To Contest or Not to Contest, That is the Question

By Lilian Doan Davis

Most employers are keenly aware of the state and federal taxes they must pay to fund unemployment benefits.  Many employers routinely include “no contest” provisions in their separation agreements whereby they agree not to contest unemployment benefit applications.  While a “no contest” provision seems like an easy, no-risk and inexpensive bargaining tool, the inclusion of a “no contest” provision can expose an employer to potential liability. 

In 2011, Congress passed the Unemployment Insurance Integrity Act (“UI Integrity Act”) to reduce payments of unemployment compensation to ineligible claimants attributed to employer non-responsiveness to unemployment claim notices.  The UI Integrity Act required states to enact laws by October 21, 2013 to (1) enhance penalties for fraudulent unemployment insurance claimants; (2) revise the timing of “new hire” reports; and (3) impose new obligations on employers with respect to responding to unemployment insurance claim notices.

States’ responses to the UI Integrity Act have varied.  To date, almost all states, with the exception of Missouri, have successfully enacted legislation to comply with the UI Integrity Act. In states such as Kansas, Texas, South Carolina, Washington and California, employers that have established a “pattern” of failing to timely or adequately respond to unemployment claim notices are penalized. Under the legislation in these states, if an unemployment compensation payment is made to a claimant and it is later determined that the claimant was ineligible, the employer’s unemployment insurance account will be charged with the overpayment if (1) the employer failed to provide an adequate or timely response to the claim that has been deemed an overpayment, and (2) the employer has established a pattern of failing to timely or adequately respond. “Pattern” is defined differently by state.

In addition, the legislation in Kansas, Oklahoma, and Washington contain provisions that disqualify an employer from having standing to appeal a determination regarding an unemployment benefits claim if the employer fails to respond to a claim within a certain period.

California’s provisions are particularly strict, penalizing willful withholding of information, willful failure to report any relevant information, or willful failure to report a material fact concerning termination.

In light of the varying state laws that have been enacted, employers should review and consider revising any standard “no contest” provisions in their separation agreements.  Doing away with language indicating that an employer will “not contest” a claim for unemployment benefits can insulate the employer from liability under the new state laws as well as liability for potential breach of contract claims if a state agency requires the employer to provide additional information that could be construed as opposition to a claim for benefits.