As business owners in the Lone Star State, we understand that managing your workforce sometimes involves difficult decisions. When these decisions include terminating employment relationships, unemployment claims often follow. At the Law Offices of Shann M. Chaudhry, ESQ., we believe that understanding the unemployment claims process is crucial for protecting your business interests while respecting the legitimate needs of former employees.

Understanding At-Will Employment in Texas

Texas is an at-will employment state, which means that, absent a contract specifying otherwise, employers can terminate employees for any legal reason without advance notice. Similarly, employees are free to leave their jobs at any time without reason or notice.

However, it’s important to understand that the at-will doctrine doesn’t prevent a former employee from qualifying for unemployment benefits. The Texas Workforce Commission (TWC) evaluates unemployment claims based on specific criteria that differ from your right to terminate employment.

Termination for Cause and Unemployment Eligibility

When you terminate an employee, the circumstances of that termination significantly impact their eligibility for unemployment benefits. The TWC examines whether the employee was terminated through no fault of their own or due to work-related misconduct.

What Constitutes Misconduct?

In Texas, misconduct is defined as behavior that shows a willful disregard for the employer’s interests. Examples include:

• Deliberate violation of company policies after receiving warnings
• Insubordination (refusing to follow reasonable instructions)
• Excessive unexcused absences or tardiness
• Theft or dishonesty
• Workplace violence or threats
• Being under the influence of alcohol or drugs at work

It’s crucial to document all instances of misconduct with dates, descriptions of the behavior, and any warnings issued. Without proper documentation, proving misconduct becomes significantly more challenging during the unemployment claims process.

Common Termination Scenarios and Benefit Eligibility

Likely Eligible for Benefits:

• Layoffs due to lack of work or business downsizing
• Termination due to inability to meet performance standards (when the employee made a good faith effort)
• Personality conflicts that don’t involve misconduct
• Termination without documented warnings or progressive discipline

Industry-Specific Examples:

• Retail/Hospitality: A server who consistently struggles with the POS system despite training and genuine effort
• Construction: Workers laid off due to project completion or seasonal slowdowns
• Healthcare: A medical assistant who cannot master new electronic health record software despite repeated training
• Technology: A developer terminated because their skills don’t match evolving project requirements, despite their best efforts

Likely Ineligible for Benefits:

• Termination for documented policy violations after warnings
• Abandonment of job (no-call, no-show)
• Termination for gross misconduct like theft, violence, or serious safety violations
• Refusal to perform reasonable job duties

Industry-Specific Examples:

• Retail: An employee caught on camera stealing merchandise or deliberately mishandling cash
• Construction: A worker repeatedly refusing to wear required safety equipment after documented warnings
• Healthcare: A nurse who violates patient confidentiality or ignores critical protocols
• Professional Services: An employee who shares confidential client information with competitors

The Unemployment Claims Process

When a former employee files for unemployment benefits, the TWC will notify you and request information about the separation. Here’s what happens next:

1. Initial Claim: The TWC sends a Notice of Application for Unemployment Benefits.
2. Employer Response: You have 14 days to respond with details about the separation.
3. TWC Investigation: The TWC reviews information from both parties.
4. Initial Determination: The TWC decides if the claimant qualifies for benefits.
5. Appeal Process: Either party can appeal the decision within 14 days.

Industry-Specific Considerations:

• Seasonal Industries (Construction, Agriculture, Tourism): Be prepared for cyclical unemployment claims and understand how temporary layoffs affect your experience rating
• Healthcare and Education: Document competency issues thoroughly, as these industries have specific standards that may affect unemployment determinations
• Professional Services: With remote work becoming more common, document performance issues meticulously as they can be more challenging to prove than in-person conduct violations
• Manufacturing: Maintain clear safety violation records, as these can be crucial in contesting claims where safety protocols were disregarded

When to Contest an Unemployment Claim

Contesting every unemployment claim isn’t always the best strategy. Consider these factors when deciding whether to contest:

When to Contest:

• You have clear documentation of misconduct
• The employee voluntarily quit without good cause
• The claim contains factual errors about the separation
• The pattern of approved claims is significantly affecting your tax rate

Industry-Specific Considerations:

• Retail/Restaurant: Contest when you have video evidence of theft or policy violations
• Healthcare: Prioritize contesting HIPAA violations or patient safety incidents
• Construction: Focus on documented safety violations that endangered others
• Professional Services: Contest when confidentiality breaches are well-documented

When Not to Contest:

• The employee was laid off due to business conditions
• Documentation of performance issues or warnings is minimal
• The cost of contesting (time, resources) outweighs the potential benefit
• The separation was genuinely not the employee’s fault

Financial Impact Considerations:

• For tax-paying employers: Consider the potential long-term impact on your tax rate
• For reimbursing employers: Every approved claim results in a direct dollar-for-dollar cost
• Small businesses should weigh the immediate administrative burden against the long-term financial impact

How Unemployment Benefits Are Funded

Understanding how unemployment insurance works helps explain why managing claims matters to your bottom line.

