What is the process for terminating an employee?
Takeaway: Terminating an employee is a high-risk legal event that must be handled with a professional, consistent, and well-documented process to minimize the risk of a wrongful termination lawsuit.
The decision to terminate an employee is one of the most difficult and emotionally charged actions a founder will have to take. It is also a moment that is fraught with legal risk. A poorly handled termination can easily lead to a costly and time-consuming lawsuit alleging wrongful termination, discrimination, or retaliation.
While the specific rules can vary by state, every termination should be handled with a professional, consistent, and well-documented process. This is not just about being fair to the employee; it is about protecting the company from legal liability.
The "At-Will" Employment Doctrine
In every U.S. state except Montana, employment is presumed to be "at-will." This means that either the employer or the employee can terminate the employment relationship at any time, for any reason, or for no reason at all, as long as the reason is not an illegal one.
Illegal Reasons for Termination: An employer cannot terminate an employee for a reason that violates a specific law. This includes:
Discrimination: Firing someone because of their race, gender, age, religion, or other protected characteristic.
Retaliation: Firing someone because they reported harassment, filed a wage complaint, or engaged in other legally protected activity.
The Importance of Documentation and Process
While you legally can fire an employee for "no reason," you should never do so. The key to a legally defensible termination is to have a clear, documented, and legitimate business reason for the decision. A lack of documentation can make it look like the company's stated reason is a pretext for an illegal one.
A standard, best-practice termination process includes:
Prior Performance Management: A termination for poor performance should never be a surprise. It should be the final step in a documented performance management process that includes prior warnings, clear feedback, and an opportunity for the employee to improve.
The Termination Meeting:
The meeting should be brief, professional, and to the point.
It should always be conducted by two company representatives (typically the employee's manager and an HR representative). This ensures there is a witness.
The reason for the termination should be stated clearly and concisely, sticking only to the documented, performance-related facts. Do not get drawn into a long, emotional debate.
The Separation Agreement: For any termination that carries a heightened risk of a lawsuit (such as the termination of a long-tenured employee or a member of a protected class), it is a strong best practice to offer the employee a separation agreement.
What it is: A separation agreement is a contract where the company offers the employee a severance payment (e.g., several weeks of salary) in exchange for the employee signing a general release of all legal claims against the company.
The Benefit: This is a business decision. The company is paying a modest amount of money to "buy" peace and to eliminate the risk of a future, much more expensive lawsuit.
Handling a termination with professionalism, consistency, and good documentation is a critical risk management function. It protects the company and allows you to make the difficult personnel decisions that are necessary to build a high-performing team.
Disclaimer: This post is for general informational purposes only and does not constitute legal, tax, or financial advice. Reading or relying on this content does not create an attorney–client relationship. Every startup’s situation is unique, and you should consult qualified legal or tax professionals before making decisions that may affect your business.