It’s been five years since the COVID-19 pandemic, and the vast majority of the quarantine relief programs have lapsed or wrapped up. However, the effect of these programs lingers on, both in how they changed the nature of employment and the issues they magnified when they went into effect. One of the most discussed examples is the massive growth and contraction of unemployment insurance claims, which were backstopped by an increase in federal spending. The quarantine requirements led to an unprecedented 14.8% unemployment rate, as in-person jobs were put on hold. This enormous increase in unemployment meant over one in ten Americans became eligible for unemployment insurance.
In the years since, we’ve learned how the volume of claims overwhelmed an unemployment system that did not have the capacity to handle them. This created opportunities for fraud, which was estimated to cost anywhere from $45 million to $150 billion dollars. State and federal governments have worked to address the issues in reporting and tracking unemployment claims, but public attention on the issue has been ongoing, as the new presidential administration has prioritized uncovering and highlighting examples of fraud.
Every organization, including nonprofits like yours, is subject to unemployment risks, including the risk of fraud. Here are some of the ways that you can build internal processes to handle claims and avoid being held responsible for mistaken or fraudulent unemployment claims:
Unemployment insurance (UI) basics
Unemployment, and, by proxy, unemployment insurance, is not a topic that comes up frequently in the workplace, for obvious reasons. It’s intended to help ameliorate the effects of organizational change and other circumstances which can affect otherwise productive employees. For this reason, it can be a difficult subject to address, particularly at nonprofits, which already have limited capacity relative to other sectors.
Unemployment insurance is both a federal and state program, as laid out in the Federal Unemployment Tax Act (FUTA) and State Unemployment Tax Act (SUTA). These laws define a tax that employers and, sometimes, employees pay to their state and the federal government to fund unemployment insurance. Unemployment is administered by states, which can draw from federal funds as needed to help handle the costs of unemployment insurance.
For nonprofits, this means that you will be taxed for each employee, but not for independent contractors or volunteers. SUTA tax rates are based on the experience of your organization, meaning they will rise if you frequently lay off employees, although some extreme situations, such as a natural disaster or the recent pandemic have led states to forego these increases, as the layoffs in question are not the fault of either the employer or the employees.
How does an unemployment insurance claim work?
Because it is both a state and federal program, the administration of these benefits can differ quite a bit depending on the state. However, the process does have some predetermined characteristics. When someone is laid off, they are given information about their rights, in particular their right to apply for UI, maintain their healthcare coverage through COBRA, and how to apply for whatever other relevant state employment programs are available.
The process typically involves three parties: your organization, the claimant who used to work for your organization, and the state department which administers UI. Here’s how the process is designed to function:
How States Monitor for Unemployment Fraud — and Why Employer Responses Matter
State unemployment agencies use several tools to detect fraud and ensure benefits are paid only to eligible individuals. One of the most common tools is the Benefit Accuracy Measurement (BAM) audit — a mailed request sent to employers asking for confirmation of when a former employee started or ended work, and how much they earned during a given period. These audits may arrive weeks or even months after separation, and they serve as a key check against incorrect or fraudulent benefit claims.
It’s critical to treat BAM audits seriously and respond promptly. Your input helps the state verify whether someone who is collecting benefits is still unemployed or has returned to work. Failing to respond can result in overpayments going uncorrected, and in some cases, your organization may become liable for costs that could have been avoided.
Responding to BAM audits also protects your former employees. If a claim is filed using someone’s identity fraudulently, your response could be the first flag the state receives. Inaccurate or missing employer responses allow fraudulent or ineligible claims to go undetected longer, increasing the financial burden on the system and on employers like you.
Identity Theft: The Most Common Type of UI Fraud
Identity theft has become the leading form of unemployment insurance fraud in recent years. In these cases, fraudsters use stolen personal information—such as a name, Social Security number, and past employment history—to file false UI claims and collect benefits they’re not entitled to. These fraudulent claims are often filed in large volumes, exploiting weaknesses in state systems and overwhelming administrative safeguards.
Employers are often the first line of defense against this type of fraud. You might receive a claim for someone who is still actively employed, who never worked for your organization, or who left your organization years ago. Because states frequently issue benefit payments before verifying employment status or identity, these false claims can result in significant overpayments if not caught quickly.
If you receive a suspicious claim, it’s important to act fast. Verify your records and, if the claim appears fraudulent, notify the state unemployment office immediately using its fraud reporting process. In some instances, the affected individual may not know their identity has been compromised until they try to file a legitimate claim or receive tax documents showing UI payments they never received.
Prompt employer responses not only help prevent financial losses to the system but also protect employees from long-term consequences like tax issues and benefit delays. Responding to BAM audits and claims in a timely and accurate manner is a critical step in identifying and stopping identity-based fraud.
What to Do If You Suspect Fraud or Receive a Suspicious Claim
If you receive an unemployment claim that doesn’t align with your records, such as one from a former employee who you know has returned to work; From someone who is currently working for you full-time; or from someone who was never employed by your organization, it’s important to act quickly. First, verify the accuracy of the claim using your internal records. If you confirm the claim is incorrect, notify your state’s unemployment office immediately using their fraud reporting process.
In some cases, former employees may reach out to you if they discover that a claim was filed in their name without their knowledge. This may indicate identity theft, and you should encourage them to report it to both the unemployment office and the Federal Trade Commission (FTC). You can also submit a report yourself to help initiate the fraud investigation.
Even if you’re uncertain whether a claim is fraudulent, it’s worth contacting the former employee directly to verify whether they filed. This simple step can prevent improper benefit payments and protect all parties involved.
Combating UI fraud takes a village
Unemployment insurance fraud is a well-known and ongoing issue that state and federal governments have been working to combat for years. While improvements in technology, data sharing, and oversight have led to progress in detecting and preventing fraud, the system still relies heavily on employers to play an active role. By maintaining strong recordkeeping practices, responding promptly to wage audits and claims, and monitoring for suspicious activity, employers serve as a vital checkpoint in the effort to safeguard public funds and ensure the integrity of the UI system. Vigilance and timely action remain key components of effective risk management.
UI claims can cause headaches. We’re here to help
501(c) Services is a team of nonprofit experts dedicated to helping organizations like yours work through these kinds of issues without putting your mission at risk. To learn more about our services, get in touch with us.
About Us
For more than 40 years, 501(c) Services has been a leader in offering solutions for unemployment costs, claims management, and HR support to nonprofit organizations. Two of our most popular programs are the 501(c) Agencies Trust and 501(c) HR Services. We understand the importance of compliance and accuracy and are committed to providing our clients with customized plans that fit their needs.
Contact us today to see if your organization could benefit from our services.
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(Image by Sammy-Sander from Pixabay)
