Team Management

Here’s What Employers Need to Know Before Terminating a Person’s Employment

Gusto Editors  
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When you’ve invested in an employee, it’s unfortunate when it’s time for them to part ways with your company. However, there is a right way and a wrong way to go about ending someone’s employment. It is important to do it professionally, ethically, and in line with employment laws. This guide covers important information about letting an employee go, including: if and when you should do it, and if you should offer severance pay.

What is employment termination?

Employment termination is the act of ending the employment relationship between your business and an employee.

An employee can be voluntarily terminated by resigning, for example if they leave for a different job with another company. On the other hand, an employer can let  an employee go for a variety of reasons, including poor job performance, misconduct, downsizing, or redundancies.

When ending someone’s employment  there are typically several HR processes involved, such as explaining how they underperformed or violated a company policy. 

What is at-will employment?

Most employment relationships in the U.S. are at-will, meaning a termination can be initiated either by an employer or an employee, without notice and without cause. Generally, unless there is a contract that states otherwise, employers may discharge an employee at any time and for any reason, or for no reason at all. However, employers may not terminate a person’s employment for unlawful reasons—which includes making termination decisions based in discrimination. 

At-will means that an employer has the ability to change terms of employment when and how they like. For example, an employer can modify company policies and alter employment benefits at any time. However, at-will also means that employees are free to leave a company at any time, for any reason, or no reason at all. 

In all U.S. states except Montana, employment relationships are presumed to be at-will. Montana is the only state which generally requires employers to have good cause for dismissing an employee who has passed a probationary period.

What is voluntary termination?

Voluntary termination of employment is initiated by an employee. Stated differently, this is resignation. It occurs when an employee provides a written or oral notice of resignation to their employer. It can also occur when an employee does not report to work for a series of consecutive days without informing their employer and they have no intention of returning to their job. This is usually referred to as job abandonment. However, employers should use caution in assuming that absences are automatically evidence of an employee’s intent to abandon their job. Employers should develop investigation procedures to determine if there are circumstances that could potentially change the employer’s action, for example a medical emergency. 

In general, employees are expected to provide at least two weeks’ notice of their intention to resign, although this is not not legally required. It’s also best practice for an employee to give notice via an email or letter of resignation instead of verbally.

What is involuntary termination?

Involuntary termination occurs when the employer, not the employee, initiates the termination of employment. There may be many grounds for firing an employee, including:

  • For cause: In this instance, the reason for termination is usually listed in the termination letter. To terminate an employee with cause, they must have violated an ethics code or policy, or have shown consistently poor performance.
    • Policy and/or conduct violations: The termination of employment is due to misconduct by the employee, for example, harassment in the workplace or extreme insubordination.
    • Unsatisfactory performance: An employee can also be fired due solely to continued poor job performance.
  • Without cause: This occurs when an employee is notified that their position is being significantly altered or even eliminated for business reasons—for example, due to restructuring.
  • Layoff or reduction in force: An employer may lay off one or more employees due to financial reasons.
  • Not a good fit: An at-will employment relationship allows an employer to terminate an employee who’s not a good fit for the role or the company culture. However, employers should critically evaluate if the reason they believe someone isn’t a good fit is actually based on their membership in a protected class and could therefore be discriminatory.  

Alternatives to employment termination

Before deciding to terminate a person’s employment, employers should carefully consider if the situation could be handled in another way. Reducing high employee turnover rates not only benefits employee morale, but it saves employers money on recruiting, onboarding, and training new employees when they hang onto seasoned ones. There are numerous alternatives to employment termination for employers to consider. If the decision is based on performance, an employer can establish a Performance Improvement Plan (PIP) to help the employee improve over a given time period. A PIP should not be used as a path to eliminate someone but as a tool for them to succeed with guidance including regular check-ins and feedback.

An employer could work with an employee to determine if transferring them to a different position might be a better fit. If the issue is conduct or performance-related, many employers use progressive discipline starting with counseling an employee on their behavior and issuing a verbal warning. 

If all else fails, an employer could still terminate an employee but offer them outplacement services. These career transition services are paid for by the employer to help the employee find a new job.

How to terminate employment

While there is no easy way to let someone go on your team, there are ways you can streamline the separation and exit process once you’ve made the decision to terminate someone’s employment.

