How to Reduce Your Virginia Unemployment Taxes

By Raymond L. Hogge, Jr., Esq.
June 1998

If you are in business and have one employee, you probably are subject to the Virginia Unemployment Compensation Act and each quarter you must pay a tax to the Virginia Employment Commission, or "VEC." The amount of that tax is based in part upon your "taxable payroll." The higher your payroll, the larger your tax base and the more tax you pay. The amount of your tax also depends upon the amount of unemployment compensation paid by the VEC to your former employees. The more unemployment compensation paid, the higher your tax rate will be. This article will explore some of the measures that you, the employer, can take to reduce these taxes.

Employ Fewer Workers To Do The Same Work

Your taxable payroll is the total of the first $8,000 of wages earned for each employee during a calendar year. Once an employee earns $8,000 in a calendar year, the rest of his or her wages place no additional burden on your taxable wage base. So, from the point of view of your tax base, it is better to have fewer employees each of whom work more hours, up to a point.

For example, suppose you have a job for which you pay eight dollars per hour. If one employee (let's call him "Joe") works 40 hours per week at that job for 50 weeks each year, the total wages are ($8 x 40 hours x 50 weeks = ) $16,000, and your tax base for state unemployment taxes is $8,000 because for each employee there is an $8,000 ceiling. In contrast, if you hire four part-time employees to do the same work, each of them will receive wages of ($8 x 10 hours x 50 weeks = ) $4,000. Although your total payroll will still be $16,000, your tax base for state unemployment taxes will be $16,000, since none of the employees ever hit the $8,000 ceiling.

Like all good ideas, however, this can be taken too far. For example, if your workload increases, you could hire additional employees. If you do so your tax base will increase. Alternatively, you could increase the hours of your current employees. If you do so, your tax base probably will not increase. But if the increased workload causes your current employees to work overtime (hours in excess of 40 hours in any workweek), you probably will be required by the federal Fair Labor Standard Act to pay them for those overtime hours at the rate of one and one-half times his regular rate of pay. Clearly, the expense of overtime compensation can quickly surpass the savings in unemployment compensation taxes.

Using fewer employees also is beneficial from a risk management point of view. Every employee is a potential unemployment compensation claimant. Since your tax rate is determined in part by the benefits paid to claimants, a smaller workforce typically will generate fewer claims and will result in a lower tax rate.

Of course, none of this means that you should start firing people in order to have a smaller workforce. To state the obvious, each employee you terminate for this reason probably will file an unemployment compensation claim and probably will receive an unemployment compensation award. In addition, every termination today carries with it a significant risk, since the favorite passtime of employees currently seems to be suing their employers for wrongful discharge, sexual harassment, and anything else they can think of. These strategies, however, should play a significant role in your hiring and staffing decisions.

Use Independent Contractors

Using independent contractors instead of employees reduces your tax base. Independent contractors are not entitled to unemployment compensation when they are fired, quit, or finish a job, and so will not affect your tax rate. Unfortunately, the worker you think is an independent contractor may be held by the VEC and by the courts to be an employee. To effectively maintain a worker's independent contractor status, you must ensure that he or she falls within the applicable legal definition of an independent contractor.

In general, a person doing work for you will be either an employee or an independent contractor. It is important to remember that the definition of an employee or an independent contractor may be different under different laws, and a person may be an employee under one law and an independent contractor under another. For purposes of Virginia unemployment compensation, it is the Virginia Unemployment Compensation Act that controls.

The Virginia Unemployment Compensation Act focuses on the "services performed" by the person. If a person performs services "for remuneration," then he is presumed to be an employee, and the VEC will treat him as an independent contractor only if you, the employer, can meet the following two-part test.

First, you must demonstrate that he "has been and will continue to be free from control or direction over the performance of such services, both under his contract of services and in fact." The following statement by the VEC suggests how difficult this requirement can be to meet:

The right of control includes not only the power to specify the results to be accomplished, but must include the power over the performance of such services. If the party for whom the work is to be done has the power to direct the means and methods by which the other does the work, an employer-employee relationship exists. Among the tests used to help determine if the right to control exists are: whether instructions or rules / guidelines have to be obeyed; whether either of the parties possesses the right to terminate services at will without incurring liability to the other; who determines hours / days of work; and who determines how the work will be done.

Virginia Employment Commission, Employer's Handbook at 2 (6/95). Clearly, you will undermine a worker's independent contractor status if you exercise any supervision over him. Furthermore, the mere physical proximity of your supervisor can suggest that supervision is being exercised.

Second, you must establish that (a) the worker's service is outside the usual course of your business, or (b) his service is performed outside of all of your places of business, or (c) he is engaged in an independently established trade, occupation, profession or business. Generally, if the services performed by the worker are part of the regular operation of your business, he will not be "outside the usual course of" your business, and his work will not be "outside of all of your places of business" if he performs it at your office, your shop, your factory, or at any job site at which you also are performing work. The question then often becomes whether the worker is an "established business." In this regard, the VEC says:

An established business ... is one that is permanent, fixed stable, or lasting. These are some things that you can do which may help you in determining if a person is a bona fide independent contractor: -- Ask for his federal and state identification numbers; -- Look at his business license; -- Ask for his business calling card -- Determine if he is listed in the business section of the local telephone directory; -- Look at his Certificate for Workers Compensation Insurance.

Virginia Employment Commission, Employer's Handbook at 2 (6/95). Thus, when you hire someone as an independent contractor, you should obtain these and other similar documents and keep copies of them in his file. To avoid confusion, it is a good idea to set up different files for employees and independent contractors, and to keep them physically separate. You should always issue a 1099 Form to an independent contractor, and should never issue a W-2 Form to one. Also, independent contractors should not be offered or given employee benefits such as group health insurance and retirement benefits.

