Employment separation settlement agreements frequently contain provisions whereby employers agree not to contest unemployment benefit applications. When the terminated employees then file for unemployment benefits, the Employment Development Department (EDD) asks the employer for information as to why the employee was let go. These employers then, because of the "we will not contest provision," provide EDD with no information that might preclude benefits eligibility. Other times, the employers simply provide no information at all.
Is there any risk in this practice? Is this a no cost, risk free way to help secure a full general release of all claims from terminated employees? Like many things that seem "free" there is a risk. The Unemployment Insurance Integrity Act ("Act"), which took effect October 21, 2013, requires all 50 states to have laws that punish employers who show a "pattern" of not responding "timely or adequately" to the unemployment agency's (the EDD in California) requests regarding unemployment claims. Employers who do not respond accurately – or who do not respond at all – will not be credited for charges to their unemployment tax account for erroneously paid unemployment benefits. Thus, employers cannot have it both ways: you cannot on the one hand withhold information that would disqualify a terminated employee from receiving benefits and then ask to be credited because benefits were erroneously paid to that employee.
California law implements this federal mandate. Unemployment Insurance Code section 1026.1 requires that an employer's reserve account shall not be "relieved of charges" for a benefit overpayment if the benefit was paid because the employer did not respond timely or adequately to the EDD's questions about the terminated employee's benefits claim.What does this mean to employers? Is there anything employers can do to try to protect against not being credited for charges to their account if they include "we won't contest" clauses in separation agreements or other settlements? To protect against risk, we suggest that, at a minimum, separation settlement agreements containing "we won't contest unemployment benefit application" commitments also specify that the agency will truthfully and accurately respond to EDD inquiries. This allows employers to comply with their agreements by not actively contesting a benefit application, but still timely, truthfully and accurately responding to the EDD's information requests. That is, you would still tell EDD why the person was fired, but you would not advocate before EDD that benefits should be denied. This should help lessen or eliminate the risk of not being credited for charges to the agency's unemployment tax account.