State governments set up unemployment insurance pools to protect displaced workers from becoming destitute due to losing a job through no fault of their own. These plans also help protect the business community at large, as well, since recently unemployed workers will still provide a market for them to purchase groceries, pay rents and mortgages and other vital goods and services. Generally, unemployment insurance benefits only apply to statutory employees who meet certain qualifications. Independent contractors typically do not qualify for unemployment compensation.
Unemployment insurance is primarily administered at the state government level, often by the state Department of Labor or Department of Work Force Development. Employers must report their payrolls to state unemployment officials, and pay a percentage of their payroll into the pool. Additionally, employers must pay Federal Unemployment Tax, which goes to supplement state unemployment pools. If a qualifying worker is let go, and is not at fault, he is generally entitled to receive a percentage of his income for a limited period number of weeks. If the worker earns money during a given week, he generally gives up some or all of his unemployment benefits for that week.
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State laws vary, but generally speaking, only workers in certain categories are entitled to unemployment benefits coverage. Seasonal workers and temporary workers are typically not covered, nor are commissioned salespersons or independent contractors, including subcontractors. To qualify, you must have earned sufficient wages during the "wage base period," which is generally the four or five calendar quarters immediately preceding the claim for unemployment. The state uses your wages during the base period to calculate your benefits.
Independent Contractors and Corporations
Independent contractors working as sole proprietors can typically not expect to collect unemployment benefits. However, you may be able to qualify for benefits if you are the owner-employee of a corporation or limited liability company. You must be a statutory W-2 employee of your company. Technically,in this arrangement, your company is a subcontractor, not you. If your company goes out of business, or must significantly reduce your hours or pay, you may be able to receive unemployment insurance, if your company paid into the unemployment insurance pool when you were working.
In some cases, employers may seek to avoid having to pay unemployment insurance premiums, benefits, insurance and Social Security contributions by improperly classifying workers as subcontractors when they should be classified as statutory employees. There are a number of specific tests that determine whether a classification as an independent contractor, but if the employer generally maintains pervasive control over how the work is performed, provides the tools and materials to do so, and the activities are an integral part of the business of the employer, a review board would likely find that the actual nature of the relationship is that of an employee. This would potentially qualify you for unemployment benefits, as well as possible result in significant sanctions against your employer.