The Potentially Unintended Effect of the Unemployment Insurance Integrity Act on Employment Settlement Agreements

The amendments to the Unemployment Insurance Integrity Act quietly went into effect as of October 21, 2013.  Congress passed the Unemployment Insurance Integrity Act (“Act”) in late-2011 as part of the Trade Adjustment Assistance Extension Act of 2011 (“TAAEA”). While the TAAEA is primarily concerned with extending retraining assistance for employees displaced by foreign workers, the Act requires states to incorporate provisions into their own Unemployment Insurance laws to (1) enhance penalties for fraudulent Unemployment Insurance claimants; (2) revise the timing of "new hire" reports; and (3) impose new obligations on employers (and their agents) with respect to responding to Unemployment Insurance claim notices. 

Effective two years after its enactment, the Act was amended to "require" employers and their agents to timely and adequately respond to a state unemployment insurance agency’s request for information regarding at least the initial unemployment insurance claim.  The new requirement provides that for a state to meet the requirements of the Act, the state must not relieve an employer of charges when the employer or agent of the employer: (1) “was at fault of failing to respond timely or adequately to the request of the [state] agency for information relating to [a] claim” for unemployment compensation 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 insurance benefits.  26 USC § 3303(f)(1)(A)-(B).  The states have latitude in implementing the requirement, including whether a pattern of behavior is required and, if so, the determination of the definition of a pattern of failure to respond timely or adequately to requests for information.  All states, however, were required to implement this provision by October 21, 2013, and the Act grants states the latitude to impose stricter standards.  

To provide a concrete example of state implementation, under Ohio law, an employer will not receive positive credit for amounts recovered by the director or for benefits that have been paid to a claimant and are subsequently found not to be due to the claimant, if (1) the benefits were paid because the former employer (or employer’s agent), failed to respond timely or adequately to a request for information regarding a determination of benefit rights or claims for benefits, and (2) the employer previously established a pattern of failing to respond timely or adequately within the same calendar year period.  ORC 4141.24(d)(i)(I)-(II). 

Under Ohio law, a "pattern of failing" is established after the third instance of benefits being paid because the employer failed to respond timely or adequately to a request for information regarding a determination of benefit rights or claims for benefits under ORC 4141.28 within a calendar year period.  ORC § 4141.24(d)(ii)(III).  A response is “timely” if it is received by the director within the time provided by Ohio statute.  And, a response is “adequate” if the employer or employee, officer, or agent of that employer provided answers to all questions raised by the director or participated in a fact-finding interview if requested by the director.  ORC § 4141.24(d)(ii)(II). 

Further muddying the waters, individual states have taken different approaches as to what constitutes a “pattern of failure” that triggers penalties.  For example, Washington law defines a “pattern” as a benefit payment made due to an employer’s failure to respond timely or adequately to a written request for claim information from the agency, without establishing good cause for the failure, if the greater of the following calculations for an employer are met:  (1) at least three instances of failure in the previous two years; or (2) 20% of the total current claims against the employer involve instances of failure.  RCW § 50.20.050(6)(b)(i)(A)-(B).  Kansas defines “pattern of failure” as the greater of two offenses or more than two percent of claims during the past year.  KSA § 44-710(c)(3)(ii).  Hawaii enacted an almost strict liability standard, with a single offense constituting a “pattern of failure.”  Haw. Rev. Ann. § 383-33.  

While some employers may view a failure to promptly and “adequately” respond to a request from an unemployment insurance department as much ado about nothing, such failure may have very real consequences.  Because the Act specifically allows states to impose stricter standards than required by the Act, a “pattern of failure” to respond to unemployment insurance inquiries in certain states can be quite costly.  California, for example, permits a fine against an employer ranging between two and ten times the weekly benefit amount (for a maximum penalty of $4,500.00) if the employer “willfully makes a false statement of representation or willfully fails to report a material fact concerning termination.”  Cal. Unempl. Ins. Code § 1142. 

The amendments to the Act also have very practical applications for many employers as they enter into settlement agreements with former employees.  While it has been longstanding tradition to offer as part of a settlement that the employer will “not contest” a subsequent unemployment claim, such an agreement is almost certainly going to run afoul of the Act and corresponding state laws after October 21, 2013.  While it is anything but clear how strictly individual states will enforce the new unemployment insurance statutes, employers would be wise to step back from the practice of agreeing not to contest unemployment claims as part of settlement agreements. 

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