United States: Further Analysis Of The Interaction Between Illinois Unemployment Compensation And The Federal CARES Act When Reducing Hours Compared To Full Unemployment

As Illinois employers ponder their futures amid the COVID-19 crisis, many are trying to determine whether some form of reducing employees' hours is the solution. Many have inquired whether their employees can make up the difference in pay through unemployment compensation (UC) benefits through the Illinois Unemployment Insurance Act, and now with enhanced benefits through the federal Coronavirus Aid, Relief and Economic Security (CARES) Act. The answer to this question is, as with so many legal questions, it depends.

Many employers are doing everything they can to keep their employees employed, potentially with all their benefits, but with the closure or partial closure of businesses (some by governmental orders) and a general reduction in work, they simply cannot afford to keep everyone fully employed. Employers are contemplating many scenarios to try and stay afloat short of outright termination, such as reducing hours to part time each day, or working every other day, or even one week on and one week off. The question becomes whether this is good for the employee and for the employer.

Further complicating the resolution of this question is the way in which the different scenarios impact the amount of an employee's ultimate compensation, when state unemployment compensation and payments under the CARES Act are considered. The analysis of how these payments will impact each other has developed as payments are actually being made and federal and state agencies interpret the requirements. Accordingly, we have revised this Alert since our last publication to take into consideration these additional developments, which may provide further clarification for employers. This is a more accurate and up-to-date version and therefore, we suggest substituting this for the prior version. Further, because we have received many questions on this over the past few months, we have also included some new formulas to assist employers in scenarios that consider higher maximum Weekly Benefit Amounts when considering dependents, which as can be seen, affect the amount of reduction in hours/wages that can occur to still allow an employee to collect unemployment benefits. (See Scenarios 12 – 13) As one further note, we have heard from many employers that employees who should be eligible for unemployment benefits are being denied, and in nearly every situation, it has been determined to be due to an error during the application process that the employee was able to fix by contacting the IDES.

This Alert takes into consideration the various formulas used by the Illinois Department of Employment Security, but does not consider every possible scenario, so employers should understand that if attempting to apply the IDES formulas prior to making business decisions about reducing hours, it may take some trial and error to find the right number of hours that will allow employees to receive both regular unemployment compensation and payment under the CARES Act. It is not possible for employers to know exactly how the IDES will calculate benefit eligibility including many unknown factors such as dependents, other sources of income, reductions for non-taxable income, and full salary history in the relevant period (if the employee started less than up to about 18 months earlier), to name a few.

Payment for Reduced Hours

The Illinois Unemployment Insurance Act (the Act) generally provides for benefits when employees become unemployed through no fault of their own. Importantly, the Act also allows for payment to employees whose hours have been reduced, in some circumstances. Currently, individuals who are unemployed are provided with a "weekly benefit amount" (WBA) of 47% of their average weekly wages, as calculated by looking at the highest two quarters of earnings in the Base Period. The Base Period is the first four calendar quarters in the last five complete calendar quarters that the individual worked prior to their benefit year, which is the quarter in which they became unemployed. Then, the two highest quarters are divided by 26 weeks, and reduced down to 47%. Individuals can receive this amount if they are entirely unemployed, up to a maximum of $484 per week (for individuals with no dependent spouse of children), or up to $667 with certain dependents. (Note that employees can only claim a dependent spouse or one dependent child, but not both, and not more than one child. The WBA is higher for a child than a spouse.) See this IDES Table for WBAs at different earning levels with different dependent situations. https://www2.illinois.gov/ides/IDES%20Forms%20and%20Publications/CLI110L.pdf

Whether the employee whose hours are reduced will be entitled to regular Illinois unemployment compensation is subject to a somewhat confusing mathematical formula. (Detailed examples are provided below to try and simplify the math.) Section 402 of the Act provides that individuals who are unemployed in any week, as defined in Section 239, are provided their WBA, minus the "part of wages (if any) payable to him with respect to such week which is in excess of 50% of his weekly benefit amount..." Section 239 of the Act defines an "unemployed" individual as an individual who either performs no services in any week, or "in any week of less than full-time work if the wages are payable to him with respect to such week are less than his weekly benefit amount." Put another way, if an employee receives wages of less than his/her WBA in any particular week, then, translated to numbers, if the individual earns less than 50% of his/her WBA, he/she will receive his/her full WBA that week, in addition to the actual wages earned. On the other hand, if the individual is earning more than 50% of his/her WBA (but still less than his/her full WBA), he/she may receive a reduced WBA, the amount of which depends on how much the individual actually earns in a week.

