Selecting the Best Option
Following are two methods you can use to help determine which unemployment insurance financing option is best for your municipality.
Premium paying
Determine how many eligible employees your municipality has. Elected officials and many appointed policy‑making officials are generally not covered for unemployment compensation purposes and usually should not be counted, but you should confirm the coverage status of specific positions under Tennessee Employment Security Law and with the Employment Security Division of the Tennessee Department of Labor and Workforce Development. If your city operates a school system, do count school system employees; while they generally cannot draw unemployment compensation during customary vacation or recess periods, they may be eligible for benefits if separated from employment during the regular school year.
Compute your city’s maximum taxable payroll by calculating the salaries and wages of all eligible employees up to the taxable wage base (for example, the first $7,000 in wages per employee, which is the current taxable wage base under Tennessee unemployment insurance law; this amount is subject to change by statute).
For illustration, multiply the maximum taxable payroll amount by an assumed new‑employer premium rate (for example, 1.5 percent). At a 1.5 percent rate, each employee who earns at least the taxable wage base ($7,000) would generate an annual premium cost of $105. Actual premium rates for governmental employers are established by Tennessee law and the Department of Labor and Workforce Development and may differ from this example.
During a city’s first year as a premium‑paying employer, its annual premium will be equal to the applicable percentage of its maximum taxable payroll, as set by TDLWD for new governmental employers. In subsequent years, after a claims history is established, the city’s premium rate will be experience‑rated within the range established under state law and TDLWD’s current schedules, with rates increasing or decreasing based on the city’s claims experience.
Example: Your city has 50 employees, all of whom earn more than the current $7,000 taxable wage base. The maximum taxable payroll, therefore, is $350,000 (50 × $7,000). At a hypothetical 1.5 percent rate, your premium during the first year as a premium‑paying employer would be $5,250 ($350,000 × 0.015). Actual rates must be confirmed with TDLWD for the applicable year.
Reimbursement
Review your city’s personnel records for the past several years and estimate the number of employees who are likely to separate and be eligible for unemployment compensation during the coming year. If you are reasonably certain that the municipality will not be laying off or terminating employees during the coming year, it may be more cost‑effective to consider becoming a reimbursing employer, while recognizing the risk of unbudgeted costs if layoffs do occur.
Estimate your potential liability under the reimbursement option. Under current Tennessee law, an eligible claimant can typically receive up to 26 weeks of benefits, with weekly benefits ranging from a minimum of $30 to a maximum of $275, depending on prior wages. A claimant must have average wages of at least $780.01 in each of two calendar quarters in the base period to qualify for the minimum weekly benefit, and an average of at least $7,150.01 in the two highest quarters to qualify for the maximum weekly benefit. These dollar amounts are established by statute and are subject to change.
A detailed benefit table is provided in Tennessee Code Annotated § 50‑7‑301. The table classifies weekly unemployment compensation benefits according to the employee’s average earnings based on the employee’s total wages in the two highest‑paying quarters of the base period. The base period is defined as the first four of the last five completed calendar quarters prior to the calendar quarter in which the unemployment claim is filed.
Example: Your city anticipates having to lay off two employees in the coming year, and both would be eligible to receive unemployment compensation benefits. One employee is presently earning $20,000 per year (with a two‑quarter average wage of $5,000), and the other earns $12,000 per year (with a two‑quarter average wage of $3,000). Under the benefit table in T.C.A. § 50‑7‑301, the first employee would receive an estimated $192 per week, for a maximum potential liability of $4,992 over a 26‑week eligibility period. The second employee would qualify, under the same chart, for a weekly benefit of approximately $115 per week, for a maximum potential liability of $2,990 over 26 weeks. The combined maximum 26‑week liability for both employees would be $7,982.
A city’s decision whether to be a premium‑paying or a reimbursement employer should hinge on a careful analysis of its potential liabilities under each option. Generally, a city that experiences few layoffs or terminations may find that the reimbursement option produces savings over time, but such cities should anticipate the possibility of occasional spikes in cost in years when layoffs or terminations occur.