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Human Resources, Payroll

Preparing for an Unemployment Compensation Audit

Hey Compliance Warriors!

Unemployment Compensation audits are about to be a top-level issue for HR and payroll professionals. Are you ready? Do you know what you need to do to get ready for challenges to UI charges and complaints? Read on…

Getting Unemployment

Generally, the requirements an employee must satisfy to receive unemployment benefits are:

  • Employee must file a claim;
  • Employee must be unemployed or have substantially reduced work hours through no fault of his or her own;
  • Employee must be able to work and available for work;
  • Employee must be actively seeking work.*
  • Employee must have earned enough money during the base period (see below).
  • Employee must meet the eligibility requirements each week benefits are claimed.

*During the pandemic, actively seeking work has been waived.

Many states have made special provisions during the COVID-19 pandemic. Here is a breakdown.

COVID-19: State Unemployment Guidance and Actions

Examples of misconduct that will usually render an employee ineligible for unemployment benefits

  • Voluntary quitting without good cause.
  • Termination for misconduct.
    • Mere inefficiency, unsatisfactory conduct, failure in good performance due to inability or incapacity, inadvertencies or ordinary negligence in isolated instances or good-faith errors in judgment or discretion are not deemed “misconduct.”
    • An employee’s inability to perform essential job duties generally doesn’t meet the definition of misconduct.
    • An employee’s refusal to sign a disciplinary notice to acknowledge receipt of that notice is not deemed misconduct.
  • Refusal to perform suitable work.
  • Intentional violation of reasonable company rules. The employer must be able to prove the employee had knowledge of the company rules before he or she violated the rules. The company rules must also be lawful and reasonable.
  • Poor attendance. The employee must have been able to attend work and repeatedly failed to do so. The absence must be unexcused and for a non-compelling reason (i.e., subpoenaed to court or taking care of an ill family member would not fall under misconduct).
  • Substantial criminal activities.
  • Irresistible compulsion to use intoxicants. There must be evidence of the employee’s use of intoxicating substances on the job.
  • Inexcusable fighting with other employees.
  •  Insubordination if the employer’s order was reasonable and the employee’s refusal to comply was willful and unjustified.
  • Employee was a student employed on a temporary basis whose employment ended so that he or she could return to school.

Examples of conduct or terminations of employment that are not generally considered misconduct or sufficient to deny an employee unemployment benefits are:

  • Layoffs
  • Voluntary quitting for “good cause.” Good cause occurs when a substantial motivating factor causes the claimant to leave work. The factor need not relate to work. It must be a real, substantial and compelling reason that would cause a reasonable person who wants to remain employed to leave work under the same circumstances.
  • Depending on the circumstances, leaving work for good cause might include.
  • Going to school.
  • Change in travel time or distance.
  • Moving beyond reasonable commuting distance with a spouse or registered domestic partner. This does not include a significant other who is not a spouse or registered domestic partner.
  • Being required to care for a seriously ill child.
  • Leaving an employer who does not address serious harassment or safety issues.
  • Choosing to be laid off in place of an employee with less seniority, if a collective bargaining agreement allows this practice.
  • Protecting himself or herself or his or her family from domestic violence.
  • The following examples do not generally constitute good cause:
  • Increased child care costs.
  • Looking for another job.
  • Change in job duties or demotion.

If an employee resigns, the employer should request the employee to put the reasons for his or her resignation in writing in case the employee later files for benefits.

Preparing to Dispute a Claim or Chargeback

The employer should treat the occasion as if it will be the only chance it ever receives to explain its side of the situation. In general, firsthand testimony from witnesses with direct, personal knowledge of the events leading to the claimant’s work separation takes precedence over all other forms of evidence. Documentary evidence may be entered as exhibits. When a hearing is by telephone, the employer must be careful to send copies of any exhibits to both the hearing officer and the claimant. Failure to send copies to the claimant may result in the hearing officer refusing the items as exhibits. The parties may offer direct testimony, conduct cross-examination, and make concluding statements. The hearing officer will issue, usually within one calendar week, a written decision either affirming, reversing, or modifying the determination that was appealed. If the ruling is not in the claimant’s favor, i.e., reverses a prior decision that allowed the claimant to receive benefits, the claimant may be found liable for an overpayment of benefits and may have to repay any benefits received that were not in accordance with the latest decision.

Making your Defense

Document, Document, Document.

