From the June 2000 issue of Entrepreneur

Like a bad dream, that no-good employee just keeps reappearing. Fed up with all the absences and sloppy work, you fired the bum and thought you'd seen the last of him. But then he had the audacity to file for unemployment compensation. And as soon as you get the paperwork for that off your desk and trudge downtown for a hearing, you find out he's sued your company for wrongful termination. Then, in the midst of that quagmire, you learn the worst: that the comments you made at the unemployment compensation hearing when you wanted to get him out of your life are now evidence in the lawsuit.

It can happen. Routine hearings over unemployment compensation sometimes lay the groundwork for an employment lawsuit by the same employee. In some states, issues decided by the unemployment compensation commission may not be opened again in a court of law. In others, where state law specifically bars that doctrine, offhand comments made in the informal hearing may show up later as damaging evidence in the lawsuit. Be careful how you handle unemployment claims and consider how your response could be used against you in court.



Steven C. Bahls, dean of Capital University Law School in Columbus, Ohio, teaches entrepreneurship law. Freelance writer Jane Easter Bahls specializes in business and legal topics.

Know The System

The good news is, with unemployment still ebbing, unemployment insurance (UI) rates per employee have dropped for the United States as a whole, from $210 in 1997 to $207 in 1998 to $182 in 1999. The bad news is, the trend may not apply in your state. Rates increased last year in 14 states and stayed the same in 12. Wherever you live, though, when one of your former employees draws unemployment benefits, chances are your company's UI rates will go up. Small businesses are especially hard-hit by this, because the formula used to figure rates involves dividing the amount of money being collected by the number of employees on the taxable payroll. With a small payroll, it doesn't take long to reach the state's maximum rate. That means it's normally worth your while to contest claims if you don't believe the former employee in question is entitled to benefits.

So who is entitled to benefits? The system uses two tests to determine who's eligible. First, the person must have been employed (not necessarily at the same job) during the previous four quarters and must be actively looking for work. The system is designed to help those who are out of work through no fault of their own stay afloat until they find another job. It wasn't meant to serve as a welfare system for people who aren't even looking for work.

Second, the examiners consider why the person was separated from the most recent employer. In most states, while people who were laid off are probably eligible for benefits, people who were fired for misconduct are ineligible for a given number of weeks. Those who quit because of sexual harassment or intolerable changes in the workplace are eligible in most cases. Those who quit to look for other work are probably not eligible, but they may be if they quit to take a job that doesn't pan out. In these cases, though, many states don't charge the most recent employer.

Here's how it works: When a former employee files for benefits, the state unemployment compensation office will send you a request for information about the reason the person isn't working for you now and about any separation or vacation pay that might be deducted from benefits. You have a certain number of days to respond, and should do so as soon as possible. Then, if you disagree with the initial decision about benefits, you have a certain period of time to ask that it be reconsidered and send documents showing why. For instance, you might send a record of progressive discipline leading to the discharge. After reviewing the documents, the benefits officer makes a decision. If you're still not satisfied, you can appeal through various review boards and ultimately to the courts.

While all this can be pretty routine, watch your step if you think the employee is likely to sue you. Angry over getting fired, ex-employees often check with the EEOC or a plaintiff's lawyer to see if they have a claim such as discrimination, sexual harassment or wrongful termination. These days, the lawyer is likely to advise filing for unemployment compensation-in part to discover the employer's side of the story.

What you say along the way can get you in legal trouble for two reasons. One is the legal doctrine called "collateral estoppel," in which issues by one court aren't open for further argument in another court. Suppose you appeal an unemployment benefits decision to a court, which rules that the employee was not fired for misconduct and should receive benefits. Later, the employee sues the company, claiming he was fired in retaliation for filing a grievance. You argue that it was actually misconduct, but the court refuses to hear your argument because the earlier court already ruled that out. In some states, even decisions made by the unemployment compensation commission are binding if they weren't appealed. However, 31 states have passed laws stating that collateral estoppel doesn't apply to the rulings of unemployment compensation officers and boards of appeal.

A greater danger is that the informal nature of unemployment compensation hearings may catch you off guard. It's easy to go to a hearing without being prepared and make offhand comments about your relationship with the employee, not realizing that you're creating a record under oath that may be used against you later in court.

Watch Your Step

Here are some steps to take to avoid problems:

  • Choose one person to receive and deal with unemployment compensation paperwork, and ask the state UI office to send everything to that person. That way, you're less likely to miss deadlines.
  • Provide adequate documentation. State what rule the employee violated and whether the employee was aware of it, or when and how the employee was warned about performance.
  • For each claim, decide whether it's advisable to contest it-especially if it's a close call. In some cases, fighting the UI claim just makes the employee mad enough to sue over something else.
  • If you decide to contest a claim, prepare your case in time to present it at the first hearing, which may be your only opportunity to submit documents and call witnesses.
  • Get your attorney involved right away if you're going to contest a claim, so you can plan strategy and be prepared.