Colorado Joins Multi-State Suit Against the U.S. Department of Labor For Over Funding Related to Improvements for Unemployment
Kassius Andersen, Associate
Colorado and several other states have filed a federal suit against the United States Department of Labor (“DOL”), alleging that the agency breached the terms of grant agreements and acted in bad faith when it suddenly terminated several grants awarded to assist in efforts to modernize unemployment insurance programs. The DOL stated that the grants “no longer effectuate […] priorities for its grant funding,” while the affected states say a shift in priorities does not void valid agreements, nor do the terms and conditions of the agreement allow a termination for this reason.
Maryland, et al v. United States of America
On October 9, 2026, Attorney General Phil Weiser and a coalition of 13 other states filed a complaint[1] in the U.S. Courts of Federal Claims against the DOL’s decision to terminate funding for unemployment insurance systems. On May 22, 2025, the DOL sent letters to the states terminating several federal grants effective immediately, resulting in a loss of $45 million in funding. Colorado specifically lost $3.7 million in previously awarded grant funding, with several projects forced to suddenly halt in the middle of their performance periods.
The letter, sent to state workforce agencies, stated that the previous agreements no longer effectuate the Department of Labor’s priorities for its grant funding, with a DOL spokesperson, Courtney Parella, stating that the funds were “bureaucratic and wasteful projects that focused on equitable access rather than advancing access for all Americans in need.”[2] In his October 9, 2026 press release, Attorney General Weiser stated that “[t]he terminations have wasted funds and squandered opportunities to increase efficiencies for unemployment insurance system workers, employers, and administrative staff. The terms of the agreement do not allow the [Department of Labor] to unilaterally terminate the grants simply because the Trump administration has changed its priorities. That’s why we are suing to get funds we are entitled to.”
From Awarded to Terminated
In 2021, amidst the pandemic related historic surge in unemployment claims, Congress created several grants for states as part of the American Rescue Plan Act of 2021. The Department of Labor awarded more than $780 million to fund modernization efforts for states’ unemployment insurance programs. In July 2023, the DOL issued a letter to states extending funding opportunities, stating that the COVID-19 pandemic revealed “‘deep vulnerabilities resulting from years of underinvestment’ in unemployment insurance administration, as states saw a ‘huge influx of unemployment insurance claims and an increased frequency and complexity of fraud attacks.’”[3]
The DOL believed that with new technology that states would be able to better detect and prevent fraud, promote equitable access, and pay benefits in a timely fashion. The DOL solicited applications for grants geared toward improving the resiliency and user experience of unemployment insurance systems and help ensure that these systems would be more reliable for a crisis like COVID-19 in the future.
Each grant award was subject to a Grant Agreement which contained the terms and conditions for the award in great length including when the grants could be terminated. Notably, as alleged in the complaint, this agreement does not state that the DOL could lawfully terminate the contract on the basis of the agency’s shift in internal priorities.
Yet on May 22, 2025, that is exactly what the DOL did. Then, on June 24, 2025, the DOL contacted the impacted states with a document titled “Grant Terms and Conditions (Additions and Deletions) Addendum,” which added a new “Termination” section. In the new language, the DOL allegedly added language that stated under “2 CFR 200.340, the Federal award may be terminated in part, or its entirety … [b]y DOL, to the greatest extent authorized by law, if the award no longer effectuates the program goals or agency priorities.”[4]
The Complaint
In the filed complaint, Colorado joins with Wisconsin, Maryland, California, Delaware, Illinois, Maine, Michigan, New Jersey, New Mexico, New York, Oregon, Kentucy, and Pennsylvania (the “States”) to argue that the DOL breached the express terms of the grant agreements and breached the duty of good faith and fair dealings. The States argue that each grant award gave rise to binding contractual obligations, and that the termination interfered with the States’ performance of those obligations and destroyed the States’ reasonable expectations regarding the “fruits of their Grant Agreements.”[5] Further, the States allege that the June 24, 2025 addendum was violative of the duty of good faith and fair dealing in federal contracts.
Colorado specifically had received grants in the amount of $2.6 million to implement case management tools to detect and report fraud, $1 million to improve the application experience, and $6.8 million to improve processes for fraud prevention, detection, and recovery activities, as well as to improve the process and experience for claimants. The abrupt termination by the Department of Labor resulted in a loss of $385,000, $779,000, and $2.5 million from those grants respectively.
The States are seeking to obtain money damages for the DOL’s violation, as well as any allowable pre and post judgement interest. The case is still in its early phases, with the DOL not having issued its response to these allegations.
Employer Considerations/Key Takeaways
Employers should remain vigilant for instances of fraud in the unemployment insurance program, particularly now, given that many fraud prevention measures have lost funding for further improvement. In 2021 the Colorado Department of Labor and Employment (“CDLE”) flagged over 1.2 million applications for unemployment benefits as fraudulent. The CDLE urges employers who receive a request for benefits they consider suspicious to contact the employee to find out if they actually filed such an application. If the claim isn’t legitimate, they are urged to file a fraud report, and the employee should file one as well.
Campbell Litigation will continue to monitor and report on the status of the case as it proceeds.
[1] https://coag.gov/app/uploads/2026/10/UI-modern-complaint.pdf
[2] Natalie Alms, Labor Cancels Unemployment Modernization Grants for States, NEXTGOV (May 23, 2023), https://www.nextgov.com/modernization/2025/05/labor-cancels-unemployment-modernization-grants-states/405582/
[3] Maryland Department of Labor, Wisconsin Department of Workforce Development, State of California, State of Colorado, State of Delaware, Illinois Department of Employment Security, Office of the Governor ex re Andy Beshear in his official capacity as Governor of the Commonwealth of Kentucky, Maine Department of Labor, State of Michigan, New Jersey Department of Labor and Workforce Development, New Mexico Department of Workforce Solutions, New York State Department of Labor, Oregon Employment Department, Pennsylvania Department of Labor and Industry v. United States of America, Complaint at 8.
[4] Id at 21-22.
[5] Id at 2.