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Unemployment loopholes in the aftermath of the pandemic

May 12, 2022
The pandemic brought about unprecedented unemployment. Unfortunately, along with unemployment came those trying to cheat the system.

Let’s face it, the onset of the pandemic turned every industry upside down. We were faced with making quick decisions without time to evaluate the pros and cons, and without a system of checks and balances.

I found myself right where many business leaders were at the time, utterly overwhelmed. To be completely honest with you, I was overly concerned about how these decisions would impact our businesses and economy at the end of the pandemic. I felt strongly that we could be facing inflation, labor and supply shortage, fraud, recession, and a global economic crisis. I was seriously concerned about the perils we could be facing regarding unemployment.

Our national answer to unemployment

When the pandemic started, the nation’s unemployment rate catapulted to 15% as 36.6 million Americans rapidly applied for unemployment insurance (UI) benefits.1,2

Lucky, President Franklin Delano Roosevelt had signed the Social Security Act in 1935, which contained plans for unemployment insurance. However, it was later determined that this would be based on a dual federal and state statutes program. As a result, much of the federal program is implemented through the Federal Unemployment Tax Act (FUTA). At the same time, each state administers a separate unemployment insurance program under the State Unemployment Tax Act (SUTA). The Secretary of Labor oversees and approves SUTA based on federal standards. The funding for FUTA and SUTA is through employer-paid taxes.

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Both emerged because of the Great Depression to create a short-term financial buffer for those who suddenly lost jobs. However, to date, the most historically noted impact on UI (unemployment insurance) benefits has occurred during the COVID-19 pandemic. As a result, the Federal Pandemic Unemployment Compensation program was formed to provide additional monies in unemployment benefits.

Problems arise

In this unemployment chaos, I found that many employers lacked managers or had limited support from their managers. For example, they had not established online access to their Employer Unemployment account, which would have allowed them to respond to and manage unemployment claims. In addition, they were unaware that they had to respond to the Notice of Separation for each claimant within 10 days. This allows the employer to validate information to approve benefits or deny them.

Because they had no one steering the ship, compliance fell by the wayside. The volatility of the situation provided a loophole that let in terminated employees, temporary placement employees, and fraudsters that were not eligible to receive benefits.

Agencies and employers couldn’t respond quickly or without slowing down essential payments. Unfortunately, the agencies automatically approved claims if they had not received a response to the Notice of Separation and noted it as COVID-related. This meant that an infinite amount of unemployment checks were issued in error.

By 2021, state and federal agencies realized that they had a significant problem on their hands with a high probability of fraud, benefit-wage conflicts, and overpayments. Several news stations across the US reported that many states had overspent due to their allotted federal funding. They quickly implemented an audit process using patterns noted during previous unemployment cycles to determine why this had occurred.

Here are the top three contributors to this crisis.

Fraud/identity theft

Out of desperation or opportunity, individuals filed for benefits using identity theft. Unfortunately, these passed through the system unnoticed or challenged, especially from larger, corporate-level businesses, due to high volumes versus small companies with minimal claims.

There were other types of fraud that occurred. Although state and federal audits exist, employers should audit their unemployment accounts and report fraud claims.

To detect these, the agencies started sending out WAGE audits to validate paid benefits. The penalties imposed may differ by state. In North Carolina, for example, when found guilty of fraud you will pay an additional 15% penalty on the overpaid benefits. You will be disqualified from receiving unemployment insurance for one year. If the overpayment is more than $400, you may be prosecuted for a class 1 felony, resulting in a financial penalty and up to 12 months in prison. 

In addition, The Employment Security Law permits the Division of Employment Security to garnish wages as well as federal and state income tax refunds to repay any fraud overpayment.


As states reopened, 83% of those receiving unemployment benefits during the pandemic returned to work within 6 months.3  However, though employed, many continued their weekly filing status and thus still received unemployment checks.

Employers should have notified the agencies when furloughed employees were rehired or declined. This notification would have regulated unemployment benefits. For example, I sent a letter immediately after we ended our furlough.

Double-dipping is the most common abuse of state unemployment assistance. To detect these, the agencies started sending out WAGE Audits to validate paid benefits. Again, the penalties imposed for overpayment differ by state. While traditionally viewed as a minor loss, additional payments spread across multiple filers results in a significant waste of unemployment benefits.

Temporary/seasonal workers filing as employees

Many employers rely on temporary agencies to provide coverage during staff vacations or leaves of absence. This allows them to run without disruption to the normal flow of business. They often hire seasonal workers to assist during peak times.

Some employers treat them as 1099 workers by issuing a straight check for their services. However, those adhering to payroll laws add them to payroll to ensure that the appropriate federal and state taxes are withheld. The employers who ran these temporary employees through payroll suddenly dealt with unexpected unemployment claims. Many unemployment agencies determined they were employees, therefore eligible, and issued unemployment benefits.

I personally encountered this situation because I use support staff from a temporary agency. Unemployment was granted to these workers despite my Notice of Separation responses that clearly indicated they were not permanent employees. I immediately filed an appeal to contest once I was notified that unemployment benefits were approved. I provided supporting documentation for more than 10 individuals. The supporting documentation included a copy of the timesheet supplied by the temporary agency and a letter from the temporary agency which validated the individuals were on an “as needed” assignment and noted the date and times.

Due to the backlog and labor shortage, the appeal did not occur until later. An appeal is a legal hearing. The date and time were scheduled for the phone hearing, and both parties must attend. If the defendant fails to attend, the plaintiff (employer) automatically wins. If the claimant attends, there is a deliberation where both parties state their case. When the appeal begins, both parties are sworn-in under oath. Then the plaintiff and claimant have time to present their facts.

During my appeal, the claimants argued that they had worked for the employer and were legally entitled to unemployment. The facilitator then reviewed and discussed the information I provided and noted the letter from the temporary agency which clearly stated that the defendant was on assignment for a specific date/time. The facilitator finally asked the claimant one final question: Are you; or have you ever been an employee of the plaintiff? The reply was no. I won all appeals. In North Carolina, this means the benefits received will be considered an overpayment and subject to repayment.

This is an excellent reminder that employers should review their accounts to determine if temporary or seasonal employees received undue unemployment benefits. Once identified, the employer should immediately file an appeal. While they may only obtain a small amount, multiplied by several individuals, it will add up to a considerable loss over time.

These “loopholes” will continue to be a threat until more preventive measures are in place.


  1. Long H, Van Dam A. U.S. unemployment rate soars to 14.7 percent, the worst since the Depression era. The Washington Post. May 8, 2020. https://www.washingtonpost.com/business/2020/05/08/april-2020-jobs-report/
  2. Associated Press. 36 million have sought unemployment aid since COVID-19 hit. Marketplace.org. May 14, 2020. https://www.marketplace.org/2020/05/14/covid-19-weekly-unemployment-jobless-claims/
  3. Unemployment fraud in the future phases of COVID-19. Thomson Reuters. https://legal.thomsonreuters.com/en/insights/articles/phases-of-unemployment-after-covid