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Unemployment Compensation

Unemployment insurance provides monetary payments to workers whose jobs have been terminated through no fault of their own. The payments last for a given period of time or until the worker finds a new job. Without unemployment compensation, workers would be forced to take jobs for which they were overqualified or receive welfare. Unemployment compensation also is justified for sustaining consumer spending during periods of economic adjustment.

Unemployment insurance is based on a dual program of federal and state statutes. Much of the federal program is implemented through the Federal Unemployment Tax Act. Each state administers a separate unemployment insurance program, which must be approved by the secretary of labor based on federal standards. The state programs are explicitly made applicable to areas normally regulated by laws of the U.S. There are special federal rules for nonprofit organizations and governmental entities. Which employees are eligible for compensation, the amount they receive and the period of time benefits are paid are determined by a mix of federal and state law.

To support the unemployment compensation system, a combination of federal and state taxes are levied upon employers. State employer contributions are normally based on the amount of wages they have paid, the amount they have contributed to the unemployment fund and the amount their discharged employees have been compensated from the fund. Any state tax imposed on employers (and certain credits on that tax) may be credited against the federal tax.

The proceeds from the unemployment taxes are deposited in the Unemployment Trust Fund. Each state has an account in the fund to which deposits are made. Within the fund, there are separate accounts for state administrative costs and extended unemployment compensation. During economic recessions, the federal government has provided emergency assistance to allow states to extend the time for which individuals can receive benefits. This is accomplished by passing a temporary law authorizing the transfer of money to a state from its extended unemployment account. The ability of a state to tap into this emergency system usually is dependent on the employment rate reaching a designated percentage within the state or nation.

Some states provide additional unemployment benefits to workers who are disabled.

The content on this page was developed in partnership with the Legal Information Institute, Cornell Law School.