Small Business

A Harsh Penalty for Initiative


By Karen E. Klein Q: I'm an electrician who was laid off this year after working two years for an contractor. After the layoff, I collected unemployment benefits and decided to reopen an S-corp my wife and I had founded in 1997. We filed all the necessary paperwork and received a letter of good standing from the state. I recently received a letter from the unemployment office, however, stating that I may not have been entitled to collect unemployment because I have my own business. Can't I still collect unemployment until I "hire myself" and pay myself a salary? -- C. H., West Branch, Mich.

A: First, contact your local unemployment insurance office and ask an official familiar with local laws and policies to help you get specific guidance about your rights and appeal procedures. Assuming you've collected a good sum of money, repaying it now will be a difficult burden -- especially when you're in the precarious financial

position of restarting your business.

In general, unemployment insurance is designed to provide a modest financial bridge until those who are laid off or fired can find other jobs. Attorney Mark Terman, of Reish Luftman McDaniel & Reicher in Los Angeles, says your question involves a determination of whether you were technically "unemployed" -- and therefore eligible for benefits -- under the statutes in your jurisdiction. A business owner, even someone involved in a startup who is taking no salary, may or may not not qualify as "unemployed," he says.

NO, YES, MAYBE. "Under California law, the individual who is an owner and employee of a business must have a good reason for not taking pay to avoid being deemed 'employed' by his entity," he says. "If an individual simply chooses not to compensate himself because, for example, he hires others to do the labor and he runs sales and the back office without taking a paycheck, then he would probably be 'employed' and not eligible for unemployment benefits."

If, however, your company is simply unable to pay you a salary through no fault of your own, and you're making efforts to secure work outside the business, then you may be technically deemed "unemployed" and entitled to benefits, Terman says. If you feel that you collected the benefits legally, you should appeal the decision made by the unemployment agency within the time limits that apply, he advises. Have a question about running your business? Ask our small-business experts. Send us an e-mail at smartanswers@businessweek.com, or write to Smart Answers, BW Online, 46th Floor, 1221 Avenue of the Americas, New York, NY 10020. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally.


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