Federal Unemployment Compensation Act

The Federal Unemployment Compensation Act (FUCA) was enacted by Congress to care for workers who in times of economic hardship and through no fault of their own lose their job and are unable to find new employment. FUCA was first enacted in 1939, underwent substantial revision in 1954, and has been amended over the years, most recently in 1988 (42 U.S.C.A. §§ 501–504, 1101–1105). The act, originally titled the Federal Unemployment Tax Act, is designed to encourage and aid the establishment of state unemployment funds and payments to those funds. The act provides that an employer pay an annual excise tax in the amount of a designated percentage of the total wages paid during that year. Employers with fewer than eight employees, or operating in the field of agricultural labor or domestic service, are exempt from this requirement.

The unemployment insurance system in the United States and FUCA had their origins in the Great Depression of the 1930s, when high unemployment occurred. The unemployment system has three principal objectives. The first is to enhance employment opportunities through a network of employment services where job seekers and job openings can be matched efficiently. The second is to stabilize employment by encouraging employers to retain employees during short periods of economic downturn. The third is to minimize the economic loss of unemployment by paying benefits to persons who are unemployed.

Unemployment Compensation is a joint federal-state program. In 1995, the federal statute imposed a tax of 6.2 percent on payrolls. That tax was reduced to less than one percent if the employer was covered by a state unemployment compensation law that met standards set out in FUCA. These standards address both substantive matters, such as what should be the conditions of eligibility for benefits, and the procedures by which benefits are to be paid.

The typical tax rates paid under state law in 1995 were lower than five percent for most employers, thus creating a substantial incentive for states to participate. An argument that this type of incentive is an unconstitutional coercion of the states by the federal government was rejected by the U.S. Supreme Court in Chas. C. Steward Machine Co. v. Davis, 301 U.S. 548, 57 S. Ct. 883, 81 L. Ed. 1279 (1937).

This federal-state sharing of responsibility has generally worked well, but it has made it necessary to work out a number of multistate agreements to handle certain administrative problems.