Written by Managing Partner, Brian Koegle
On February 18, 2026, the U.S. Department of Labor (DOL) announced it is deploying a specialized “UI Strike Team” to investigate California’s Unemployment Insurance (UI) program administered by the state’s Employment Development Department (EDD). This federal action — prompted by billions in suspected fraud, a depleted state trust fund, and a $21 billion federal debt obligation — has direct consequences for all California employers.
What Happened
In a formal letter sent directly to the EDD, Labor Secretary Lori Chavez-DeRemer cited multiple systemic failures within California’s UI program, including a rising rate of improper payments, inadequate timeliness of benefit disbursements, and serious concerns about data accuracy and participant eligibility verification. The DOL’s strike team will include specialists drawn from both national and regional offices, with a mandate to uncover fraud and abuse and restore the program’s financial integrity.
The backdrop is significant. California’s UI trust fund — the pool of employer-paid payroll taxes used to fund unemployment benefits — is currently insolvent. The state has borrowed $21 billion from the federal government to keep the UI system operational. According to a DOL notice published in the Federal Register, this outstanding debt means California employers are now subject to a FUTA credit reduction, effectively increasing federal unemployment tax costs for every business operating in the state.
The scale of the underlying problem is staggering. The California State Auditor — not a federal agency, but California’s own independent watchdog — previously classified the state’s UI program as “high risk” and found that inadequate internal controls allowed more than $30 billion in potentially fraudulent claims to be paid during fiscal years 2019-2020 and 2020-2021 alone. More recently, the DOL Inspector General identified nearly $1 billion in taxpayer funds “at risk” nationally due to COVID-related UI fraud, including $720 million still loaded on prepaid debit cards that were distributed as unemployment benefits.
In concrete terms, at least one California UI program steward has already been convicted of using her position to file nearly $860,000 in fraudulent claims. Others have been convicted of fabricating nonexistent businesses to collect benefits. This is not abstract government waste — it is documented criminal activity on a massive scale that has left the system broken and California business owners holding the bill.
Why This Matters to Your Business
- You Are Already Paying More in Taxes
Because California has failed to repay its federal UI loan, the federal government has reduced the FUTA tax credit available to California employers. Under normal circumstances, employers receive a 5.4% credit against their 6.0% FUTA rate, resulting in a net federal UI tax rate of just 0.6%. But for each year California’s debt remains outstanding, that credit shrinks — increasing your effective FUTA tax cost per employee. This FUTA credit reduction has already taken effect for the 2025 tax year and will continue to grow until the debt is repaid or resolved. For employers with larger workforces, this translates into a material and ongoing payroll tax increase.
2. Heightened Scrutiny of Employer Records and UI Claims
A federal strike team investigating the EDD means increased attention on the mechanics of how UI claims are processed — which necessarily involves employer records. Employers who have been lax about responding to EDD claim notices, or who have not maintained solid documentation around separations from employment, may find themselves under closer scrutiny. Claim contests, audits of employer account records, and verification of separation-related information are all likely to intensify and increase in frequency, as the federal investigation proceeds.
3. Risk of Erroneous Charges to Your Employer Account
California’s UI system charges unemployment benefit costs against the accounts of employers whose former employees collect benefits. If the EDD’s records and processes are unreliable — as federal investigators now assert — there is a real risk that employers could face improper charges to their UI accounts, whether from misclassified separations, identity fraud involving your employees’ names, or administrative error. Monitoring your employer account and challenging improper charges is more important now than ever.
4. Potential for Expanded Federal Oversight and New Requirements
When the federal government identifies systemic failures in a state program funded by federal dollars, it has the authority to impose corrective action requirements — and ultimately to withhold federal funds or impose additional conditions on state operations. It is too early to predict exactly what remedial measures may follow this investigation, but employers should be aware that changes to EDD processes, documentation requirements, and claims adjudication timelines are all possible outcomes. We will monitor this closely and keep you informed.
What You Should Do Now
While this situation is still developing, there are concrete steps every California employer should take immediately to protect their interests.
- Audit your EDD employer account. Log into your EDD employer portal and review the UI claims activity and charges against your account. Look for any unfamiliar former employees or unusual charge patterns that may signal fraud or administrative error.
- Tighten your response practices for UI claim notices. Every time a former employee files for UI benefits, the EDD sends your business a notice and an opportunity to respond. If you have not been responding promptly and with detailed information, now is the time to change that practice. Failure to respond — or responding inadequately — can result in benefit charges being improperly assigned to your account and can affect your UI tax rate.
- Review your documentation for all recent separations. When an employee is terminated or resigns, the circumstances matter for UI eligibility. Ensure you have written documentation supporting the basis for every separation, including performance records, written warnings, resignation letters, and separation agreements.
- Verify your FUTA tax calculations and budget for increased costs. Work with your payroll provider or tax advisor to confirm that your 2025 FUTA tax filings reflect the California credit reduction and to budget for the likelihood of continued reductions in future years until the state’s federal debt is resolved.
- Be alert to identity theft affecting your employees. Sophisticated fraudsters have used stolen personal information to file UI claims under real employees’ names — even while those employees are still working. If any current employee reports receiving EDD correspondence they did not initiate, treat it as a potential fraud incident and report it to the EDD immediately.
- Consult legal counsel before responding to any federal or state investigative inquiries. If your business receives any communication from the DOL, the DOL Inspector General’s office, or the EDD in connection with this investigation or any audit, contact your employment counsel before responding. The legal landscape here is shifting quickly, and a misstep in responding to a government inquiry can have serious consequences.
Our Perspective
This investigation reflects a broader federal shift toward holding state agencies accountable for poor stewardship of federal unemployment funds. For California employers — who have long shouldered some of the heaviest UI tax burdens in the nation — the hope is that meaningful reform follows. A more efficiently administered EDD benefits employers and employees alike: legitimate claimants receive timely payments, and employers are protected from fraudulent charges that inflate their tax rates.
In the near term, however, the increased scrutiny also creates new risks. Employers who have not been diligent about their UI compliance practices may find those gaps exposed. We encourage all our clients to treat this as an opportunity to review and strengthen their processes before any issues arise.
We Are Here to Help.
Koegle Law Group regularly advises California employers on unemployment insurance compliance, EDD audits, employment separations, and related legal matters. If you have questions about how this federal investigation may affect your business, or if you would like assistance reviewing your UI compliance practices, please contact our office.
DISCLAIMER: This client alert is provided for informational purposes only and does not constitute legal advice. The information contained herein may not reflect the most current legal developments. You should consult with qualified legal counsel before taking any action based on the information in this alert. Receipt of this alert does not create an attorney-client relationship.
