When a business terminates an employee, it is common--and, in some cases, mandatory--for the company to provide certain unemployment benefits. These benefits can take several forms, including:

  • A severance package, including severance pay and pay in lieu of unused vacation days
  • Unemployment compensation
  • Continued access to the company's group health insurance

Whether your company is required to offer these benefits will depend on a number factors, including:

  • Whether the employee was terminated for performance-related reasons
  • Whether the individual is an at-will employee, or covered by a contract or collective-bargaining agreement
  • Laws specific to the state in which the employee works
  • The size of the company

Severance Pay

In general, employers are not legally obligated to provide employees with severance pay. However, many employers will provide severance pay to terminated employees if the employee agrees to sign a severance agreement. In exchange for signing the agreement and receiving severance pay, the employee may be required to agree:

  • Not to sue the company
  • Not to file for unemployment benefits
  • Not to disclose confidential information about the company
  • Not to speak poorly of the company

Unemployment Compensation

If your small business has employees, you will probably have to pay a tax that is used to fund an unemployment compensation program. These programs, which are jointly administered by the federal and individual state governments, provide financial benefits to people who lose their jobs for non-performance related reasons.

People are typically only eligible for unemployment benefits while they are actively seeking a new job. Benefits cease after a person:

  • Finds a new job
  • Stops actively looking for a job
  • Has collected a certain number of weeks of benefits

Although each state has varying ways of dealing with unemployment compensation claims, some general principles apply in most cases. Typically, an unemployment claim will proceed through certain steps.

Filing: The process of obtaining unemployment compensation begins when the former employee files a claim with the state unemployment program. Written notice of the claim is sent to the employer. Your company can file a written objection if you believe the ex-employee is ineligible for benefits.

Determination of eligibility: Only employees who are out of work through no fault of their own are eligible for unemployment benefits. The initial determination of whether the employee is eligible to receive unemployment benefits is made by the state agency that administers unemployment benefits.

Referee's hearing: The initial eligibility decision can be appealed by either the employee or the employer. An appeal results in a hearing before a referee, who will most likely be an attorney who works for the state's unemployment agency. This hearing gives each party the chance to have their say. Each party can have their lawyers present and can use the hearing to present witnesses and relevant written records such as evaluations or warning letters. Prior to the hearing, the parties can request a viewing of the agency's complete file on the claim, which may provide a preparatory opportunity to refute inaccurate statements.

Your company should not hesitate to use a lawyer at the referee's hearing if you believe that a complex legal issue (such as sexual harassment, illegal discrimination or retaliation) may be mentioned at the hearing. This is because the decision of the referee may influence the outcome of any related civil lawsuits. For example, if the referee rules that the employee quit his job because he was the victim of sexual harassment, the decision could be significant if the ex-employee later brings a lawsuit against your business.

Administrative appeal: The referee's decision can be appealed by either party to an administrative agency such as a board of review. At this stage, your business should be represented by an attorney. Typically, an administrative appeal is based exclusively on the testimony and documents recorded at the referee's hearing. Nevertheless, some states allow the review board to direct that additional evidence be taken. Although the review board may draw its own conclusions from the evidence and overrule the referee, more often than not it follows the referee's ruling.

Judicial appeal: Although either party can appeal to the state court system, such appeals are rare. On average, an agency's decision will be overturned by a court only if the decision is contrary to law or is not supported by substantial evidence.

Contesting a claim: It is usually prudent for an employer to contest a claim only if the employee engaged in serious misconduct or quit without a compelling reason. Furthermore, your company should only contest a claim if it has a good and practical reason to do so. There are two reasons that employers typically fight unemployment claims:

  • You are worried that your unemployment insurance rates may increase
  • You are worried that the employee will file a wrongful termination action

COBRA

Under the Comprehensive Omnibus Reconciliation Act (known as COBRA), terminated employees may continue to participate in a company's health insurance plan for up to 18 months after their employment ends.

Companies are required to offer COBRA coverage if:

  • The company offers health insurance to its employees
  • The company has at least 20 employees
  • The employee quits or is fired for any reason except gross misconduct

Former employees must notify the company within 60 days if they intend to purchase health insurance under COBRA. The employee is responsible for all premiums, including any portion of the premiums previously paid by the employer.

Questions for Your Attorney

  • What steps must the company take to comply with all state and federal unemployment laws?
  • Are we legally obligated to provide severance pay and COBRA coverage?
  • What should we include in a severance agreement?
  • What should we do if an employee challenges his unemployment eligibility?