NJ Sues U.s. Labor Department Over $20.7m in Cancelled Unemployment System Grants

New Jersey is suing the federal government over three cancelled grants, worth about $20.7 million combined, that were supposed to upgrade the technology behind the state's unemployment insurance system, and to pay for investigators who look for fraud.

Attorney General Jennifer Davenport announced the lawsuit on Friday, Oct. 9. New Jersey and a coalition of 13 other states filed it in the U.S. Court of Federal Claims against the U.S. Department of Labor (DOL). According to the Attorney General's office, the department unlawfully cancelled the grants in May 2025.

What it means if you file for unemployment

The money in this fight was meant for the system that handles unemployment claims. According to the AG's office, New Jersey's grants were going to:

• improve the technology people use to file unemployment claims;
• move that system to the cloud;
• hire investigative staff to find fraud in the unemployment insurance program.

Without the grants, the AG's office says, the New Jersey Department of Labor and Workforce Development (NJDOL) can't carry out key security updates, system improvements and program expansions.

The release does not say the cancelled grants change who qualifies for benefits or how much claimants receive. What it describes are planned upgrades, meant to make claims faster, more secure and better at catching fraud, that were stopped partway through.

The three New Jersey grants

According to the AG's office, NJDOL lost three grants, each beginning in fiscal year 2023:

• Unemployment Insurance Integrity Grant: $2,609,000
• IT Modernization Grant: $11,250,000
• Unemployment Insurance Equity Grant: $6,840,000

Together the three awards total $20,699,000, by JerseyTalks’ count. The release does not give a New Jersey total or say how much of that money was still unspent when DOL ended the grants. All three came from the American Rescue Plan Act (ARPA) of 2021. Congress created six related grant programs under that law after unemployment claims surged during the pandemic. The AG's office says DOL awarded more than $780 million nationwide to help states modernize their unemployment systems, detect and prevent fraud, promote equitable access and pay benefits on time.

What the states say happened

According to the release, DOL sent termination letters to the affected states on May 22, 2025, saying the agreements no longer matched the department's grant funding priorities. The AG's office says the cancellations pulled back unspent money for projects DOL had already reviewed and approved, with set multi-year timelines.

The AG's office says states have since had to shift money from other sources, shrink projects or cancel them altogether.

Davenport said in the release that the federal government is cutting off the funding midway, and that New Jersey residents deserve services "that work when they are needed most."

The legal claims

The coalition argues that DOL:

• broke the terms of each grant agreement, which the states say do not allow the department to end a project early just because the administration's priorities changed;
• violated the implied duty of good faith and fair dealing, by imposing new conditions, relying on what the states call erroneous and bad-faith readings of regulations and statutes, and not giving the states formal notice or a chance to object.

The states are asking for money damages. Across all the plaintiff states, the suit covers more than $45 million in remaining grant funding, according to the AG's office.

These are the states' claims; a court has not ruled on them.

Who is suing

Wisconsin Attorney General Josh Kaul and Maryland Attorney General Anthony Brown co-led the lawsuit. New Jersey joined along with the attorneys general of California, Colorado, Delaware, Illinois, Maine, Michigan, New Mexico, New York and Oregon, and the governors of Kentucky and Pennsylvania.

Federal response

The Attorney General's release does not include a response from the U.S. Department of Labor. JerseyTalks found no public comment from the department on the lawsuit as of Oct. 9.

Source: New Jersey Office of the Attorney General, press release, Oct. 9, 2026. Read the complaint (PDF).

Photo: The New Jersey State House in Trenton. Niagara / Wikimedia Commons, CC BY-SA 3.0. Cropped.