The following scenarios (1 through 6) do not take into consideration any additional federal benefits under the CARES Act; the CARES Act scenarios (7 through 11) are found in that section. They also assume the employee has no dependents, and that the employee is receiving less than the maximum WBA (except for Scenario 14). We have added Scenarios 12 and 13 for calculations assuming both spouse and child dependents. We have also added in Scenario 14 to illustrate how the calculations are affected for highly compensated employees who max out their WBA. In addition, note that there are many other factors that may reduce an individual's WBA, including a payout of vacation pay, receipt of workers' compensation benefits, receipt of a pension, etc. These scenarios assume no such reductions; however, reductions may be relevant. For this, and other reasons, it is recommended that employers do not tell employees that they are or are not eligible for UI benefits, or advise on what the amount may be. Instead, employers should merely advise employees to apply for benefits, as employers do not ultimately control any of the additional factors to be considered. These scenarios are purely for illustrative purposes only to assist employers in understanding the confusing formulas. It may take adjustments to wages after the employee has applied for benefits to bring about the intended results.

• Scenario 1: Employee earns an average of $1000 per week. WBA would be $470 (47% of $1000) in a week in which no work is performed.
  • If employee is reduced to two (2) days per week (or the equivalent part-time work of 16 hours), and is thus earning $400 that week, the formula is:
    • 50% of WBA = $235
    • $400 is more than 50% of WBA
    • $400 - $235 = $165 reduction
    • $470 WBA - $165 reduction = WBA of $305
    • Therefore, WBA that week is $305, plus earnings of $400 = $705 received

• Scenario 2: Employee earns an average of $1000 per week. WBA would be $470 (47% of $1000) in a week in which no work is performed.
  • If employee is reduced to half hours during the week, and is thus earning $500 that week, the employee will not receive any UC that week because he/she will have received more than WBA.
  • Thus, this employee working half the hours and receiving half his/her wages only receives the wages ($500), while the employee working less hours and earning $400 (Scenario 1), receives $705 income through wages and UC.
  • Note that if that same employee has a higher WBA because he/she has a dependent, then it is possible for that employee to receive UC with wages reduced by 50%, or even higher. (See Scenario 12 below for an example.) Therefore, it is important for an employer to know whether the employee has dependents when it is performing these calculations.
• Scenario 3: (Same as Scenarios 1 and 2 but with different pay rate): Employee earns an average of $600 per week ($15/hr for 40 hours/week). WBA would be $282 (47% of $600) in a week in which no work is performed.
  • If employee is reduced to half hours during the week, and is thus earning $300 that week, the employee will not receive any UC that week because $300 is more than the WBA of $282.
  • If employee is reduced to 40% of hours/wages and is thus earning $240/week, then the formula is:
    • 50% of WBA is $141
    • $240 is more than 50% of WBA
    • $240 - $141 = $99
    • $282 WBA - $99 reduction = WBA of $183
    • Therefore, WBA that week is $183, plus earnings of $240, for total of $423.
  • Therefore, this employee with wages reduced to 50% receives $240 that week, while the same employee with wages reduced to 40% receives $423.
• Scenario 4: Employee earns an average of $600 per week ($15/hr for 40 hours/week). WBA would be $282 (47% of $600) in a week in which no work is performed.
  • If employee is reduced to 20% of hours during the week, and is thus earning $120 that week, the formula is:
    • 50% of WBA = $141
    • $120 is less than 50% of WBA
    • Therefore, no reduction of WBA
    • WBA that week is $282, plus earnings of $120 = $402 received
    • (The approximate cutoff of the percentage of earnings an employee can receive in a week and not have any reduction of WBA is 23.5%)
  • Therefore, the employee working 20 hours and the employee working 8 hours (assuming a 40 hour week) would receive significantly different amounts, i.e. $240 for 50% wages/20 hours v. $402 for 20% wages/approx. 8 hours.
  • Note still that these scenarios showing the disparity apply when the employee has no dependents and may be different if the employee has dependents, which provides a higher WBA, and therefore, a higher amount that can be earned in a week and still qualify for regular UC. (See Scenarios 12 and 13.)

The following scenarios and calculations are for an employer who reduces hours in full week increments by having employees work one week on, then one week off.

• Scenario 5: Employee earns $1000 per week, with a WBA of $470. If employee works one week, he/she earns $1000, and if he/she does not work at all the following week, he/she will receive $470 in unemployment, for a total of $1470 over two weeks. Compare this to Scenario 2, in which the reduction in hours each week by 50% yields the employee only $1000 over two weeks (i.e. substantially less), because that employee will not receive UC in either week.
• Scenario 6: Employee earns $600 per week, with a WBA of $282. If employee works one week, he/she earns $600, and if he/she does not work at all the following week, he/she will receive $282 in unemployment, for a total of $882 over two weeks. Compare this to Scenario 3, in which a reduction in wages per week by 50% yields the employee only $600 over two weeks, because that employee does not receive any UC in either week.

