This is a five person company, and my friend is a relatively new 'manager' there. I'm trying
to get insight on why they can't just fire him... It's bizarre to me, but I know people here
are in his shoes, trying to get out of the job.. but only if it's the right conditions. No one
has explained to me what the downside to the company is on the unemployment tax is and
why they would need to contest the circumstances of the dismissal.
The company does not "contest the circumstances of the dismissal" and no one has said that. If the terminated employee applies for unemployment compensation, the company may challenge or contest the application by showing that the employee was "terminated for cause" and therefore is not eligible for unemployment compensation benefits. Both the employee and employer may attend a hearing in person or by telephone and give their version of the circumstances. Some employees are excellent at documenting supporting circumstances. "My supervisor was new and unskilled. He lacked training skills and I struggled to learn from him. He often looked at me in a threatening way and I felt intimidated. Etc." Therefore, most companies only contest or challenge (same thing) cases where the "termination for cause" documentation is solid such as in cases of excessive absenteeism where accurate and timely records were kept.
The unemployment tax change for one additional claim would be dependent on the state the company is located in and the company's history of having terminated/layed off/fired employees who collected in the past. As a manager, your friend and the company owner should be very aware of this. If not, they should shut down and board up the place asap. Or hire an HR consultant service to help them. The rules vary significantly from state to state so you're not likely to get specific quantitative information here.
The employee in question CAN be terminated. But the employee can exercise certain employment rights (dependent on state and fed laws) and challenge the termination if he feels it violates some civil right or employment law. For example, if the employee is race A and is replaced by a race B person, he might challenge that he was terminated because of his ethnicity, etc. Therefore, the reasons for termination are always documented to show that the termination was for legal, non-civil rights violating reasons.
Recruitment and hiring of a "good" work force is critical. Even in "employment at will" states, an employee who turns out to be a poor performer or who has personal traits which make him a general pita on the job will successfully collect unemployment benefits if terminated. Generally, successfully challenging a claim requires that the employer show specific violations of documented company policies which commonly lead to termination. Examples: theft of company property, absenteeism, threatening or harming another employee, etc.