A startup layoff, also called a reduction in force (RIF), is lawful when it rests on a documented business reason, selections are made on objective criteria, and the required notices, pay and paperwork go out on time. Run it in order: write down why, choose roles and people using criteria you can defend, check federal and state WARN laws, prepare severance and release packages that meet the rules for workers 40 and older, then deliver the news in one well-planned day. Most of the legal risk comes from skipped steps, not from the decision to cut.
Key takeaways
- Write down the business reason and the alternatives you considered before you pick anyone.
- Choose roles first, then people, using written criteria, and review the list for age, leave and complaint issues before it’s final.
- Federal WARN starts at 100 employees, but New York’s law starts at 50, and New Jersey’s requires severance even when you give notice.
- A release from anyone 40 or older in a group layoff needs 45 days to consider, 7 days to revoke and written disclosures about who was and wasn’t selected.
- Severance of 2 to 4 weeks of base pay is typical for early-stage employees, and 3 to 6 months for executives, paid in exchange for a signed release.
Should we do a layoff at all?
Start with the alternatives and write them down: a hiring freeze, founder and executive pay cuts, paused raises, lower non-payroll spend or voluntary departures. Pay cuts have their own rules. An exempt employee’s salary can’t drop below the exempt threshold, and some states require written notice before a pay change takes effect.
If a layoff is still needed, put it in a short board memo: cash, runway before and after, the alternatives and why they fall short, the savings target and the severance terms. Have the board approve the layoff, severance and any equity changes by written consent. That record is your defense if anyone later claims the layoff was a pretext. See What Does My Startup’s Board of Directors Need to Approve?
How do we choose who is affected?
Decide which work the company will stop doing before you look at names. Where you must choose among people in the same role, write down the criteria before applying them: skills the company needs going forward, documented performance and cost. Apply them the same way to everyone.
Then review the list as a whole, comparing the ages, sex and race of those selected with those kept. Flag anyone on leave, anyone who recently complained or asked for an accommodation, and anyone on a work visa. Including them isn’t illegal, but you must be able to show they were selected for the same reasons as everyone else. Have employment counsel review the list before it’s final. Assume employees will see the numbers: for workers 40 and older, the release disclosures described below list the job titles and ages of everyone selected and not selected.
Do WARN Act notice laws apply?
The federal Worker Adjustment and Retraining Notification (WARN) Act requires 60 days’ written notice of a plant closing or mass layoff to affected employees, the state dislocated worker unit and the local chief elected official. It covers employers with 100 or more employees, not counting people who work under 20 hours a week or have worked fewer than 6 of the last 12 months. An employer that skips notice owes back pay and benefits for up to 60 days.
Several states have “mini-WARN” laws with lower thresholds and longer notice:
| Law | Who’s covered | What triggers it | Notice |
| Federal WARN | 100+ employees | Plant closing affecting 50+ at a site, or a mass layoff of 50 to 499 (if a third of the site) or 500+ | 60 days |
| New York | 50+ full-time employees in New York | 25+ employees in a plant closing, or a layoff of 25+ that’s a third of the site, or 250+ | 90 days |
| New Jersey | 100+ employees anywhere | 50+ employees terminated within 30 days who work at or report to New Jersey locations | 90 days, plus mandatory severance |
| California | Sites with 75+ employees in the past 12 months | Layoff of 50+ within 30 days, regardless of percentage | 60 days |
New Jersey’s severance is one week of pay per year of service, owed even when you give full notice, and it can’t be conditioned on a release. Miss the 90 days and you owe four more weeks. New York’s regulations, amended in 2023, count remote employees based at a New York site. California’s notices must include information about local workforce development board services for notices given on or after January 1, 2026.
Count remote employees where they report, check every state where an affected person works, and look at layoffs within 90 days of each other together. Many early-stage startups fall below these thresholds, but check before you announce. Paying wages and benefits in place of notice reduces damages under federal WARN, but state rules differ, so get advice first.
What severance should we offer?
Severance isn’t legally required unless an offer letter, employment agreement, policy or a law like New Jersey’s requires it. Startups pay it anyway, because it’s the price of a signed release and the decent thing to do. At an early-stage company, 2 to 4 weeks of base pay is typical. Executives usually have severance set in their employment agreements, commonly 3 to 6 months. Some companies add a week per year of service, a few months of paid health premiums, accelerated vesting or a longer option exercise window.
