North Carolina Unemployment Reform: A Grievous Blow or a Path to Economic Recovery?

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In one of his first major acts as governor, Pat McCrory signed into law a bill that will mark a dramatic overhaul in North Carolina’s unemployment system.  The bill, which McCrory signed on February 19, is the second bill he has signed since taking office in January and will go into effect on July 1 of this year.

Currently, the unemployment rate in North Carolina is around 10 percent – remaining consistently higher than the national unemployment rate of 8.5 percent. The state’s unemployment rate is the fifth highest in the nation, and the $2.5 billion that North Carolina owes the federal government for loans related to unemployment benefits puts the state at fourth highest in the nation in regard to unemployment debt.  The state’s Unemployment Insurance program is funded by employers who are required to make monthly payments into the system.  A 0.3 percent increase in the Federal Unemployment Tax (FUTA) rates occurred in January of this year and the unpaid debt would mean a 0.3 percent federal tax increase on North Carolina businesses with each new year until the debt is paid off.  The North Carolina Chamber of Commerce estimates that at this rate, employers would face an estimated $548 million FUTA tax increase by 2018 in the absence of unemployment reform in the state.  Proponents of the new legislation argue that the bill is a step in the right direction toward rectifying this growing problem.

Under the state’s current unemployment law, the maximum benefit an individual can receive is $535 per week, and is calculated using a formula set forth in the North Carolina General Statutes, which is recalculated annually.  An unemployed worker can receive these state unemployment benefits for up to 26 weeks, and may qualify for a federal extension thereafter. Under the new law, however, the statutory formula is no longer used.  Weekly benefits are calculated based on the individual’s average wage during the last two quarters preceding the unemployment claim and are capped at $350 per week.  Further, the duration of unemployment benefits will be calculated based on the statewide unemployment rate and will range from five to 20 weeks. When the state’s unemployment rate is nine percent or greater, claimants will receive benefits for up to 20 weeks. With each 0.5 percent decrease in the state’s unemployment rate, the maximum duration will be reduced by one week, until the minimum five-week mark is hit.  Additionally, the limited duration of state benefits under the new law does not meet the 26-week time period required for federal unemployment benefits to kick in.  Thus, once a claimant has received state unemployment benefits for the 20-week maximum under North Carolina law, there will be no option for a federal extension.

In addition, the health exclusion has been eliminated entirely from the new unemployment scheme.  Currently, an individual may draw unemployment benefits if he or she left a job due to a health condition or other disability, or if he or she left work due to a health condition of a minor child, parent, or other immediate family member.  However, if an employee draws benefits under this provision, those benefits are charged to the employer’s unemployment insurance account.  Under the new law, the health exclusion has been abolished, and an individual who leaves work voluntarily due to a health reason may only avoid exclusion from unemployment benefits if he or she left work for “good cause attributable to the employer” which is defined in the new statute at N.C.G.S. § 96-14.5.

Particularly interesting to employment lawyers and claimants alike is the elimination of “substantial fault” from the new unemployment law.  Currently, “substantial fault” is a middle ground between a termination that is chargeable to the employer and misconduct by the employee, which is not chargeable to the employer.  If there is a finding of substantial fault, an individual is partially disqualified from receiving unemployment benefits for a four- to 13-week waiting period, after which the claimant may receive full benefits.  In cases where an employee was discharged due to “substantial fault,” the employer’s unemployment insurance account is not charged for any unemployment benefits drawn by the employee after the four- to 13-week disqualification period.  In some cases, the availability of a substantial fault finding under current law allowed the employer and employee to stipulate to facts that would result in a “substantial fault” finding, and provided a way for the employee to receive unemployment benefits while allowing the employer to avoid being charged for the benefits drawn by the employee.  Under the new law, such compromises will be unavailable because the possibility of a “substantial fault” has been eliminated.  This change also means there will no longer be a “middle-ground” between a discharge that is due to misconduct and a discharge that does not meet this high standard.  As a practical matter, this means that more employees who are discharged due to minor or intermediate violations of work rules will be eligible to draw unemployment benefits under the new law without any period of disqualification.

While “substantial fault” has been removed from the statutory scheme, the definition of “misconduct” which prevents a discharged employee from receiving unemployment benefits has not changed. The new version of the statute lists examples of employee misconduct at N.C.G.S. § 96-14.6 that were also included in the previous statute.  With the elimination of “substantial fault,” however, employers will need to ensure they adequately document instances in which employees fail to follow work rules to ensure that they can prove that an employee’s discharge meets the higher “misconduct” standard.  Where employers do not have adequate documentation, and in cases involving minor infractions of work rules, under the new law, employees may be able to qualify for benefits even though the reasons for the employee’s discharge would have been classified as “substantial fault” under the current law and resulted in a partial disqualification.

In similar fashion, avoiding liability may become even more important to employers under the new law.  Under both versions of the statute, an employer’s experience rating determines the tax that will be paid by employers as unemployment insurance premiums. Generally, the employer’s experience rating is based on the number of chargeable claims against that employer, so avoiding chargeable claims was essential.  Effective January 1, 2014, the tax contribution rates paid by experience rating employers each quarter will increase by 0.06 percent. Thus, even employers who pay nothing under the current law will pay a 0.06 percent tax under the new statute.

Finally, and perhaps the piece of knowledge most important to the unemployment claimant, is the new statutory definition of “suitable work.”  In order to be eligible for unemployment benefits, an individual must be able and available to work and must be actively seeking employment.  The new law requires that after an individual has received unemployment benefits for 10 weeks, he or she must accept any “suitable work” or may become disqualified from receiving benefits.  The new mandate defines “suitable work” as any employment offer paying at least 120 percent of a claimant’s weekly benefit amount.

According to Republicans, the new laws provide a necessary solution to the growing problem.  Governor McCrory said in an issued statement, “This bipartisan solution will protect our small businesses from continued over-taxation, ensure our citizens’ unemployment safety net is secure and financially sound for future generations, and help provide an economic climate that allows job creators to start hiring again.”  Critics of the legislation claim it will further harm those who are already struggling to make ends meet, and the law may damage the state’s already shaky economic recovery by taking money out of the economic cycle that was formerly given in the form of unemployment benefits.  Current U.S. Labor Secretary Seth Harris said the legislation will cause around 170,000 North Carolinians to miss out on $780 million in federal unemployment benefits and will result in a “grievous blow” to families.

North Carolina’s new unemployment law will likely remain controversial even after it goes into effect this summer, and only time will tell whether the legislature has blazed a trail for economic recovery or made a grave mistake.  But as economic conditions remain volatile, several other states will likely follow in North Carolina’s footsteps in this regard. Florida and Georgia have already reduced the length of their unemployment programs to 14 weeks. Michigan, Missouri and South Carolina have eliminated six weeks of unemployment benefits, and Arkansas and Illinois have cut one week of benefits.


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About Leslie Underwood, Former Associate Editor (10 Articles)
Leslie graduated from Campbell Law School in 2013. She is a native of Four Oaks, North Carolina. In 2010, Leslie graduated summa cum laude from North Carolina State University with a Bachelor of Science in Business Management and a minor in Political Science. Leslie participated in numerous moot court competitions, served as a 2012 Graduation Marshal, and worked as a Graduate Assistant in the Campbell Law Career Center. From 2007 to 2010, she was a file clerk at Coats & Bennett, PLLC. In the Summer of 2011, she was an intern at North Carolina Department of the Secretary of State. She was also a summer associate at Smith, Debnam, Narron, Drake, Saintsing & Myers, LLP and externed in the Chambers of the Honorable Linda Stephens at the North Carolina Court of Appeals.
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