Every business experiences employee turnover. Losing an employee, whether it's voluntarily or forcibly, can be costly in claims for unemployment insurance benefits. The financial impact may not be felt right away because an unemployment benefit is not money that an employer pays directly out of pocket (except for a non-profit organization). But rather, employers must pay both state and federal unemployment taxes that are deposited into the Unemployment Compensation Trust Fund from which benefits are awarded.

Unemployment compensation can be a big deal for companies with huge staffs or high turnover. "As an employer you are taxed according to past claims," says Richard A. Hooker, a partner with the law firm Varnum Riddering Schmidt in Novi, Michigan. "The more former employees you have collecting unemployment benefits, the higher your taxes are going to be," he explains.

This is a bona fide reason why employers are well served to scrutinize unemployment benefit claims and contest them whenever there is a justified reason to do so.

Regardless of reason for termination, the large majority of departing employees automatically file for unemployment compensation. Why not? Filing a claim doesn't cost them anything. Once a claim has been filed, the ball is in the employer's court. If the employer does nothing, unemployment compensation will likely be granted.

"Unemployment insurance relies on employers to raise issues. It is part of the determination as to whether an individual qualifies to receive benefits and also whether that person should be paid on a week-by-week basis," says Douglas J. Holmes, president of UWC-Strategic Services on Unemployment & Workers Compensation, a Washington, D.C. trade group that represents employers on unemployment issues. "Employers should raise issues; this is an unemployment insurance program, not public assistance," he adds. "You want to minimize costs to your business and make sure the system is working the way it was designed."

(Editor's Note: This guide includes expert advice, but it should not be mistaken for legal advice. If you are in the process of contesting an unemployment benefits claim and have a particular question, consult an attorney.)

Contesting an Unemployment Claim: Responding to a Notice of Claim

An ex-employee seeking benefits will file a claim with the state unemployment agency. At that point, the employer receives a Notice of Unemployment Insurance Claim Filed. The first course of action is to respond accurately and thoroughly when filling out the separation and wage information section. There are essentially three types of separation: 1.) the layoff; 2.) the discharge; and 3.) and the voluntary quit.

"All you can do is contest the claim," says Elizabeth Milito, senior execute counsel with the National Federation of Independent Business Legal Center in Washington, D.C. "The ultimate grant of denial of benefits is up to the state agency."

However, this decision is based upon conducting telephone interviews with claimants and employers and reviewing written statements. There are essentially two deciding factors. The first is whether or not the claimant is eligible for benefits, which generally boil down to if the individual is actively seeking full-time employment and is indeed unemployed (her or she is not secretly working elsewhere). The second is whether or not the individual may be disqualified from receiving benefits.

Before contesting an unemployment compensation claim, look at the status of the individual and reasons behind the departure and assess your chances of winning, advises Milito. Three primary considerations:  

1. Why was the employee terminated? Challenge a claim if you discharged or fired an employee for misconduct or for a significant policy violation, such as excessive absenteeism, fighting, stealing, working under the influence of alcohol, or testing positive for drug use. If you fired the worker simply because he or she was not very good as the job, you may still contest the claim, although you are less likely to be successful.

2. What evidence do you have to support your decision to terminate the employee?  If your action was motivated by absenteeism or drug use or another serious situation, make sure you have the appropriate documentation to prove it.

3. How likely is the employee to sue you? If the person threatens to file a wrongful termination claim, make sure you've gathered evidence that the termination was legitimate.

In most states, individuals who lose their jobs through no fault of their own are entitled to collect unemployment compensation for the applicable benefit period or until they find a new job. The most common reasons for denial of unemployment benefits are voluntary resignation without good cause, and dismissal for cause or misconduct.

Typically, an employee who quits a job does not qualify for unemployment benefits.

But that's not always the case, says Holmes. "When an employer creates an environment that makes continued employment difficult, then the (former) employee may qualify for unemployment benefits."

