in a "using" block is a SqlConnection closed on return or exception?

1. Yes
2. Yes.

Either way, when the using block is exited (either by successful completion or by error) it is closed.

Although I think it would be better to organize like this because it's a lot easier to see what is going to happen, even for the new maintenance programmer who will support it later:

using (SqlConnection connection = new SqlConnection(connectionString)) 
{    
    int employeeID = findEmployeeID();    
    try    
    {
        connection.Open();
        SqlCommand command = new SqlCommand("UpdateEmployeeTable", connection);
        command.CommandType = CommandType.StoredProcedure;
        command.Parameters.Add(new SqlParameter("@EmployeeID", employeeID));
        command.CommandTimeout = 5;

        command.ExecuteNonQuery();    
    } 
    catch (Exception) 
    { 
        /*Handle error*/ 
    }
}

Yes to both questions. The using statement gets compiled into a try/finally block

using (SqlConnection connection = new SqlConnection(connectionString))
{
}

is the same as

SqlConnection connection = null;
try
{
    connection = new SqlConnection(connectionString);
}
finally
{
   if(connection != null)
        ((IDisposable)connection).Dispose();
}

Edit: Fixing the cast to Disposable http://msdn.microsoft.com/en-us/library/yh598w02.aspx