Considerations for Premium v. Reimbursement

Cities opting to be premium‑paying employers should enjoy two immediate advantages. First, such cities can calculate, in advance, their annual unemployment insurance premiums and set their annual budgets accordingly. Second, once such premiums are paid, the city will not incur additional, unexpected unemployment insurance costs during the year when layoffs or terminations occur. The downside, of course, is that a premium‑paying city must pay its premiums even in those years when it does not experience layoffs or terminations.

Cities that select the reimbursement option can realize considerable savings during those years when they avoid layoffs and terminations. Over a period of years, these savings may be sufficient to offset the occasional unemployment compensation claim filed against the city. The downside is that the city assumes the risk of paying benefits directly: if multiple layoffs or terminations occur, a city may be faced with a large, unbudgeted expense to reimburse the Tennessee Department of Labor and Workforce Development for unemployment compensation benefits paid.

There are several other factors to consider, including:

• It takes 36 consecutive months (ending on December 31 of each year) for a premium‑paying municipality to establish an experience rating. Until the experience rating is established, cities are required to pay the new‑employer premium rate on their taxable wages, as set by the Tennessee Department of Labor and Workforce Development for the applicable year.
• Even though they are not required to pay unemployment compensation premiums, reimbursement employers are still obligated to file quarterly reports with the Department of Labor and Workforce Development indicating wages paid to their employees.
• Claimants who worked for reimbursement employers receive the same unemployment benefits and in the same manner as those who worked for premium‑paying employers.
• Reimbursement employers can be held liable for overpayments of benefits made by the Department of Labor and Workforce Development. In general, reimbursement employers receive refunds for overpayments charged to their accounts only after the Department has recovered those overpaid amounts from the claimant.

Even when good reasons exist for firing an employee, reimbursing cities should not assume they will avoid unemployment compensation charges. Tennessee law requires proof of “misconduct” as defined in the Employment Security Law and interpreted by the courts; cities that fail to document performance and disciplinary issues, provide clear notice, and offer opportunities to correct behavior may still be liable for benefits even when they believe they had solid grounds for termination. Thorough documentation of rule violations, warnings, and progressive discipline greatly improves an employer’s ability to contest claims.

Tennessee courts have held that “misconduct” for unemployment purposes involves conduct showing a willful or wanton disregard of the employer’s interests, including deliberate violations or disregard of standards of behavior which the employer has the right to expect, or such repeated carelessness or negligence as to amount to an intentional and substantial disregard of the employer’s interests. In cases such as Ralph E. Williams v. Tennessee Department of Employment Security, habitual violation of known rules and policies was sufficient misconduct to disqualify a claimant from benefits. By contrast, mere inefficiency, isolated mistakes, or good‑faith errors in judgment do not constitute misconduct. Serious acts such as theft or other on‑duty criminal conduct are clear examples of misconduct, but they are not the only circumstances in which benefits may be denied.