Take for instance, an individual who quit because child-care arrangements were terminated. An employee who leaves voluntarily for good cause or a "constructive discharge" is likely to be granted unemployment compensation. Quitting for good reason can be the result of sexual harassment, age discrimination, or hazardous working conditions. Reducing the pay and hours of the individual, making it impossible for that person to continue working for the company may also be viewed as good cause.

Challenge a claim that follows a normal resignation for another job, a move, or other personal reasons. But don't go overboard. It doesn't pay to fight legitimate claims, says Milito. "You don't want to challenge an unemployment claim that you can't win."

Dig Deeper: How to Write a Termination Notice

Contesting an Unemployment Claim: Appealing a Notice of Determination

After the state agency makes a decision, it will mail a Notice of Determination. Employers and claimants have the right to challenge the agency's decision if they disagree. An appeal will head to a hearing before an Administrative Law Judge.

Base your decision to appeal on a cost benefit analysis, says Hooker. "You have to make a decision about how much you want to spend to contest the claim."

However, plan to participate even if you are not the appealing party. The Judge's decision is based only on what is presented at the hearing. Be prepared to present and defend your position. If you choose not to participate, the hearing will proceed without you, and the decision will be based on the employee's evidence. Also, do not assume that at a later date, new evidence or information can be added.

Keep track of all notices that you get from the state and reply in a timely fashion. Bear in mind, there's often a short time frame to respond to notices. After all, Unemployment Insurance Agencies are charged with moving quickly to pay people who are out of work.

"Your appeal could be dismissed and the claimant could win just because you miss a deadline," says Milito. Also, make sure you provide all information that is being requested. Don't overlook requests such as subpoenas for witnesses.

Dig Deeper: Employees from Hell

Contesting an Unemployment Claim: Preparing for a Hearing or Trial

You will receive a Notice of Hearing that will state the date, time, type of conversation (telephone or in-person), and location of your hearing. Many business owners represent their companies during a hearing. In most cases, the benefits amount is not large enough to enlist outside legal counsel. In-house counsel, a HR officer or third-party unemployment claims administrator also can handle the case. But if the hearing is going to be about more than unemployment compensation, say a wrongful termination, you should plan on hiring an attorney to defend the company, advises Holmes.

Hooker says a common mistake business owners make is not providing sufficient evidence and argument early on in the process. Know the issues involved for qualification or disqualification of benefits, gather performance records and other documents, line up witnesses supporting your side of the case. Review the employee's statement attached to the Protest Acceptance. Write a summary of the key points you intend to present.

Facts, not conclusions, are the basis of a good case. Be prepared to answer questions about who, what, when, where and why. And do not rely solely upon written statements of witnesses as part of your evidence presentation, he cautions. If you have a statement concerning an employee's behavior, back it up with contemporaneous e-mail records, for example.

Finally, prepare all evidence well in advance and be ready to explain company records. "Don't wait until the morning of the hearing," says Hooker.

Dig Deeper: The Art of Firing

Contesting an Unemployment Claim: Improving Your Hiring Practices

The best way to defend a claim is to build in safeguards when you hire a new worker, by putting him or her on notice as to your company's policies, says Milito. Every new hire should be given a copy of the employee handbook, and asked to sign a form stating that he or she has read it and understands the consequences for failing to follow the rules. (Keep your handbook up to date, adds Milito.)

It also is important that you treat everyone the same. In other words, you can't let some employees break the rules and get away with it. For instance, "policies about tardiness can't be enforced in one department but not another division of the company," cautions Milito. "This is a preventive strategy to help employers with unemployment compensation claims and other employee issues that may arise."

Be diligent about keeping a paper trail regarding employee conduct, especially in disciplinary action. For instance, says Milito, even if it feels like overkill, you should file a police report if an employee threatens to assault a co-worker. If a worker claims harassment or that another employee is acting inappropriately, conduct a formal investigation, get statements from witnesses, and document your findings. Holmes says many undeserving individuals have received unemployment compensation simply because adequate records couldn't be produced. Don't let yourself become one of them.

Dig Deeper: A Sample Employee Handbook