One of the biggest issues employers will tackle during this pandemic is the refusal of employees to come back to work when recalled or just refuse to work in general. Why would they do this? There are several reasons.

  • Fear of COVID-19
  • Mental health issues that cause severe anxiety – PTSD, BiPolar Disorder, Major Depression, Social Anxiety, and many others.
  • I can make more money on unemployment
  • I believe my workplace to be a direct threat to my health and safety
  • I have FFCRA covered circumstances
  • and more.

This is a hard situation. You don’t want to lose anyone, but you must require people to work unless there is a covered reason not to work. In reality, you may have to lose and hopefully replace someone. However, the lawsuits and DOL actions are already beginning to pour in. So, establishing good faith and reasonable basis has never been more important. Let’s unpack this a bit.

Employees are allowed to refuse work under certain conditions. https://www.osha.gov/right-to-refuse.html

Your right to refuse to do a task is protected if all of the following conditions are met:

  • Where possible, you have asked the employer to eliminate the danger, and the employer failed to do so; and
  • You refused to work in “good faith.” This means that you must genuinely believe that an imminent danger exists; and
  • A reasonable person would agree that there is a real danger of death or serious injury; and    **KEY**
  • There isn’t enough time, due to the urgency of the hazard, to get it corrected through regular enforcement channels, such as requesting an OSHA inspection.

You should take the following steps:

  • Ask your employer to correct the hazard, or to assign other work;
  • Tell your employer that you won’t perform the work unless and until the hazard is corrected; and
  • Remain at the worksite until ordered to leave by your employer.

Once these steps have been followed, the EE cannot be terminated. There could also be ADA issues if the refusal relates to a covered disability. Each employee must be reviewed individually. Document your steps as you determine whether a disability exists – mental or physical – and then use the interactive process as applicable. 

https://askjan.org/disabilities/Mental-Health-Impairments.cfm

https://askjan.org/topics/interactive.cfm

Finally, you must consider that if the employee returns, there may be a question of FFCRA leave for school or daycare closures or other covered reasons. So, all of that will need to be unpacked and reviewed so you will not be found in violation of the FFCRA.

Outside of this, employees who refuse to return to work are possibly resigning or abandoning the job. This is why we recommend you issue an offer letter where the EE can decline employment. We have a sample on the COVID-19 page of our site.  https://helpdesksuites.com/coronavirus-covid-19-resource-center/

Consider each of these areas and show that you have considered them fully along with any other issue which may be in play.


Records Reviewed During an Audit

In addition to your complete documentation of your processes as listed above, a field auditor reviews an employer’s acknowledged payroll and searches the records for misclassified workers and wages. These records include:

  • All canceled checks, check stubs, check registers and bank statements
  • Time cards
  • Cash vouchers
  • Cash disbursement journal
  • General ledger
  • Individual earnings records
  • Payroll journal
  • Quarterly tax reports – federal and state
  • IRS forms 940 and 941
  • W-3 and W-2s
  • Federal W-4 and State withholding election forms
  • FUTA and SUTA records
  • IRS forms 1099, 1096
  • Proof of independent contractor classification
  • Master vendor files
  • Petty cash
  • Chart of accounts
  • Profit and loss statement
  • Corporate minutes
  • Federal tax returns (1040 Schedule C, 1120, 1120S, etc.)
  • Any other records which may reflect services

FAQs

WHY WAS I SELECTED FOR AUDIT?

Each year, several thousand employers are selected for audit to ensure compliance with the reporting and taxation provisions of the PA UC Law. Some employers are selected randomly from the entire population of employers covered under the PA UC Law. Additionally, businesses that do not report employees may be audited to verify that their workers are properly excluded from PA UC Law coverage. Finally, an employer may be audited if a reporting error is suspected or known to exist, or the employer is in an industry with a high degree of reporting errors.

HOW LONG WILL THIS AUDIT TAKE?

The time needed to complete an audit depends on the size of the employer, the condition of the employer’s records, and the number of issues that must be addressed.

WHAT IF I CANNOT PROVIDE RECORDS ON THE SCHEDULED AUDIT DATE?

Contact the auditor immediately to reschedule if you cannot be available on the date scheduled and cannot arrange to leave the records with another responsible individual. Please provide the auditor with several alternate dates so that rescheduling can be done promptly.

MUST I BE PRESENT AT THE TIME OF AUDIT?