Do Employers Make Direct Payments to Former Employees?

A common misconception among new business owners is that they must directly pay additional funds to former employees who are receiving unemployment benefits. This is not the case. Here’s how the system actually works:

1. No Direct Payments to Former Employees: Employers do not make direct payments to former employees receiving unemployment benefits. Instead, benefits are paid by the Texas Workforce Commission (TWC) from the Unemployment Compensation Fund.
2. Two Types of Employer Funding Systems:
   • Tax-Paying Employers: Most businesses pay unemployment taxes each quarter based on their experience rating and taxable wages.
   • Reimbursing Employers: Certain non-profit organizations and government entities can elect to reimburse the TWC dollar-for-dollar for benefits paid to their former employees instead of paying regular unemployment taxes.
3. No Employee Contributions: Unlike some other states, Texas employees do not contribute to unemployment insurance. The entire cost is funded by employers.

The Basics of Unemployment Tax

Unemployment benefits in Texas are funded by employer-paid taxes. The state unemployment tax (SUTA) is based on a percentage of each employee’s wages up to the annual taxable wage base of $9,000 per employee.

How Your Tax Rate Is Determined

Your unemployment tax rate is primarily determined by your “experience rating,” which reflects your company’s history with unemployment claims. For 2025, tax rates for experienced-rated employers in Texas range from 0.25% to 6.25%.

Your specific rate is calculated using several components:

• General Tax Rate (GTR): Based on benefits paid to former employees
• Replenishment Tax Rate (RTR): A flat rate (0.15% for 2025) paid by all employers
• Obligation Assessment Rate (OA): Helps fund certain obligations
• Deficit Tax Rate (DTR): Applied if the Unemployment Compensation Fund is below statutory levels
• Employment and Training Investment Assessment (ETIA): Helps fund workforce development

Reimbursing vs. Tax-Paying Employers

Most private businesses are tax-paying employers, but it’s important to understand the difference between the two funding methods:

Tax-Paying Employers:

• Pay quarterly unemployment taxes based on their experience rating
• Taxes are paid regardless of whether former employees claim benefits
• Tax rates can increase or decrease based on benefit claims history
• May pay less than the actual cost of benefits in some cases and more in others

Reimbursing Employers (Option for certain non-profits and government entities):

• Pay nothing when no claims are filed
• Reimburse the TWC dollar-for-dollar for benefits paid to former employees
• Receive quarterly statements for reimbursement of benefits paid in the prior quarter
• Face greater financial uncertainty with each claim, as they must repay the full amount
• May form group accounts with other reimbursing employers to share the risk

How Claims Affect Your Tax Rate

Each approved unemployment claim can potentially increase your tax rate. The TWC uses your “benefit ratio” when calculating your General Tax Rate. This ratio is:

Benefit Ratio = Your last three years of chargebacks ÷ your last three years of taxable wages

A chargeback occurs when a former employee receives unemployment benefits that are attributed to your account. More chargebacks mean a higher benefit ratio, which leads to a higher tax rate.

Best Practices for Managing Unemployment Claims

Before Termination:

• Implement clear, written policies and ensure employees understand them
• Document all performance issues and policy violations
• Use progressive discipline when appropriate
• Provide clear warnings when continued behavior could lead to termination
• Consider alternatives to termination when appropriate

Industry-Specific Tips:

• Restaurant/Retail: Maintain video evidence of policy violations when available, particularly for cash handling or inventory issues
• Medical Practices: Document HIPAA violations meticulously, as these constitute serious misconduct
• Financial Services: Keep detailed records of compliance training and violations, which can be critical in contesting claims
• Tech Companies: For performance-based terminations, maintain specific metrics and objectives that weren’t met despite coaching

During Termination:

• Be clear about the reasons for termination
• Reference previous warnings or disciplinary actions
• Document the termination conversation
• Avoid vague explanations or mixed messages
• Have a witness present when possible

After Termination:

• Respond promptly to all TWC notices
• Provide factual, documented information about the separation
• Submit all relevant documentation with your response
• Prepare thoroughly if an appeal hearing is scheduled
• Have specific examples of policy violations or performance issues ready for reference

Conclusion

Navigating unemployment claims requires a balanced approach that respects the legitimate needs of former employees while protecting your business interests. At the Law Offices of Shann M. Chaudhry, ESQ., we’re committed to helping Texas business owners develop effective strategies for managing unemployment claims and minimizing their impact on your bottom line.

Remember that each situation is unique, and specific legal advice should be tailored to your circumstances. If you’re facing complex unemployment issues or want to develop stronger policies to manage these claims more effectively, we’re here to help.

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This blog is for informational purposes only and does not constitute legal advice. For guidance on specific situations, please contact our office to schedule a consultation.