20,000 Reasons Not to Hire Someone

February 3, 2010, 9:15 am

From The New York Times By JAY GOLTZ

After my last post,
some readers suggested that I was exaggerating the potential cost of
paying unemployment insurance when you hire the wrong person. Fred
from Florida wrote, "Payroll tax rates that fund unemployment insurance
are affected by the company's history, but it's not a dollar for dollar
payout." Actually, in Illinois, it's even worse.

The unemployment insurance tax may be the most confusing and
misunderstood tax there is. It is run by the states, and the rules can
vary as much as the weather from one state to another.

Here's how it works in Illinois. The important point for business
owners to know is that when the state pays out claims to a company's
former employees, that company's unemployment tax rate goes up. For
each business, the state calculates how many dollars have been paid in
compensation over the previous three years and adds on about 48 percent
through various calculations. The result is that in Illinois, you end
up paying for incremental compensation claims at a rate of $1.48 for
every dollar that a former employee collects.

If you lay off or fire someone without "cause," that person is
eligible for unemployment compensation. "Cause" means that the employee
violated a company policy, like coming in late or threatening a
co-worker. "Cause" does not include doing a bad job, being very slow,
or having a bad attitude. The formula used to calculate the
unemployment benefits is still a mystery to me, but the payouts go from
a minimum of $51 per week to a maximum of $531, depending on income
level, the number of dependents and whether a spouse is working.

It used to be that a former employee would collect unemployment for 13 weeks. Now, it has been expanded to 26.

I understand and agree with the concept of unemployment insurance.
It can be a lifeline for people who have lost their jobs. It is the
cost of doing business and of being responsible, especially to people
who have held a job for years. I do question, however, the eligibility
rules, at least in Illinois. In some states, an employee has to work 90
days to be eligible. In Illinois, it is 30 working days.

That makes it entirely possible that a business can be taxed more
than $20,000 - $531 multiplied by 26 weeks multiplied by 1.48 - for
someone who is employed by the business for as few as 30 days. But what
if it were "only" $10,000? Does even that make sense for 30 days of
employment? And, more important, how much incentive does this provide
for businesses to risk hiring new people who may or may not work out?

One of the reasons this expense goes unnoticed by most business
owners is that instead of getting a bill for $20,000, which would
surely raise awareness, they might get a subtle half percent increase
in their unemployment tax rate six to 18 months after the fact. It will
stick for three years. The state will get its $20,000, albeit slowly.

I have recently learned that you can be charged with a claim even if
you've employed someone for less than 30 days. We fired someone after
three weeks because she was text-messaging her friends all day. After
we told her twice that she had to work during the day and stop texting,
she put her phone away. We then noticed she was leaving her desk drawer
open and looking into it a lot. She was now texting out of the drawer.

We fired her, and we assumed that we had no exposure to having to
pay unemployment. She filed anyway, and much to my surprise we had to
have a hearing. We were told that because she had been eligible to
collect unemployment when she accepted a job from us, she might again
be eligible despite having worked for us only 21 days. Fortunately for
us, we were deemed not responsible for paying the unemployment - but
only because we had clear documentation and she did not dispute our
facts. She was fired for cause.

As Congress, the Obama administration and the states consider ways
to encourage hiring, they should look at incentives, but they should
also consider the disincentives. I'm thinking about hiring an outside
salesperson. There are many people looking for jobs who might be great
at selling art and framing in the commercial interior market. But it
takes at least two or three months to determine whether someone has the
contacts and ability to be effective. That person will have just
finished training after 30 days.

In today's economy, I have to consider the cost of a potentially
expensive unemployment tax increase if I hire someone and it doesn't
work out. If I knew I could get a chance to try out the person for,
say, three months without "buying the farm," it would be a lot more
tempting to make the hire. And extending the eligibility period
wouldn't cost the government a cent.

As it is, someone who wants a chance to prove himself might not get
it because I am hesitant to expose the company to another expensive
claim.

Do you know what the eligibility period is in your state and how the
rate is calculated? From my experience, most business owners don't
know. It is good to know.

Jay Goltz owns five small businesses in Chicago.