Q: How Do I Legally Terminate an Employee?

In legal speak, a “termination of employment” means a separation between two parties: the employer and the employee.

There are many legal reasons to let an employee go, like your company is moving or the employee quit of their own volition, but there are also some illegal reasons.

First, ensure your termination complies with employee protection laws—you can’t let someone go because of race, color, religion, sex, national origin, pregnancy, age or disability. You also can’t fire whistle-blowers.

There’s also some terminology to pay attention to. Laying off an employee isn’t the same as firing them.

  • Firing definition: A fired employee is let go because of cause, such as misconduct or poor performance.
  • Layoff definition: Laying off employees happen when you need to downsize or restructure departments, or if you plan to take the company in a new direction—meaning some roles are no longer necessary.

With layoffs, slightly different rules apply. For example, if you have more than 100 employees, the Worker Adjustment and Retraining Notification (WARN) Act requires you to provide at least 60 days’ written warning if you plan to lay off more than 50 employees.  

Whether your employee leaves on their own or you let them go, there are certain things you need to do as an employer to handle the termination compliantly. There are also some things you can do (but aren’t required to) that can help protect you from future lawsuits.

The following employee termination checklist will help you stay compliant and protected while parting ways with your worker.

1. Calculate and give the last paycheck

Calculate how much you owe your employee in their last paycheck by taking into account benefits like accrued vacation time or outstanding commissions or bonuses.

Depending on your state, you might be required to pay out unused vacation and sick time. Your state may also dictate whether these payments have to be included in your employees’ final paycheck, or if you can send a separate check. So be sure to check your state’s laws on the matter.

Then, make sure you give them their final paycheck before or on the date specified by your state. These calculations can be tricky, so be sure to use a CPA or payroll provider to ensure the numbers are correct.

2. Provide information about benefits and health insurance

The Department of Labor and the IRS require you to inform your employee about their options regarding:

  • Their 401(k) retirement savings plan; and
  • Continuing health care coverage under COBRA and individual state continuation coverage laws, even if they are being fired.

3. Create a separation agreement

This isn’t required, but many experts recommend that you prepare documentation that the employee will have to sign upon being laid off. Most commonly, this means creating a separation agreement.

Learn what goes into an employee separation agreement here.

4. Create a severance package

While you are not required by law to offer a severance package, many employers choose to do so.

Check here for more information on putting together a severance package.

5. Provide information on unemployment insurance

Laid off employees are eligible for unemployment insurance. Check out our primer on the Federal Unemployment Tax Act—you’ll learn what it is and how to offer unemployment insurance to your employees.

Fired employees, or employees who’ve quit on their own, may not eligible for unemployment insurance.

6. Handle the actual termination

Unless your employee quits, you will need to inform them about their termination. This is never an easy conversation to have so it helps to prepare beforehand.

We walk you through how to handle employee terminations here. You may also want to refer to our list of things never to say when firing an employee.

Remember, termination laws differ from state to state. So the best rule of thumb is to check employment laws in your state or to talk to an HR expert in your area.

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