By Dona DeZube

Yes, you read the headline correctly. While freelancing, volunteering, networking, or laying the groundwork to launch your own business can help you find your next job, if you're not careful, they can also prevent you from collecting unemployment compensation.

Rules governing unemployment insurance vary for state to state, but in general, to collect you must be able to work, available to work, and actively seeking work.

"If you're doing so much freelancing and volunteering, or you take on so much networking that you honestly have to say you're not available (to work), that's going to be an issue," says Douglas Holmes, president of UWC, a national organization that lobbies on unemployment insurance issues.

"The intent of unemployment insurance is to assist you in getting to the next job so it's not inconsistent to be volunteering and networking and still be available," he adds. "But, you have to be careful about how you characterize what you do."

So if you're volunteering as part of your work search, say that. If you're volunteering, but able to leave at any time if someone calls you in to work or an interview, say so.

Dona DeZube is a business writer based in Maryland.

In California, for example, you might be asked:

• Are you volunteering for a charity, government agency or other public service organization;
• Do you have an employment contract with the organization?
• Are you available to work, on call, or free to accept work while volunteering?
• Are you being paid?
• Can you leave at any time?

Think Twice Before Freelancing

Freelancing or doing contract work while you're unemployed can change your eligibility for unemployment compensation.

If you're busy doing an assignment, you're likely not immediately available for work, says Kevin Callori, spokesperson for the California Employment Development Department. "Because one of the eligibility requirements is to be ready and available for work, there may be an eligibility interview conducted with the claimant to determine if they're available for work." 

Californians who've experienced first-hand what happens when you report income from self-employment, freelance or contract work say doing so complicates their unemployment benefits.

"EDD promptly puts a hold on benefits until it can determine just when you started, how often you're doing this (by day), exactly how many hours, when you're doing it, if it interferes with you taking a full time job immediately," says one unemployed worker who experienced the process. "Any hours you worked (or volunteered) that are deemed to be those you could have been working (even if you have no job) are deducted from your already pretty miserable check."

The investigation process lasted for weeks during which there were no benefits paid. "Please note that the guidance given in their One Stop Shops throughout the state recommends contracting and volunteering as well as retraining or starting a business as great ways to find a new job," the unemployed worker points out. 

Business Start Ups

Texas resident Sandra Talley, a laid-off IT sales and marketing expert, lost a week of benefits when she attended an insurance sales training course.

That's because preparing to become self-employed, or doing work for which you make no money, disqualifies you for unemployment benefits in some states.

Roger Jon Hyman of Agoura Hills, Calif., had his unemployment benefits cut after he developed a Web site about unemployment depression. "The EDD decided I had a business and was self-employed and dumped my claim like a hot potato," he says.

His site hasn't made any money and it took six weeks to get his benefits back. However, he did enjoy making a YouTube video about his experience.

During a year-long bout of unemployment, New York communications professional Bob Johnson earned a couple thousand dollars freelancing. He called the state first and was told freelancing wouldn't cause his benefits to end. "I took the work to show any future employers that I've been productive during this down time," he says.

In July of 2009, the state began investigating his freelance activities, and audited one of his two clients. The last he heard, the state was denying him benefits.

"Hindsight is 20/20 and I never would have taken on that freelance work if I had known I would have to go through all this," Johnson says. "In these times, it really benefits people not to accept any freelance work. Is it really worth the $50 or $300 to put your claim at risk?"

Report All Money

If you do accept any type of work while unemployed, be sure to report it. States cross-match unemployment benefits with business tax returns.

"If someone is claiming benefits and not reporting income, there's a presumption of fraud," says Holmes. He cites the case of a woman who earned $200 in benefits and didn't report $31 in weekly income from her church. "The AG in Ohio prosecuted her for fraud, and it stuck," he says. "She got big penalties and had to pay the benefits back with interest."

Dona Dezube is a business writer based in Maryland.