Unemployment Compensation: A Trap for the New Business Owner

Many individuals who are laid off or fired for reasons beyond their control can collect Unemployment Compensation for a period while they are looking for a new job. Some enterprising individuals take this time to go into business for themselves. It sounds like a great plan. The person has the time to form the new business because he or she is unemployed and the unemployment compensation benefits to help pay bills until the business is running. The idea of someone picking himself or herself back up and creating his or her own business is quite noble and romantic. For many, that is part of the American dream. Unfortunately, that spirit of entrepreneurship may lead to a trap.

Under Pennsylvania’s Unemployment Compensation Law, someone who is self-employed is generally not eligible for Unemployment Compensation (“UC”) benefits. Once the unemployed person starts the process of forming his or her own business, the Department of Labor may terminate the UC benefits because it considers the person to be self-employed. It does not matter whether the business ever makes a profit or pays the person wages. Even if the person decides to discontinue the business, UC benefits will not be available.

But let’s assume that the business starts well. The person makes a nice salary from the business, but then the economy turns south. Business dries up. This person is again ineligible for UC benefits because he or she is self-employed.

There are some exceptions to the general rule that someone who is self-employed is ineligible for UC benefits. For example, those who have a “sideline business” may be eligible for UC benefits. A sideline business has a precise legal definition and it is your job to prove that the business qualifies as a sideline business. Another example is if the person’s new business declares bankruptcy, a lengthy and difficult process.

Unfortunately, the Unemployment Compensation Law creates a disincentive to starting your own business. If you are planning to start your own business or do any type of work for others while receiving UC benefits, contact a knowledgeable attorney first to avoid any potential traps.

This article is for general informational purposes only. This article does not create an attorney-client relationship between the reader and Pepicelli, Youngs and Youngs PC or its attorneys. Every situation is different and the information in this article may or may not apply to your specific situation. You should not rely on this article as legal advice.

By Brian T. Cagle, Esq.

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