Therefore, under regular Illinois unemployment law, when reducing an employee's wages (through hours) in any amount that results in wages higher than the WBA, it would seem that the better situation for the employee would be to reduce hours in full week increments rather than partial reductions each week. With the CARES Act, this difference in payment is even more pronounced.

Federal CARES Act and $600 Federal Pandemic Unemployment Compensation

Under the CARES Act, the federal government is providing up to $600 per week in additional Federal Pandemic Unemployment Compensation for those receiving unemployment compensation. The CARES Act also extends unemployment benefits to 39 weeks from the existing 26 weeks under Illinois law. This $600 payment is provided even if the employee was not making that much at the time s/he lost his/her job, or if combined with regular Illinois UC ends up receiving more than his/her prior wages. There is also no reduction in the $600 payments for employees who are still working, albeit reduced hours. As long as an employee is receiving any regular UC during a benefit week, even just $1, he/she will qualify for the $600 payment. This may cause many employees to prefer to not return to work, or prefer to be fully unemployed. In Illinois, however, in order for laid off employees to be considered "actively seeking work," they have to be prepared to return to their job as soon as their employer is reopened. This means that if they turn down the work because they prefer the UC rather than working, they should no longer be eligible for UC benefits. The employer should immediately report to the IDES this change in status, i.e. that the employee was offered his/her job back and declined.

Below are additional scenarios taking into consideration the $600 CARES Act benefit:

• Scenario 7: Employee earns $1000 per week, with WBA of $470. If weekly hours reduced to point where employee is earning only $400 (i.e. about 16 hours), then employee would receive $305 from "regular" Illinois UC (Scenario 1), plus $400 wages, plus additional $600, for total of $1305, or $2610 for two weeks.
• Scenario 8: Employee earns $1000 per week and is fully unemployed, such that he/she would receive $470 in Illinois UC unemployment benefits plus $600 under CARES Act, for total of $1070/week, or $2140 for two weeks.
• Scenario 9: Employee earns $1000 per week and is scheduled to work one week on and one week off. He/she would earn $1000 in Week 1, then in Week 2, receive $470 in "regular" Illinois UC benefits, plus $600 under the CARES Act, for a total of $2070 for two weeks.

Therefore, in each of these Scenarios, the employee is receiving more money than he/she was earning when working full time, which would have been $2000 over two weeks. In fact, the employee working the most hours (Scenario 9) would receive the least overall (albeit still more than his prior average wage). This extra payment is even more pronounced the lower the employee's wages. For example, a fully unemployed individual who was only earning $400 per week prior to full unemployment will now receive $188 in Illinois UC, plus $600 under the CARES Act, for a total of $788, nearly double his/her regular wages.

Compare these scenarios to the following:

• Scenario 10: Employee earns $1000 per week and has hours cut to point of earning $500/week (Scenario 2), then the employee is not eligible for regular UC, and thus also is not eligible for the $600 under the CARES Act, and only receives $1000 for two weeks of reduced work.
• Scenario 11: Employee earns $1000 per week and has hours cut to point of earning $750/week, then the employee is not eligible for regular UC, and thus also is not eligible for the $600 under the CARES Act, and only receives $1500 for two weeks of reduced work.

Thus in Scenario 10, the employee who is working about half his/her prior hours to receive half his/her prior wages is receiving less than half of the amount that the fully unemployed individual is receiving (Scenario 8), and less than half of the amount that the individual who is working the same number of hours over two weeks, but with one week on and one week off (Scenario 9). An employee working 75% of the prior hours and earning 75% of their prior wages (Scenario 11) will receive about a third less than those fully unemployed (Scenario 8), and nearly half as much as someone with wages reduced to 40% (Scenario 7). Whether or not this was the intended result by the legislation, and whether or not it is fair to employers, this is the law that employers have to work with at this time. Employers will need to consider what is best for their business, as well as what is best for their employees, and this information should help employers understand how Illinois law and the CARES Act work when making these difficult staffing decisions.

Employees with Dependents

The following are scenarios that utilize a higher WBA because the employee has a dependent. As can be seen, the higher WBA allows for more flexibility with hours reductions to still allow the employee to receive regular UC, which in turn, allows for the $600 CARES Act payments.

