You’re the Boss Blog: Are You Managing Your Unemployment Insurance?

Thinking Entrepreneur

An owner’s dispatches from the front lines.

Every Nov. 30, the State of Illinois sends out a statement that tells businesses what rate they will pay in the coming year for unemployment insurance. I view the rate as one indication of how I did this year as a manager. This time around, I’m anticipating a gift, because we had no unemployment claims this year, and I expect the rate to go down. In a bad year, the statement feels more like a reprimand, one that comes with a bill attached.

As you can read in the helpful article The Times just published about unemployment insurance, businesses ultimately pay the bill for unemployment claims. The state may write the check, but the money comes from employers. Most important — and something a lot of small-business owners don’t understand — is this: The more people you lay off or fire “without cause” in the current year, the more you will have to pay into the system for the next three years, at least in Illinois (it varies by state). On the other hand, if you have a good year and manage your people well, you can keep the rate down.

In my case, because of a few claims made after the economic crisis first hit, my rate jumped to 3.8 percent, from 2.1 percent. I have 110 employees, and that jump increased the cost of unemployment insurance for my company by about $24,000 per year. It is the cost of doing business, especially the cost of doing business in a bad economy. Make no mistake: I understand that unemployment insurance is an essential lifeline for people who have lost their jobs. But I also know that it can be a big expense for a company that is already struggling.

When times are good, this is much less of an issue. Fewer employees are laid off and those who do lose their jobs tend to stay unemployed for less time and to collect fewer benefits. When the economy goes bad, of course, many companies are forced to lay off employees, and those laid off are less likely to find another job. But this is not just a function of a bad economy — it can also be a function of bad management. Trust me, I know.

My unemployment rate used to be at the maximum, and it wasn’t because the economy forced me into mass layoffs. It was many years ago, and it was because I was hiring the wrong people — people who ultimately got fired and became eligible to collect unemployment. Our hiring has gotten much better, largely because I have found people who are much better at it than I am. In the old days, only about half of the people I hired worked out well. Today, we’re probably closer to 80 percent. That means there are far fewer people to unhire, and that saves us from wreaking havoc on both the employees’ lives and our unemployment rate.

This is really about recognizing that great companies have great hiring protocols. It is about placing the right ads, interviewing well and checking references. It is also about recognizing when you have made a mistake — and recognizing it quickly. In Illinois, you have 30 working days before you become liable for a person’s unemployment claims. Most of the time that is enough, although for some jobs — like outside sales — it really isn’t. But there is more you can do to avoid the need to fire someone, and that’s good for both parties.

If there is a problem with an employee, the situation has to be managed. It starts with honest conversations about what the problem is. There should be a plan for improvement, and there should be a clear understanding that things have to improve or the situation will be unacceptable. After a couple of conversations, one of three things should happen:

Best case, the employee improves. Great.

Second-best case, the employee sees the writing on the wall and finds another job — perhaps having concluded that the boss is the problem, which may well have been the case. Or maybe the employee just wasn’t right for that particular job. Or has outgrown it. Or the job has outgrown the employee. Regardless, the employee has moved on, and the problem is solved. Win-win.

And then there is the last group, the people who are not getting better and are not looking for a new job. Obviously, many of these people will leave their bosses no choice but to fire them. When you get better at the hiring and management process, this group shrinks significantly. And that’s good for all concerned.

The costs of unemployment insurance are substantial enough that they should be taken into account when considering layoffs. If sales have fallen and laying someone off is looking like the smart and responsible thing to do, think again. And do the math.

If this is a good employee, and you think it’s likely that either the business will rebound in a few months or there might be some attrition, you might be better off toughing it out and keeping the person around. In Illinois, the insurance increase can end up costing you more than 50 percent of a person’s salary if he or she doesn’t get another job (although the cost will be spread out over the following three years).

It comes down to this. You might be better off paying people to get some work done — even if it is painting the walls, cleaning out files, contacting old customers, doing research and development or building inventory — rather than paying them to stay home and look for a job. And if you end up hiring them back in a few months, you will have saved little and you will probably have done damage to the employee and to your relationship. It’s also not great for other employees who may wonder how secure their own jobs are.

Good employees are valuable assets. This is all very tricky, and sometimes you have to make decisions that require a crystal ball — unfortunately, they seem to be on back order. Someone at the crystal-ball factory must have laid off too many people.

Jay Goltz owns five small businesses in Chicago.

Article source: http://feeds.nytimes.com/click.phdo?i=4bbedc6b11286c6c6b49e515819978a8