You may designate a responsible individual to be present at the audit on your behalf. Because there is a questionnaire which must be completed as part of the audit, the individual you designate should be familiar with your records. If you must designate a representative who is not familiar with your records, contact the auditor by phone in advance of the audit to arrange to complete the questionnaire.
If your records are in the possession of another person, such as your accountant or bookkeeper, and you would like that individual to be your representative and to have the audit occur at their place of business, you must contact the auditor in advance of the audit and provide the name, address, and phone number of the designated representative.
The auditor will contact you a few days prior to the audit to confirm the appointment.

WHAT PERIOD OF TIME WILL THE AUDIT COVER?

The audit appointment letter indicates the time period for which records will be reviewed. Usually, an audit will cover one calendar year. However, an audit may be scheduled to cover a larger period of time or an audit may be expanded if the auditor discovers issues that could affect additional years.

WHAT RECORDS WILL THE AUDITOR EXAMINE?

Genrally, UC Law requires employers to keep accurate employment records. Most UC regulations specify the information that must be contained in employment records and provides that employment records and other business records, such as ledgers and corporate minutes, are subject to review by a department auditor.
The list of records to be examined is attached to the audit appointment letter. Not all employers maintain all of these records, but those you do maintain should be made available.

WHY IS THE AUDITOR EXAMINING RECORDS, FORMS, AND DOCUMENTS IN ADDITION TO PAYROLL RECORDS?

Payments to workers are made differently and through different accounts from employer to employer. Thus, the auditor will look at all records that may contain information about remuneration paid to workers.

WHY ARE YOU AUDITING ME WHEN I CONSIDER ALL MY WORKERS TO BE INDEPENDENT CONTRACTORS?

Under UC Law, an individual being paid for work he or she performs is presumed to be your employee. To rebut this presumption, you must show that the individual is free from your direction and control and is performing work for you as part of his/her independently established business. The auditor must verify that both of these conditions are satisfied for each individual you consider an independent contractor. If an individual is performing construction work, additional criteria under some provisions for construction companies must be met in order for the individual to qualify as an independent contractor. You may be asked to provide additional documentation in cases where there is a question if a worker is an employee or an independent contractor.

CAN I REFUSE TO PROVIDE RECORDS TO THE AUDITOR?

UC regulations provide that employment records and other business records must be made available to a department auditor for review. If you refuse to allow access to your records, the department may subpoena your records and enforce the subpoena in court. In some states, the department may assess a civil penalty of $1,500 for each day you withhold your records. Also, you may be subject to criminal fines or imprisonment for up to 30 days for failure to produce your records.

WHEN WILL I KNOW THE AUDIT RESULTS?

The auditor will discuss his/her proposed findings with you or your representative and, if applicable, give you a summary of the proposed audit adjustments before leaving your place of business or the location at which your records are kept. Once the auditor and his/her supervisor have completed their review of the audit, a letter will be mailed to you with the approved audit findings.

WHAT IF I DON’T AGREE WITH THE AUDIT RESULTS?

If the auditor’s proposed findings indicate that you owe UC taxes and you disagree with the auditor’s findings, the auditor will explain the tax assessment process and your appeal rights.

CAN THE AUDITOR ANSWER QUESTIONS REGARDING THE DEPARTMENT OF LABOR & INDUSTRY?

Auditors are knowledgeable about the tax provisions of your state’s UC Law. Therefore, they should be able to answer most UC tax questions. If you have questions about other programs or services within the department, the auditor can provide you with information on whom to contact.

WHAT IF I HAVE OTHER QUESTIONS REGARDING THE AUDIT?

You can contact the auditor directly at the number shown on the audit appointment letter, or email the state department.

DISCRIMINATION PROHIBITED

The federal and state legal guidelines governing the department’s operation of UC programs mandate equitable, non-discriminatory treatment of all employers. No person dealing with the department will be discriminated against on account of race, color, religious creed, sex, age, national origin, handicap/disability, or political affiliation or belief.


Well, that is enough for now. Go out there and get ready to defend. Document, state your case and be ready to prove that you have done everything you can to show fairness and consideration to all your employees.

Be well, be safe, and Be Audit-Secure!

About LISA SMITH

Lisa Smith is CEO of Andere Corporation and Chief Content Developer at HelpDeskSuites.com. Follow her on Twitter, connect with her on LinkedIn, listen to her Small Business Spoonfuls Podcast, and find more in her Compliance Warriors Facebook Group.

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