The COVID-19 pandemic and subsequent lockdowns have been brutal for small-to-medium-sized businesses. But programs designed to ease the hardship have also been boomeranging and hitting employers where it hurts. One common complaint is that businesses are having trouble re-opening fully, because workers collecting generous unemployment benefits don’t want to get off the couch. But a far more widespread problem has to do with unemployment insurance fraud gobbling up CARES Act benefits and subjecting employers to higher State Unemployment Tax Act payments. Here’s some background on the problem and how you can protect yourself.

How UI fraud hurts your business

First, it’s important to understand how fraudulent unemployment claims affect your business. Unemployment insurance, which is a joint venture of the federal and state governments, is funded by taxes you pay. As with any insurance premium, the more claims you make, the higher your monthly payments are going to be. So, when people who were on your payroll file claims, those claims are assessed against you. When ineligible claims get paid, such as the worker who left voluntarily or the scammer who never worked for you at all, you’re being wrongly charged for the benefits they wrongfully receive.

The staggering scope of UI fraud hitting COVID relief programs

When Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020, it created a rich target for scammers. A year later, the U.S. Department of Justice announced it had “publicly charged 474 defendants with criminal offenses based on fraud schemes connected to the COVID-19 pandemic.” The DOJ estimates the total fraud against the federal government to be more than $569 million. And these were not amateur chiselers seizing low-hanging fruit. In the area of unemployment Insurance fraud specifically, the DOJ states that “international organized criminal groups have targeted these funds by using stolen identities to file for UI benefits.” On the domestic front, “fraudsters, ranging from identity thieves to prison inmates, have also committed UI fraud.”

The DOJ highlighted one particular case, U.S. v. Leelynn Danielle Chytka, in the Western District of Virginia, where “a defendant recently pleaded guilty for her role in a scheme that successfully stole more than $499,000 in UI benefits using the identities of individuals ineligible for UI, including a number of prisoners.”

More recently, an NBC News report stated succinctly: “The federal government cannot say for sure how much of the more than $900 billion in pandemic-related unemployment relief has been stolen, but credible estimates range from $87 billion to $400 billion — at least half of which went to foreign criminals….”

How you can protect your company from COVID-driven UI fraud

Under these circumstances, businesses must be vigilant. At the very least, your company should recognize the red flags of UI fraud:

• A claim submitted by someone who never worked for you
• A claim submitted by someone still working for you

Unfortunately, many small business owners are too busy to personally scrutinize every notice they receive, and larger companies may not have the proper controls in place to catch UI fraud. The person receiving the claim, and taking it for an error, may not understand the urgency of responding. Companies must:

• Respond to the false claim by the state deadline
• Advise the state of fraud suspicions in the claim response
• Follow the procedures for reporting fraudulent claims through the U.S. Department of Labor

Educating your employees is also important. If their identities are being used for fraud, they will receive communications from the state unemployment office and even a Form 1099-G from the IRS. Your employees must recognize this as a red flag for fraud and report the problem immediately.