Employers should establish an employee off-boarding checklist to ensure you address all the points needed in the exit process.

Use an employment termination checklist

It’s helpful to use an employment termination checklist. This can include:

  • Setting up a termination meeting
  • Writing a termination letter
  • Providing information on the Consolidated Omnibus Budget Reconciliation Act (COBRA)
  • Providing unemployment benefits information
  • Announcing the termination to your team appropriately, without violating the privacy of the individual whose employment is terminated.
  • Conducting an exit interview
  • Collecting company property that needs to be returned. (Uniforms, for example, may or may not need to be returned.)
  • Removing the employee’s access to the company’s premises and computer networks
  • Updating your HR records
  • Preparing the final paycheck for the employee

Termination letters are generally not required by law but some employers provide them to employees as best practices. 

In all states, employers must provide separated employees with information about COBRA. COBRA requires that health plans sponsored by employers with 20 or more employees provide notice offering employees the opportunity for a temporary extension of their group health coverage in instances where coverage would otherwise end. The option to extend an employer’s health plan is generally offered for 60 days from the date an employee receives the election notice or the date they would lose coverage, whichever is later.

Additionally, some states require employers to provide unemployment information. For example, employers in California must provide several unemployment pamphlets upon employment termination. Take care not to guarantee unemployment benefits. Instead, let people know that they “may be eligible for unemployment benefits.”

It is also best practice for employers to request the return of the company property, however, employers cannot withhold an employee’s final paycheck for any reason—even if there is outstanding company property. 

Equity

If an employee has equity in your company, make them aware of their rights. When an employee has vested options, they only have a limited amount of time to exercise them after leaving. This is called the post-termination exercise (PTE) window or period. The standard time frame for employees to exercise their options post-termination is 90 days, but companies could have shorter or longer windows. If the employee whose employment is terminated doesn’t exercise their options within this time, they forfeit them. Any options the employee has already exercised are theirs. Depending on the grant, the company may have repurchase or redemption rights. Alternatively, the employee may forfeit their right to the shares.

How much termination notice to provide an employee

There are pros and cons to providing advance notice of a termination. While it may be helpful to the rest of a team to prepare to take on new tasks, it may not be in the best interest of an employer or customers for a terminated employee to stay on. 

Some states, such as California, require a final paycheck to be given at the time of termination. Employers should check the wage and hour laws of their state and consider how soon they can generate a final paycheck when they terminate an employee without prior notice.

Write a script for terminating employment

Letting someone go can be hard! Be sure to deliver your message clearly and decisively. Creating a script beforehand can make it easier to know what to say (and what to avoid saying) in the moment. 

Your termination script could be something like this:

“Today will be your last day at XYZ Company. I am terminating your employment because XYZ. Thank you for all the work you’ve done here. HR will now go over some logistics with you.”

In addition to preparing documents, employers should arrange to have two people present at termination meetings. It is most common for the employee’s manager to deliver the message and for a human resources representative to be there as a witness and to explain offboarding policies. It is also important to consider the dynamics of the particular situation and avoid them if possible. For example, two males should not be alone in a room to terminate a female employee. 

Write an employment termination letter

In most states, employment termination letters are not required. There are pros and cons to providing one and employers should develop a policy first based on local laws and then what is best for their company. Be sure to stay consistent. If you decide to provide letters, take adequate time to write them accurately with attention to the details. Make sure that each letter includes everything required in your state.

A termination letter should include details about the employee’s final paycheck, COBRA, and how other benefits (like unused PTO) will be handled. Keep reading for more details on these items.

State the date by which the employee should return company property. Confirm when they’ll no longer have access to the company’s premises and computer networks.

Document the process with an employment termination form

An internal employment termination form can be a useful documentation tool for employers. Include details such as:

  • Employee name
  • Department
  • Termination date
  • Last day worked
  • Reason for separation
  • Details on the reason for separation
  • Whether or not the employee is eligible for rehire
  • Exit interview
  • Items received
  • Payroll details
  • Severance agreement if applicable
  • Benefits
  • COBRA

What to consider when terminating remote employment

Terminating employment with a remote employee may seem challenging considering the geographical distance but it should be handled with the same process and with just as much care as an in-person termination.