• Scenario 12: Employee earns an average of $1000 per week. WBA if the employee had no dependents would be $470 (47% of $1000) in a week in which no work is performed. Assuming the employee has a dependent spouse, his/her WBA would be $560/week.
  • If employee is reduced to half hours during the week, and is thus earning $500 that week, the formula is:
    • 50% of WBA = $280
    • $500 - $280 = $220
    • $560 WBA - $220 reduction = WBA of $340
    • Therefore, WBA that week is $340, plus earnings of $500 = $845 received
  • Thus, the employee working half the hours and receiving half their wages but with a dependent spouse receives $845. Compare that to the same employee who has no dependents who also received half wages but was ineligible for any regular UC that week because wages were higher than WBA. This would mean that an employee with a dependent spouse can receive slightly more than 50% of his/her prior wages (approximately 56%) and still be eligible for UC, while an employee with no dependents can only work less than about 47% of his/her prior hours and still receive UC.
  • This same scenario with a dependent child provides a WBA of $649, and with earnings of $500, would result in a WBA of $474. Therefore, this employee with a dependent child can earn up to around 64% of prior wages and still receive UC.
  • We caution against trying to calculate down to quite this detail when making the determination because of issues with rounding, as well as all of the other unknown factors mentioned above.
• Scenario 13: (Same as Scenario 12 but with different pay rate): Employee earns an average of $600 per week ($15/hr for 40 hours/week). WBA with a dependent spouse would be $336 in a week in which no work is performed.
  • If employee is reduced to half hours during the week, and is thus earning $300 that week, the formula is:
    • 50% of WBA = $168
    • $300 - $168 = $132
    • $336 WBA - $132 reduction = WBA of $204
    • Therefore, WBA that week is $204, plus earnings of $300 = $504 received
  • This same scenario with a dependent child provides a WBA of $390, and with earnings of $300, would result in a WBA of $285. Therefore, this employee with a dependent child can earn up to around 64% of prior wages and still receive UC.

Highly Compensated Employees

We have added this final scenario to illustrate how most of the above scenarios are affected in terms of wage reductions when an individual earns enough to receive the maximum WBA because they are "highly compensated." Employees who earn an average of $1028 or more per week/$53,456 per year will max out at $484 WBA (or $577 with a dependent spouse or $667 with a dependent child).

• Scenario 14: Employee earns an average of $1500 per week. WBA would be the maximum $484 in a week in which no work is performed, assuming no dependents.
  • If employee is reduced to two (2) days per week (or the equivalent part-time work of 16 hours), such as in Scenario 1, and is thus earning $600 that week, the employee will not receive any UC that week because $600 is more than the WBA of $484. This employee would need to earn no more than $483 to be eligible for UC, or about 32% of his/her average wages. Compare this to the employee in Scenario 1, who can earn up to 47% of his average wages and still be eligible for UC. The higher the compensation, the fewer hours the employee can work.
    • If this same employee has a dependent child, he/she would still be eligible if he was reduced to $600 per week

Other Important Considerations

When determining whether to reduce hours, days, or weeks in order to keep employees employed instead of a full termination, there are several other issues and pitfalls to consider.

• Employers should check with their medical insurance carriers to make sure that employees are still eligible for health insurance even with the reduced hours. If employees are required to utilize COBRA, and/or if the employer agrees to cover employees' insurance payments, employers should consider requiring a written agreement providing for the reimbursement of those payments from future paychecks once the employee is back to full-time work. The agreement should also provide that if the employee does not return to full time work (whether voluntarily or involuntarily), the employee must reimburse the employer directly. Under the Illinois Wage Payment and Collection Act, the employee must agree in writing to all deductions from paychecks at the time the deduction is made, but a reimbursement schedule for future deductions agreed upon at the time of the agreement can suffice.
• Before reducing the pay of any employee, the Illinois Wage Payment and Collection Act requires that employers give written notice in advance of the reduction (and we recommend obtaining an acknowledgement of receipt either with a signature or electronically if the employee is working at home).
• Employees whose pay or hours are significantly reduced may be allowed to voluntarily quit and still claim "good cause" due to this "substantial change" and still qualify for unemployment compensation. Thus, it is possible that if the employer significantly cuts hours in an effort to keep the employee employed, the employee might still choose to quit and be entitled to regular and enhanced unemployment benefits. It is unknown at this time how the IDES will handle this situation.
• Employers should consult with their attorney for advice pertaining to the Fair Labor Standards Act, the Illinois Wage Payment and Collection Act, and the Illinois Minimum Wage Law prior to cutting the hours or salaries of FLSA-exempt employees.