While employers are not obligated to issue severance payments (unless they have specifically agreed to do so in a written employment or other agreement), many do offer severance to terminated employees to shield themselves from potential litigation or as a courtesy for the employee’s years of service. But there have been recent changes to the New York unemployment insurance law that all New York employers should be aware of before offering a severance package to a departing employee.

Most notably, the change in the law prevents employers from ignoring unemployment insurance notices as part of an agreement with a former employee to not contest unemployment. Effective Oct. 1, 2013, employers are required to respond to certain New York Department of Labor (NYDOL) unemployment insurance correspondence within specified periods of time or they will face penalties for late responses to request for information. Previously, employers could ignore and disregard correspondence from the NYDOL if, for instance, they agreed, in a severance agreement with a particular employee, not to contest unemployment insurance. The employer’s response to a request for information must contain adequate information for the DOL to make a correct determination regarding benefit eligibility in the New York Unemployment Insurance Fund.

If an employer fails to submit a timely and/or adequate response, the employer’s unemployment insurance account will be charged for the benefits paid to the employee, even if the employee is overpaid, and even if he or she would have otherwise been deemed ineligible for unemployment benefits.

Employers need to be diligent in responding to inquiries from the NYDOL or risk being charged for unemployment insurance benefits to an individual who is ineligible or not entitled to those benefits. Moreover, although it is not recommended to agree to not contest unemployment, employers who choose to do so are cautioned to include in a severance agreement that nothing in the agreement can interfere with the employer’s obligation to respond adequately and truthfully to inquiries from the NYDOL.

Additionally under the new law, an individual cannot obtain unemployment insurance benefits during any week in which his or her severance pay exceeds the maximum weekly unemployment benefit rate – currently $405 and increasing to $420 in October 2014. Ineligibility for unemployment insurance benefits will continue for each week in which the weekly severance payment exceeds the maximum weekly unemployment benefit rate. In the event the employer structures the severance payment as a lump sum, the New York State Department of Labor will employ a formula (using the former employee’s prior actual or average weekly pay) to determine the number of weeks of ineligibility for unemployment insurance benefits.

The new disqualification provision only applies to applications for unemployment benefits filed after January 1, 2014, and not to previously filed claims. New York employers should keep these new unemployment disqualification provisions in mind when designing separation packages and communicating with former employees.

The timing of severance payments, in particular, is a crucial consideration. If the employer wants to enable the former employee to receive unemployment benefits immediately after his or her termination date, then the employer may wish to commence severance payments 31 days after the employee’s termination date.

Also, effective January 1, 2014, the reform increases employers’ assessments and contributions based on the Federal Unemployment Tax Act (FUTA). Previously, the FUTA tax was assessed on the first $8,500 of each employee’s earnings. As of the new year, employers’ taxes and contributions are assessed on the first $10,300 of each employee’s earning and will increase annually thereafter until 2026.