In response to a federal mandate requiring states to restructure their unemployment insurance ("UI") laws to reduce government spending on UI benefits, New York State has amended its law in a way that may cause New York employers to rethink their severance policies and procedures. The New York law also affects how employers may respond to New York State Department of Labor ("DOL") inquiries regarding a former employee's UI eligibility. Specifically, in 2011, Congress passed the Unemployment Insurance Integrity Act ("Act") to help maintain the integrity of the nationwide UI program. The Act required each state to implement, by October 2013, legislation to prevent, detect, and reduce the improper payment of UI benefits.
UI Law's Effect on Severance Benefits
Before these changes became effective, severance benefits affected a former employee's eligibility for UI benefits only in very limited circumstances. Recent changes to New York's UI law, however, provide that receipt of severance pay will render a former employee ineligible for UI benefits for any week during which he or she receives severance pay, so long as the former employee began to receive severance benefits within the first 30 days following the termination of the employee's employment. Further, when severance pay is provided in a lump sum, the DOL will determine how many weeks or months that lump sum would cover if it had been paid over time, and the former employee will be ineligible for UI benefits for any week during which the allocated severance pay exceeds the maximum UI benefit amount.
Significantly, these rules do not apply when the initial severance payment is paid more than 30 days after the former employee's last day of employment with the company. Further, nothing in these rules invalidates a former employee's entitlement to UI benefits once the severance period ends. In other words, if an employee's potential period of UI eligibility is 26 weeks, and the employee receives a lump-sum severance payment two weeks following the termination date equivalent to eight weeks of base salary, the employee will be ineligible to receive UI benefits for the first eight weeks following termination and will receive 18 weeks of UI benefits once the "severance period" ends, assuming continuing eligibility (e.g., no new job, continuing to seek employment, etc.). On the other hand, if the employee received the same lump-sum payment on the 31st day following termination, such severance payment would have no effect on the employee's UI eligibility, and the employee would be eligible for the full 26 weeks of UI benefits.
Other Changes to New York's UI Scheme
1. Pattern of Failing to Respond to UI Inquiries
In response to the requirements of the Act, as set forth above, the New York UI law was amended to provide that employers will not be relieved of charges to their UI accounts if the State UI Division determines that: (1) the payment of unemployment benefits was made because the employer or its agent was at fault for failing to respond timely or adequately to the request of an agency for information relating to a claim for UI benefits, or (2) the employer or its agent has established a pattern of failing to respond timely or adequately to such requests.
In New York State, the UI Division generally sends requests for information pertaining to a former employee's eligibility for UI benefits in a standard form, which asks for information, such as the former employee's previous pay and the circumstances of his or her termination. Upon receipt of the request, New York employers have 10 days to respond. Employers that do not submit a timely response will be deemed to have failed to respond. Employers that fail to respond to two or more claims are deemed to have exhibited a "pattern of failing" to respond and will not be refunded any erroneous UI payments that are recouped by the State. In other words, even if the UI Division decides that the former employee is not entitled to benefits (or has been otherwise overpaid), the UI Division will not credit the employer's account (as it used to do). Instead, that money will be paid into the State's general UI Fund.
Thus, if an employer wishes to contest a UI claim, it should ensure that it makes a timely and complete response to the UI Division's initial request for information. On the other hand, if the employer does not wish to contest the claim, there does not appear to be any independent penalty for not responding. We are aware that some New York employers opt not to respond to such inquiries, either because they wish for the former employee to receive UI benefits or because they fear that their response to the UI inquiry will be used as evidence in some other proceeding, unrelated to UI eligibility (e.g., a discrimination claim). Now, employers must understand that failing to respond may have other implications.
2. Increase in Employer Contributions
The other major change to New York's UI law is that New York has increased employer contribution requirements to reduce underfunding of the New York State Unemployment Insurance Fund by eliminating the six lowest unemployment insurance employer contribution rates. In addition, employers must now make contributions for the first $10,300 of wages for each employee, up from $8,500 in 2013. The amount of wages for which employers are responsible for contributions will continue to increase annually until it reaches the first $13,000 in earnings per employee in 2026.
3. Taxation of Severance Benefits
Finally, on the subject of severance payments, employers should be aware that in its March 25, 2014, decision in United States v. Quality Stores, 572 U.S. __ (2014), the Supreme Court of the United States confirmed that severance payments made in connection with a reduction in force, discontinuance of a plant or operations, or similar conditions constitute "wages," which are taxable under the Federal Insurance Contributions Act ("FICA"). In rejecting the argument that such payments constitute supplemental unemployment benefits, the Court looked to FICA's broad definition of "wages" as "all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash," and reasoned that, since severance pay is only provided to former employees, it qualifies as "remuneration for employment." The Court distinguished "severance" from "supplemental unemployment benefits," which are made periodically and tied directly to the receipt of state unemployment benefits. As such, employers should seek the advice of counsel before declining to make FICA withholdings on any type of severance payments or benefits made in connection with a reduction in force or terminations under similar conditions.
What New York Employers Should Do Now
While not legally required, if you would like to enable a terminated employee to become immediately eligible for the full complement of UI benefits under the terms of the amended statute (notwithstanding the payment of severance benefits), consider delaying the commencement of severance payments until at least 31 days following the termination date.
In light of the potential ramifications of a "pattern of failing to respond," consider eliminating provisions from severance agreements whereby the company agrees not to contest applications for UI benefits. The DOL may, in connection with an assessment of UI eligibility, request a copy of the separation agreement, and nothing in that agreement should appear to demonstrate that you will take any unlawful, untruthful, or otherwise improper action in order for a former employee to receive UI benefits.
Respond timely and completely to DOL information requests if attempting to contest a UI claim by a former employee.
Withhold Social Security and Medicare taxes from any severance payments.
IRS Circular 230 Disclosure
To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of: (i) avoiding any tax penalty, or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.