Before Terminating a US Employee Make Sure to Consider the Following…
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An employer that decides to terminate an employee is generally anxious to complete the termination process as quickly and seamlessly as possible. Before terminating a US employee, however, the employer should take the time to reflect on various issues that may impact the termination decision, as well as the timing and procedures for completing the termination process. Each employee termination should be considered on a case-by-case basis to minimize the risk that an employee’s termination will create unnecessary exposure and/or a potential lawsuit for the company.
Before deciding to terminate an employee, an employer should consider the following:
- Exceptions to the At-Will Employment Rule. Most employers of US employees are familiar with the concept of “at-will employment,” meaning that the employer may terminate the employment of an employee (or an employee may resign), at any time, with or without notice, for any reason. However, most states that follow the at-will employment doctrine have adopted exceptions to the at-will rule based on public policy, implied contracts, and “covenant of good faith” (which generally requires that employees be terminated only under circumstances that qualify as just cause). Therefore, before assuming that an employer is free to terminate an employee at any time for any reason, the employer should be careful to consider limitations to the at-will doctrine, as applied to the case of a particular employee.
- Contractual Obligations. A written employment agreement, offer letter, employee handbook, company policy, and sometimes even an email from a company manager to an employee, may create a contractual obligation requiring the employer to follow a specific protocol when terminating an employee. For example, an employer may be limited to terminating an employee under circumstances qualifying as “Cause” as contractually defined, or an employee may be entitled to a certain period of notice prior to termination, a separation payment, and/or the opportunity to cure improper conduct prior to termination. In some states, a widely established company practice (such as repeatedly giving previously terminated employees two weeks’ notice of termination or one week’s severance pay per year worked) may also create a contractual obligation on the part of an employer. All such potential contractual obligations should be carefully evaluated by an employer before finalizing a company’s decision to terminate an employee.
- Legitimate Business Reasons for Termination. The decision to terminate an employee is generally made based on business reasons related to the employee’s poor performance and/or failure to meet established targets and goals. However, companies often fail to document employee performance issues and/or to analyze actual data related to a particular employee’s work performance, as compared to other employees. In the event of a lawsuit brought by an employee who falls into any legally protected category (which includes almost all employees on account of their race, gender, religion, age, marital status, sexual preference, etc., or because the employee made a statutorily protected complaint against the company), it will be the company’s burden to prove that the decision to terminate the employee was based on legitimate business reasons. As such, before deciding to terminate an employee, the company should carefully evaluate whether it will be able to defend its termination decision based on non-discriminatory, non-retaliatory legitimate business grounds.
Once the above factors have been considered, if an employer decides to proceed with terminating a particular employee, such termination should be carefully managed to ensure that the process goes smoothly and does not create any unnecessary exposure for the company. At a minimum, the employer should consider the following issues before notifying an employee of his or her termination:
- Final Pay Check. Depending on the state in which a particular employee is located, a company may be required to issue an employee’s final pay check on the last day of the employee’s employment, rather than wait for the next regularly scheduled payroll day. Some states also require that the last paycheck include payout of all accrued but unused vacation time and any other forms of owed compensation (in addition to regular salary). Accordingly, employers should verify what sums must be included in the final paycheck, and should contact the company’s payroll provider to confirm that the employee’s final wage payment will be made in compliance with the relevant state law requirements. Many jurisdictions impose fines and penalties on employers that fail to issue a terminated employee’s final pay check in a timely fashion or without all required payments.
- Benefits. Termination of an employee’s employment will affect the employee’s health insurance coverage and other employee benefits. While most benefits will terminate on the employee’s last day of employment, some benefits may terminate on the last day of the calendar month in which the employee is terminated, and the employee may have the right to continue certain benefits, such as health insurance, post-employment at the employee’s expense. Employers should clarify the employee’s last day of benefits coverage, and by law, must notify an employee in writing as to the last date of health insurance coverage, as well as the employee’s right to continue such coverage via “COBRA” or the state law equivalent.
- Equity. Termination of employment triggers certain rights with respect to employees who have been granted equity by the company (or its affiliated entities). In general, any equity that has not vested as of the employee’s termination date will be forfeited, and the employee will have a period of time as set forth in the applicable Employee Stock Option Plan and grant agreement(s) to exercise any vested options. However, depending on the circumstances surrounding the employee’s termination, some previously unvested options may accelerate and vest upon termination. Prior to terminating an employee, the company should review any applicable plans and agreements to verify the implications of the employee’s termination on any equity grants.
- Employee Access to Company Systems. At what point the company should cut off a terminated employee’s access to company systems will depend on the nature of an employee’s position, as well as the circumstances surrounding the employee’s termination. While the company may want one employee to actively work during a notice period for purposes of transitioning various business matters, another employee may be considered a security risk if the employee continues to have access to company on-line systems and materials. Note that if the employee’s compensation structure includes eligibility for incentive payments, such as commissions based on sales, then the company may not have the right to take away the employee’s opportunity to earn such incentive payments during a contractually required notice period, unless previously agreed upon in writing by the parties. Employers should carefully consider these issues before cutting off the employee’s access to the company’s premises, on-line systems and/or materials. In general, it is best to designate a specific company representative to serve as a liaison between the company and the terminated employee for purposes of making sure that all company property is returned, and any employee passwords and access to company systems are deactivated.
- Signed Non-Disclosure/ Non-Competition Agreement. Most companies routinely require employees to sign a Non-Disclosure/Non-Competition agreement which limits the employee’s right to disclose confidential information, engage in solicitation of customers or company employees, and/or compete with the company following termination of employment. If the employee has signed such an agreement, then a separation letter from the employer, reminding the employee of such post-termination obligations, often effectively averts violations of that agreement by the terminated employee.
- Release of Claims. To minimize the company’s future legal exposure, and particularly in the case of a protected status employee (which again, applies to most employees), the company should consider whether an employee should be offered some sort of benefit (such as a severance payment) in exchange for signing a release of claims. For an early stage company that seeks to attract investors or engage in significant business transactions with third party business partners, having a signed release from a terminated employee serves to alleviate the concerns of such parties. For a release of claims to be legally enforceable, an employee must be given something to which he or she would not otherwise be entitled — most commonly, a reasonable sum of money — in exchange for signing the release. Employees age 40 or older have specific rights with respect to the timing and signing of the release, and all such legally required obligations must be followed to preserve the release’s enforceability.
After notifying an employee of his or her termination in person or by telephone, it is good practice for the employer to send the employee a separation letter addressing the above issues related to the employee’s termination. In general, employees find a letter of this nature reassuring and helpful in terms of alleviating any concerns related to the termination process. Employees who feel that the termination process was handled professionally and respectfully tend to be less angry, and generally less likely to look for reasons to sue their former employer.
The above article sets forth some general guidelines for employers to consider when terminating US employees. These guidelines are by no means meant to be comprehensive, and employers should contact legal counsel for purposes of evaluating each employee termination on a case-by-case basis.