Unemployment Compensation

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Related to Unemployment Compensation: Unemployment insurance, Unemployment benefits

Unemployment Compensation

Insurance benefits paid by the state or federal government to individuals who are involuntarily out of work in order to provide them with necessities, such as food, clothing, and shelter.

Unemployment compensation for U.S. workers was established by the federal Social Security Act of 1935 (42 U.S.C.A. §§ 301 et seq.). Unemployment insurance provides work-ers who have lost their job through no fault of their own with monetary payments for a given period of time or until they find a new job. This compensation is designed to give an unemployed worker time to find a new job equivalent to the one lost without major financial distress. Unemployment compensation is also justified as a way to provide the U.S. economy with consumer spending during an economic downturn.

The mass unemployment during the Great Depression of the 1930s led to the enactment of the federal unemployment compensation law. States had resisted establishing their own unemployment compensation plans because the first states to tax employers to fund such a plan would lose business and jobs to other states. Therefore, a federal program was needed. Much of the federal plan was implemented under the Federal Unemployment Tax Act of 1935 (26 U.S.C.A. §§ 3301 et seq.). In 1938, Congress enacted the Railroad Unemployment Insurance Act (42 U.S.C.A. §§ 351 et seq.), which provides unemployment compensation for railroad workers who lose their jobs. A combination of federal and state taxes is levied on employers to fund state-administered programs that meet minimum federal standards. Federal funds are also used for administrative costs and to set up employment offices that attempt to match workers with new jobs. In 2000, approximately 125 million individuals, or 97 percent of all wage earners, were covered by unemployment compensation programs. During that same year, an average of 38 percent of unemployed individuals were receiving some sort of unemployment benefits.

In general, a tax on employers provides the funds to pay unemployment compensation. An employer who has more than a specified minimum number of employees is ordinarily required to file regular reports that disclose the number of employees and the amount of their wages, including tips. A standard or basic rate is charged against the employer based on the amount of wages paid. If the employer does not lay off employees, the employer will be entitled to a credit. An employer's record is unaffected if an employee quits or is discharged for good cause. An employer of eight or more persons is permitted to subtract what he pays to the state unemployment compensation fund from his federal unemployment tax. Each state establishes which employers are obligated to pay state unemployment taxes. Ordinarily a state will require payment of the tax from every individual, partnership, or corporation that pays wages to a specified minimum number of people to do work. Certain types of employment are excluded from mandated coverage, including some agricultural labor, some charitable or nonprofit work, and some government work.

Any individual who qualifies under the terms of the state unemployment compensation law is entitled to collect benefits. To be eligible, an individual must have worked for a certain minimum number of weeks and earned wages in at least the amount set by state law. Certain states will pay reduced benefits where part-time work provides only a small amount of money. Individuals who are self-employed are not entitled to unemployment compensation

A state may not discriminate because of gender or religious beliefs in the awarding of unemployment compensation. In Wimberly v. Labor and Industrial Relations Commission, 479 U.S. 511, 107 S. Ct. 821, 93 L. Ed. 2d 909 (1987), the U.S. Supreme Court ruled that no person may be denied compensation solely on the basis of pregnancy or the termination of pregnancy. The Court, in Hobbie v. Unemployment Appeals Commission, 480 U.S. 136, 107 S. Ct. 1046, 94 L. Ed. 2d 190 (1987), held that a state may not deny unemployment benefits to a worker who is discharged for refusing to work because of religious beliefs that he or she adopted after becoming employed.

Unemployment compensation is paid for a certain number of weeks. However, during economic recessions the federal government has provided emergency assistance to allow states to extend the time during which individuals can receive benefits. The states are allowed to use money they have deposited in special accounts of the federal Unemployment Trust Fund. For a state to use this emergency benefit system, the unemployment rate usually must reach a designated percentage within the state or the country.

An unemployed worker is not required to submit proof that he needs money or that he has no other means of support. Anyone who qualifies has a right to collect benefits because payments are designed to replace part of the wages lost during temporary periods of unemployment. Severance pay does not necessarily preclude payment of benefits, but some state laws treat it as earnings for the amount of time such payments cover and do not allow payment of unemployment compensation until that time has expired. Accumulated vacation time, vacation pay, or a leave of absence also postpone or prevent the payment of benefits.

Ordinarily, state unemployment compensation statutes provide benefits for those who are unemployed because of their employer's inability to provide work for them. An employee who is discharged may receive benefits unless he was discharged for good cause. Good cause for dis-charge usually is related to recent misconduct on the job. Misconduct in private life or during off-duty hours may constitute good cause for firing an employee if it affects the person's work. Care-lessness, disregard for the employer's interest, intoxication, the use of illegal drugs, illegal work slowdowns, use of abusive language, absenteeism, and habitual lateness can be reasons for a discharge and denial of unemployment benefits. A person denied benefits may appeal this determination, first to a state administrative office and then to a court of law.

An unemployed worker is required to be available for work. This means that the person must actively seek a new job while collecting benefits. In cases where it appears that the person is not willing and able to work, he has no right to receive unemployment compensation. Workers who leave a job to find a better job or to attend school are not eligible for benefits. An individual who is too ill to work, who has no means of transportation, or who refuses to accept more than a small amount of work to avoid forfeiting retirement benefits is not regarded as being available for work. Employees who are on strike generally cannot collect unemployment compensation. However, individuals in such circumstances may qualify for other types of government aid.

An individual who is out of work is given no guarantee that he will find an attractive and convenient job. If jobs are available, even outside the person's local area, he is required to find one. An individual is not, however, disqualified from receiving unemployment compensation merely because he has recently moved, except in cases where no employment is available in the new locality. An unemployed worker cannot decline to accept a new job because he does not like the wages or hours. A person who refuses to accept a job is no longer entitled to receive unemployment compensation if the job is reasonable and suited to his skills.

In 2000, the Labor Department issued rules that allowed states to provide unemployment compensation benefits to parents after the birth or Adoption of a child. An extension of the Family and Medical Leave Act of 1993, the new Birth and Adoption Unemployment Compensation (BAA-UC) was to be funded by individual state unemployment compensation funds. Several states took steps to initiate programs, but no state adopted legislation. Opponents of the program claimed that it was contrary to federal compensation policy, which is in place for individuals who are unemployed through no fault of their own. They also contended that BAA-UC would put an additional tax burden on employers, and that it would deflate a compensation system that was already in funding jeopardy. In 2003, the Labor Department moved to dismantle the program.

Further readings

Drew, Erin P. 2001. "The Birth and Adoption Unemployment Compensation Experiment: Did the Department of Labor Go Too Far?" Dickinson Law Review 106 (fall).

Schiff, Wm. Michael. 2000. Unemployment Compensation Handbook. Indianapolis: Indiana Chamber of Commerce.

Unemployment Compensation and the Family and Medical Leave Act: Hearing Before the Subcommittee on Human Resources of the Committee on Ways and Means, House of Representatives, One Hundred Sixth Congress, second session, March 9, 2000. 2001. Washington, D.C.: U.S. Government Printing Office.


Employment Law; Labor Law; New Deal; Old-Age, Survivors, and Disability Insurance; Workers' Compensation.

West's Encyclopedia of American Law, edition 2. Copyright 2008 The Gale Group, Inc. All rights reserved.
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Figure 4 displays the three components of the right side of equation 5 as functions of the probability of getting a wage offer, while figure 5 displays their sum for two different levels of unemployment compensation, [Gamma], equal to zero and greater than zero.
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