It’s wise to set up a termination meeting. Make sure that another organization representative is on the call as a witness. During the call, discuss the reason for termination (if appropriate), as well as severance, payroll, and benefits matters, as applicable. If COBRA applies, be prepared to inform the employee about the program. In addition, instruct the employee on how to return company property, and inform them when they’ll be denied access to the company network.

Regardless of where your employee is located, you must still make sure they receive their final paycheck within the legally required time frame. This may require extra attention on your part, for example by overnighting them a check.

Common issues when terminating employment

Terminating employment can be a complicated matter that’s often emotional for both the employee and the supervisors involved. As such, it’s important to be aware of common issues when terminating an employee to make it as smooth as possible.

As noted above, always investigate the reason for terminating the employee properly. Stating a wrong or unfounded reason is not only bad for business but could leave you open to legal repercussions.

Make sure the employee isn’t being terminated unlawfully—for example, as a result of discrimination. In the U.S., employees may not be discriminated against based on race, color, religion or creed, national origin or ancestry, sex (including gender, pregnancy, sexual orientation, and gender identity), age, physical or mental disability, veteran status, genetic information, and citizenship status. Many states have additional protections for employees, so be sure to look into the laws that apply to your business or speak to an employment attorney.

Someone who falls into one of these protected classes may have their employment terminated, but be aware of the situation and make sure that their membership in such class has nothing to do with the reason for their termination. 

Also, keep in mind that replacing an employee is a costly procedure. As such, it’s often best to rely on HR processes and good people management to resolve any issues and avoid termination when possible.

Understanding wrongful termination

While the majority of employment relationships are at-will, wrongful termination is firing an employee for an illegal reason. This may involve an employer violating federal or state discrimination laws when terminating someone based on their protected status. Beyond discrimination there are many state and federal laws that protect employees from wrongful termination. An employer needs to be sure that the employee who is being terminated was not a victim of workplace harassment or being retaliated against. 

Retaliation against employees for exercising protected rights is unlawful. Examples of retaliation would be demoting or firing an employee for lodging a legal complaint against the company, seeking or taking protected leave, or filing for workers’ compensation. If an employee acted as a whistleblower and brought the employer’s wrongdoing to light, they also may not be fired in retaliation. 

Payouts for employees after termination

Final paycheck for terminated employees

Before ending someone’s employment, employers must determine their obligations relating to the employee’s final payment of wages. Various state laws stipulate when a terminated employee must receive their final pay. These laws range from immediately upon termination, the next business day, and finally to the next regularly scheduled payday. The time frame is also different depending on if the termination is voluntary or involuntary. Voluntary terminations such as resignations generally grant employers more time to issue a final paycheck although it varies from state to state. 

It’s important to note that most states, such as California and Colorado, consider commissions as wages and require them to be paid out within the same time frame. Other states allow more time for processing commissions payments. Employers should verify the wage laws of their state and reach out to an employment attorney if they are unsure.

Vacation and sick leave payout at termination

At the federal level, there are no laws regarding vacation payout at termination. However, some states do require you to pay employees for unused PTO when their employment is terminated. If a company is not in a state that requires payment of unused PTO, an employer should still develop a company policy on PTO and sick time and stay consistent in issuing or not issuing them upon termination.

Employers are not required by federal law to pay out accrued sick time upon termination. However, it may be required under a collective bargaining agreement or employment contract.

Vacation payout calculator

To determine how much PTO payout you must add to the terminated employee’s final paycheck, use a PTO payout calculator or vacation payout calculator.

Severance pay, garden leave, and unemployment benefits

Severance pay is an amount of money that an employer may pay an employee at the time of termination in exchange for a signed agreement releasing future legal claims. 

There are pros and cons to severance, so employers need to balance their priorities to determine if and when it is appropriate. Severance pay is not required by law and is not common among small to medium sized businesses. Some employers may offer severance agreements as a gesture of goodwill for potentially contentious situations or as a company policy to be competitive in their industries. 

The majority of employers that do offer severance pay generally calculate the amount based on one or two weeks of pay for every year of employment.

It is different from garden leave in that it’s paid out after the employment is terminated and the employee is no longer on the payroll. With garden leave, an employee remains on payroll and continues to receive benefits but does not work; the purpose is to prevent them from having access to time-sensitive proprietary information that is at risk of being shared with competitors with whom they may seek employment. It is also different from payments received through unemployment benefits, which is a state-funded benefit that an employee may receive after being involuntarily let go.

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