Screen New Employees Carefully

Each new employee is a potential unemployment compensation claimant, so choose your employees carefully. Obviously, applicants for some types of jobs can be screened much more readily than others, and when labor is in short supply you may have to take what you can get. Nevertheless, the fundamentals of effective hiring should be followed as much as practical.

Note: Never, ever, ever ask an applicant medical questions or questions about their workers' compensation history. You will violate the Americans with Disabilities Act, the Virginians with Disabilities Act, or both. Such questions should be asked only after you make a conditional offer of employment.

Implement a 30 Day Probationary Period

Unemployment compensation is awarded against the last employer for which the claimant worked for 30 days or 240 hours. Therefore, you may wish to consider implementing a "probationary period" during which the employee will be evaluated for continued employment before he reaches 30 days or 240 hours of service (whichever comes first), and terminated if appropriate. If you adopt a probationary period, you should take appropriate steps to prevent completion of the probationary period from altering the at-will employment relationship, including incorporating appropriate language in your employee handbook.

Let Employees Resign Voluntarily

An employee is disqualified from unemployment compensation if he leaves work "voluntarily and without good cause." Therefore, if it appears that an employee is headed toward termination, you may wish to explain that to him and give him an opportunity to resign before any final employment decision is made. If the employee chooses to do so, he may be disqualified from unemployment compensation.

It bears repeating that, for a resignation to disqualify an employee from unemployment compensation, it must be" voluntary." The employer must prove a resignation was voluntary, and any circumstances suggesting the employee was coerced into resigning should be avoided.

Fire for Misconduct When Appropriate

An employee is disqualified from unemployment compensation if he is discharged for "misconduct connected with his work." There are two ways you can establish employee misconduct. First, you can show that the employee deliberately violated a company rule reasonably designed to protect your legitimate interests. Alternatively, you can establish misconduct by showing that the employee's acts or omissions were of such a nature or so recurrent as to manifest a willful disregard of your interests and the duties and obligations he owes to you. Except in extreme cases, whether a particular set of facts establishes misconduct seldom can be predicted with certainty. Some conduct which has been held to constitute misconduct includes being absent from work without notice, eating during working time in violation of a company rule, engaging in rude and insubordinate behavior, and intentionally falsifying company records.

If you have grounds to terminate an employee for misconduct, it is important that you act promptly. Employers who have delayed have been held to have "condoned" the misconduct of the employee, and have lost the right to assert misconduct in defense of the terminated employee's unemployment compensation claim.

Adopt Appropriate Personnel Policies

Your written employment policies, which typically are contained in an employee handbook, are cornerstones of effectively reducing your state unemployment compensation tax. The following are some specific examples of personnel policies that can help you achieve that goal.

If you hire independent contractors, you may wish to adopt a policy that certain functions generally will be delegated to independent contractors rather that employees. You also may wish to adopt a procedure outlining the documents to be required from independent contractors, such as a business license.

Many employees have in their employee handbook a policy stating "Two unexcused absences in any workweek shall be deemed a voluntary quit" or words to that effect. Such a policy can be useful when, for example, you want to fire an employee who chronically fails to report for work but you do not want your tax rate to increase as a result of a termination.

An employee who quits without "good cause" will be disqualified from unemployment compensation; if the employee had good cause to quit, he will be entitled to unemployment compensation. Although the employee must prove that he had "good cause" to quit, the wise employer will be prepared to refute the employee's contentions. One way to do this is to adopt an internal grievance procedure or "open door policy" by which disputed actions and working conditions can be brought to the attention of the company and, if appropriate, corrected. An employee usually will be denied unemployment compensation if he fails to use available procedures to seek a resolution of whatever motivated him to quit.

As explained above, to establish misconduct you will be required to show that you had a rule or interest that the employee deliberately violated or wilfully disregarded. This will be much easier if the rules and interests in question are expressed in writing, such as in an employee handbook, which you can prove the employee received. Such employer rules are often included in a "standards of conduct" section of an employee handbook, and any such section should specifically address the employee behaviors which you have seen or expect to see and which you would want to assert constituted misconduct. Employer interests serving as the basis for a misconduct defense may be less obvious in the written materials, until they are violated. However, they can be seen where, for example, your policy on absenteeism states "In order to provide our customers the service they demand, it is imperative that everyone report to work as scheduled." Thus, the written policies should be formulated with this purpose in mind, as well as the many other purposes they serve.

Finally, it should be remembered that any personnel policy or procedure, to be effective in reducing your unemployment taxes, must be effectively communicated to all employees and should be consistently enforced.

Defend Claims Vigorously

Unemployment compensation claims will not go away on their own. If you want to control your unemployment tax rate, unemployment compensation claims that can be defended must be defended vigorously. Moreover, you can expect good results only if you begin defending the claim early. The farther into the appeal process you get before taking it seriously, the less likely you are to be able to overturn an unemployment compensation award.

Conclusion

There are many steps you can take to reduce your state unemployment compensation tax, some of which have been described in this article. The measures which are appropriate in a particular situation, however, cannot be determined without careful consideration of practical, business and legal issues not discussed in this article, such as, for example, the culture of your company, employee morale, the threat of a union campaign, potential liability for wrongful discharge, and any unique aspects of your industry or workforce. Furthermore, special provisions in the Virginia Unemployment Compensation Act apply to particular employers and employees, which may suggest measures in addition to or different than those described above. Therefore, in developing your plan to reduce these taxes, it is recommended that you consult a human resources professional or qualified legal counsel.