Use one formula for everyone at the same level, and pay only after the release becomes effective, meaning after any revocation period ends. Outside the US, local law usually sets mandatory notice, consultation or severance, so bring in local counsel early.
What does the release need for employees 40 and older?
The federal Age Discrimination in Employment Act covers employers with 20 or more employees, and the Older Workers Benefit Protection Act sets the rules for releasing age claims. When two or more people are let go as part of the same program, each employee 40 or older must get at least 45 days to consider the agreement and 7 days after signing to revoke it. They must also receive a written disclosure listing the decisional unit (the group from which you chose), the eligibility factors, the time limits, and the job titles and ages of everyone selected and everyone not selected in that unit. Ages must be listed individually, not in ranges.
The release must be in plain language, refer specifically to age discrimination claims, advise the employee in writing to consult a lawyer, and give something the employee isn’t already owed. Employees can sign early, but you can’t pressure them to. Many companies give everyone in the layoff the same 45-day window for simplicity.
Some states add rules. In California, an agreement with confidentiality or non-disparagement terms must preserve the employee’s right to discuss unlawful acts in the workplace, and every separation agreement must give at least five business days to consider it and notice of the right to consult a lawyer.
What do we owe on the last day?
Final pay deadlines are set by state law. California requires final wages, including accrued vacation, immediately when you let someone go. New York requires them by the next regular payday. Check each state, plus your PTO policy.
Employers with 20 or more employees must offer federal COBRA continuation coverage, and many states have similar rules for smaller employers. Most states also require a written notice about unemployment insurance at separation. For H-1B employees, the company must notify USCIS and may owe the reasonable cost of return transportation. The employee generally has up to 60 days to find a new sponsor or change status.
What happens to their equity?
Unvested options are cancelled and go back to the pool. Unvested restricted stock is bought back at the price the employee paid. Vested options must be exercised within the post-termination window in the grant, usually 90 days. ISOs exercised more than three months after employment ends are taxed as NSOs.
The board can accelerate a few months of vesting or extend the exercise window. Either change needs board approval and has tax consequences, especially for ISOs, so involve your tax advisor. Give each person a written statement of vested shares, exercise price and deadline. See What Happens to Startup Stock and Options When You Leave the Company?
Example. An engineer earning $120,000 holds 40,000 options at $0.50 per share, vesting over four years with a one-year cliff. She’s laid off at month 22, so 18,333 options have vested. The company’s plan pays three weeks of base pay, about $6,923, and the board approves three months of accelerated vesting for everyone affected, bringing her vested total to 20,833, and the other 19,167 options return to the pool. Exercising all of them would cost her about $10,417, and she has 90 days to decide.
How should we communicate the layoff?
Keep the circle small until the day. Prepare a script, a written FAQ and a packet for each person: notice letter, separation agreement and any required disclosure, final pay and benefits information, and equity statement. Hold all the meetings on one day, with the manager and a founder or HR lead. Cut system access as the meetings happen.
Speak to the remaining team the same day: what happened, why and what the plan is now. Don’t promise there won’t be more cuts. Tell investors before or on the day, prepare short statements for customers and the press, and route outside questions to one spokesperson. Anything said can later become evidence, so script it.
Can we rehire after a layoff?
Yes, but carefully. Filling an eliminated role soon after, especially with someone younger or cheaper, undercuts your documented business reason and can look like pretext. Decide in advance whether laid-off employees are eligible for rehire, and if a role comes back, consider offering it to the person who held it first.
Layoff checklist
- Board-approved memo with the business reason, alternatives considered and savings target.
- Written selection criteria, applied consistently and reviewed by counsel.
- WARN analysis for every state with affected employees, remote workers included.
- Severance formula, separation agreements and age disclosures for employees 40 and older.
- Final pay, PTO, COBRA and unemployment notices for each person.
- Equity statements and board approval of any acceleration or extension.
- Scripts, FAQ, IT shutoff, and messages for the team, investors and customers.
For one-off terminations, see What Do I Need to Do When an Employee Is Fired? For the wider rules, see What Should Founders Know About Startup Employment Law? and Startup Employment Contract Guide. If cuts follow a financing reset, see What Is a Down Round?
If you’re planning a layoff, see our separation agreement service or contact us.
