Does a Lawsuit Settlement Affect Unemployment?

Unemployment benefits are funded by both state and federal government and are administered by state agencies through a program similar to an insurance policy. If you receive money in a settlement, your unemployment benefits might be affected. Your right to collect unemployment benefits depends on how much money you currently collect that is job-related.

Unemployment regulations typically require you to report any wage income earned while you are receiving unemployment benefits. This reported income may reduce your unemployment payments or disqualify you from getting any benefits. However, not all money received counts against your unemployment claim. The money must be earned as a wage for services performed by you for an employer.

You may sign a settlement agreement over a wide variety of legal claims, ranging from an automobile accident to a contract dispute over the sale of land. Cash payments under these lawsuits may serve various purposes, including compensation for pain and suffering as well as lost business opportunities. Some settlement agreements may also provide payment to reimburse you for money that you have already spent, or for money that you may owe to an attorney or medical care provider.

Money received from a lawsuit against an employer that was designated as back pay or in lieu of lost wages must be reported to the unemployment agency. Since these payments are to compensate you for lost wages, the unemployment agency may reduce or deny your benefits.

Any other money received as part of a settlement agreement is not likely to impact your unemployment benefits. Cash received to reimburse you for expenses, medical bills and attorney's fees are not considered wages and therefore should not reduce your benefit payments. Similarly, money paid as compensation for pain and suffering is not considered a wage because there was no work performed to earn the money. Rather, the payment is made as restitution for damage caused by the other party.