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Disqualifying Income

By March 28, 2023July 14th, 2023No Comments

Did you know that some states may disqualify an individual from collecting unemployment benefits if they are collecting certain types of pay after they leave your employment? The basic requirement for collecting unemployment benefits requires claimants to be unemployed and be able and available to work. However, certain pay that is received can raise questions about the claimant’s availability or ability to look for continuing work.

In this article, we will discuss the various types of pay that can have an impact on unemployment. These income types could range from vacation, holiday, or back pay to wages paid in lieu of notice or severance pay. Even pension or retirement pay can have an impact on a claimant’s eligibility for unemployment. As with most unemployment related issues, state laws vary, and these types of disqualifying pay may be allowed in some states and considered disqualifying in others.

Disqualifying Income Definitions

To better understand the impact of potentially disqualifying pay, it is helpful to understand the difference between the types of pay that may be received. The most common types of pay that may be considered disqualifying are listed below.

States that have a 501(c)(3) exception to the Federal Minimum Requirements

Pay Type Definition
Vacation Compensation paid while employees take time off work. Assumes that they were still employed and otherwise working.
Holiday Compensation employees receive for working or not working during any holiday. This covers both paid time for not working the holiday or a bonus or incentive for working that day (i.e., double time).
Back Pay Compensation for the difference between the amount an employee was supposed to be paid and the amount they were actually paid.
Wages Paid in Lieu of Notice Compensation equaling what would have been earned by working through the contracted period because the employee is being terminated early without notice.
Severance Compensation and/or benefits an employer provides to an employee after employment is over.
Pension/Retirement Compensation that provides income in retirement based on the employee’s length of service to the company and salary history.
Workers’ Compensation A form of employer insurance coverage that pays medical benefits and/or partial income to employees who are injured or become disabled as a result of their job.
Regular Earned Income Compensation received from the primary employer, even during times of reduced hours. It could also come from additional employers from side gigs or part time jobs.

Able and Available Issues

Some types of pay may not be specified by state law as disqualifying but these payment types raise questions about the eligibility for benefits. For example, if a claimant reports vacation pay, this may raise a question about the claimant’s availability for work. Theoretically, vacation pay indicates that work would have been available. For example, if unused vacation pay is paid as part of a severance package, some states may disqualify the claimant for the time-period represented by the vacation pay. Holiday and back pay are also special pay types that may raise the question of availability for the time-period that they represent.

Workers’ compensation is another pay type that may result in claimant disqualification for unemployment compensation. The fact that an individual is collecting workers’ compensation may provoke the state into asking questions about the claimant’s ability to work. Workers’ compensation is only paid when the employee is injured and unable to work. By the very definition, the claimant would not meet the able to work requirement for unemployment.

Social Security Benefits

Social Security benefits are a clear exception to the rules relating to disqualifying pay. In almost every state, unemployment benefits are not reduced if a claimant is receiving Social Security benefits.

Retirement or Pension Plans

Retirement or pension plans do have an impact on unemployment benefits and in most cases will reduce or disqualify an individual from unemployment benefits.

According to the Highlights of State Unemployment Compensation Laws 2022, “Federal law requires states to reduce the weekly benefit amount of any individual by the weekly amount of the governmental or other pension, retirement or retired pay, annuity, or any other similar periodic payment which is based on the previous work of such individual.”

This is only applicable if the employer is the base period or chargeable employer.

Severance Pay

When employment ends, such as through a layoff or termination of a contract, the employer may opt to provide some type of severance pay to the impacted employees.

The impact of this type of pay will vary from state-to-state. Some states do not consider severance pay when making the determination of eligibility. In other states, the severance pay is considered, but how that pay is received can have an impact. A lump sum payment may be disqualifying for the week it is received in some states, but in others, the state will allocate that amount over the time-period it represents.

Reporting any type of pay that may be received after a separation is just as important as the separation details. This information can be shared with the state to help them make the proper determination on the eligibility for benefits and reduce your exposure to benefit charges.

Provided by our friend, Michele Heckmann, Director of Customer Insights, at Thomas & Company.

(Image by AndreyPhoto63 from Freepik.)

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