New Financial Liabilities for Employers Under the Unemployment Insurance Integrity Act Now in Effect

Originally passed in 2011 as part of the Trade Adjustment Assistance Extension Act of 2011 ("TAAEA"), the Unemployment Insurance Integrity Act ("Act") went into effect across the nation on October 21, 2013.  The Act mandates each state incorporate new federal requirements into their unemployment insurance ("UI") laws in order to detect and reduce improper UI payments.  The federal government's intent is to ensure more stringent nation-wide standards on employers in order to address waste within the UI system, especially improper payments to unqualified claimants.  The Act imposes new burdens that employers should be aware of in order to avoid unnecessary financial liability.

Among the new federal requirements mandated by the Act, states must now impose new obligations on employers in how and when they respond to initial claims for UI.  States must require employers and their agents to respond to the state agency administering UI benefits in a timely and adequate manner when the agency requests information about a claimant's application for UI benefits, particularly the reason why the claimant's employment was terminated.  The states were given two years to consider and adopt new legislation that would meet these new requirements.  In order for state legislation to meet these requirements, the legislation must require an employer's UI reserve account be charged for improper payments if the claimant is determined ineligible for UI benefits and if the employer has developed a pattern of not responding in a timely and adequate manner to the agency's request for information about a claimant. (26 U.S.C., § 3303(f)(1)(A)-(B).)

California's Legislation

In response to the Act, the California legislature passed AB 1845 on September 13, 2012, and it was signed by the Governor on September 29, 2012.  AB 1845 added Section 1026.1 to the California Unemployment Insurance Code to implement the federal requirements.

As required by the Act, Section 1026.1 holds employers financially responsible for improper charges or overpayments if that employer has established a pattern of failing to respond to the California Employment Development Department's ("EDD") requests for information.  This holds true even if the employer was only partly responsible.  Employers are also responsible even if they have contracted with third-party administrators to handle unemployment claims and those third-party administrators are ultimately responsible for the improper payments.  The employer's financial responsibility for the improper charges comes from the fact that the employer's unemployment reserve account cannot be relieved of any of the charges related to those improper payments.  (Cal. Unempl. Ins. Code, § 1026.1.)

For the purposes of the Act, California's AB 1845 determines that an employer or agent has established a pattern of failing to respond timely or adequately "when the employer or agent fails to respond timely or adequately in two instances relating to the individual claim for unemployment compensation benefits."  (Cal. Unempl. Ins. Code, § 1026.1 [emphasis added].)

California has additional penalties available for employers who are responsible for improper charges or overpayments, pre-dating the Act.  California may fine an employer between two and ten times the unqualified claimant's weekly benefit amount, but not to exceed $4,500, if the employer "willfully fails to report a material fact concerning [the UI claimant's] termination…." (Cal. Unempl. Ins. Code, § 1142.)  As a result, California employers face at least two possible financial penalties: 1) charges to their unemployment reserve account; and, 2) fines under Section 1142. 

How Should California Employers Respond?

A few examples of what employers should keep in mind in light of this legislation follows.

  • Employers frequently agree with employees, either in written settlement agreements or orally, that they will not contest an employee's claim for UI benefits after the employee is terminated.  Employers normally adhered to this agreement by simply not responding to the EDD's request for information about the former employee's claim.  Employers often view this as a simple form of consideration in exchange for an employee's general release of claims.  In light of the Act, AB 1845, and Section 1142,employers who continue to make such agreements will face potential financial liability.  Employers should seek legal counsel before considering any such agreements.
  • Employers may fail to respond to the EDD's requests for information because they miss the response deadline or the inquiries are simply overlooked in the shuffle of everyday business.  Currently, employers are required to respond to the EDD within ten days.  Employers should keep in mind that under AB 1845, the EDD will determine that an employer has developed a pattern of not responding to requests for information if the employer fails to respond in two instances relating to the individual claim for UI benefits.  Employers should develop a system of processing the EDD inquiries in a timely and efficient manner so as to avoid the potential financial liability. 
  • If employers have contracted with third-party administrators to handle UI claims, employers should review any current contracts and confer with the third-party administrator to ensure that these new requirements are being addressed.

Topics:  Hiring & Firing, TAAEA, Termination, Unemployment Benefits, Unemployment Insurance Integrity Act

Published In: Labor & Employment Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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