by state employment laws. These funds are invested by states and used to pay unemployed workers.
In addition to the number, type and income levels of employees, the number of former workers collecting unemployment benefits will also influence the amount of contribution an employer must make into state funds. Employers who lay off a large number of workers, and consequently lead to a large amount of drawdown from the fund in relation to their size, pay higher insurance contributions than more stable employers whose former workers rarely collect unemployment benefits.
Short and Long-Term Impact
Since the benefits paid to former employees do not come directly from the former employer, a single additional worker filing for unemployment benefits is unlikely to have any immediate impact on the former employer. Most states, however, periodically adjust the contribution rates of employers based on the number of former workers applying for unemployment benefits. The most critical factor determining the effect of one laid off employee is the size of the workforce. While an additional lay off in a firm employing 500 people will make a small change, it is a much bigger deal in a company of five, representing a 20 percent reduction in the workforce and likely resulting in a larger hike in contributions.
Over the longer term, more unemployment insurance claims may lead to a reduction in unemployment benefits paid out. As more workers receive benefits, the funds in state unemployment funds will decrease. Often, the only way to ensure that all eligible applicants can get paid is to decrease benefits or pay benefits for shorter durations.