The United States unemployment system is very complex. To better understand it, let’s take a step back in history.  Our modern unemployment system has roots in the Great Depression, when wide-spread unemployment impacted our nation for the first time.  States began to recognize the need for a structured social assistance program to provide financial aid to the unemployed masses.  Because the system was created during this economic downturn, it was established with the fundamental goal of supporting those who lost their jobs through no fault of their own.

At a federal level, provisions for an unemployment assistance system were established for the first time in the Social Security Act of 1935. This laid the groundwork for the employer tax system, whereby employers began paying taxes in advance to fund accounts administered by each state. When a worker was laid off and filed an unemployment claim, these state accounts could potentially be drawn against. The first unemployment check was paid to a claimant in Wisconsin on August 17th, 1936.

When the program was introduced in 1935, employers paid unemployment taxes only if they employed 8 people or more. That guideline remained in place until 1954 when employers were required to pay taxes if they employed 4 or more people. Beginning in 1970, taxable employers were required to pay unemployment taxes for all employees.

The American unemployment system is a unique partnership between the federal government and each individual state government. While the unemployment program itself is based on the federal law as outlined in the Social Security Act, the program is administered at the state level. These state programs have evolved differently with states developing their own individual laws and procedures.

This structure of administration is unique to the United States and is also the reason why the unemployment system has become so complex. There are some generally agreed upon concepts nationwide, such as the idea that unemployment is meant to assist those who’ve lost their job through no fault of their own. But the nuances in how those concepts are applied and administered can vary significantly from state by state.

The criteria for eligibility and the means to determine if a claimant lost their job through no fault of their own are decided upon and enforced at the state level, not the federal level. This can pose a great challenge for employers with operations in multiple states because the best practices for responding to unemployment claims may vary by jurisdiction.

This certainly explains why many companies choose to outsource this complicated and potentially costly HR function. Any questions? We’d love to hear from you.

Source: US Department of Labor http://www.dol.gov/ocia/pdf/75th-anniversary-summary-final.pdf