Unemployment law question (Iowa)

I thought I’d ask here, before I call IWFD and make a fool of myself.

I work for a city. We have a permanent part-time employee who also has his own business. When things are slow in his business, he applies for unemployment compensation. Apparently he pays into the system so he has coverage for his slow times.

Today the city received a request for payment/reimbursement for benefits the State paid him during his most recent downtime.

However, the downtime isn’t due to his city employment. We didn’t lay him off or cut his hours. He’s done his usual job and received his usual pay, and this info was provided to the State a couple months ago when the guy first applied for UC.

So what’s up? Should the city (taxpayers) have to subsidize this guy’s downtime, even though he’s lost no city pay?