If you need to terminate an employee, there are two main ways to do it:
- Fire them; or
- Lay them off.
It’s easy to get these two terms confused, so here’s a quick breakdown to help determine which approach to use:
- Fire an employee who has failed to perform as expected, either by consistently not meeting goals or by violating policies and laws.
- Layoff an employee if there’s a need to downsize for either financial or organizational reasons.
In short, a firing is seen as the fault of the employee while a layoff is seen as the fault of the company.
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What are the costs of terminating an employee?
Terminating can cost employers money: unemployment insurance, severance pay, and the value of unused vacation time. These requirements are state-specific, so check with your local laws. Nonetheless, here’s an overview of common costs to be aware of:
- Unemployment insurance: If an employee is laid off, they are eligible for filing an unemployment insurance claim. A heads up though: Every year, your state issues new unemployment rates, which your business pays through payroll taxes. If your business repeatedly lays off employees, you might have to pay higher unemployment rates. Employees who are fired, however, are typically not eligible for unemployment insurance. In some cases, a fired employee will contest this and attempt to get coverage. If you have carefully documented every step leading up to termination, you’re more likely to successfully block that claim.
- Unused vacation time: Depending on your state, you may be required to pay your employee’s unused vacation time when they leave the company.
- Severance pay: Even if you’re not required to provide a severance package, some employers choose to offer severance pay to make that employee’s transition a little easier. Be sure to check with your state’s labor laws to see what your requirements are.
- Separation pay: Yes, separation pay is typically separate from severance pay. Separation pay is the payment an employee receives in exchange for signing a separation agreement that waives their rights to sue for wrongful termination or additional pay.
What are laws on firing or laying off an employee?
Whether you are firing or laying off an employee, it’s illegal to terminate employees for discrimination, whistleblowing, or when an employee is on protected leave. Read on for more specific laws on laying off or firing employees.