There’s a startup adage: hire slow and fire fast. This means that you should take your time assessing whether a potential hire is the perfect fit for the organization. On the flip side, if it is not working out, it’s essential to be honest and cut them lose as fast as possible.
But how do you actually do that? What are the steps in terminating a startup employee?
Terminating an employee is a difficult decision that requires careful consideration of potential legal risks, clear communication and proactive planning. By taking steps to minimize potential disputes or claims, providing a clear explanation for the termination, and treating departing employees with respect and compassion, employers can help maintain positive relationships and protect their business interests.
This article highlights some of the key considerations for employers when terminating an employee involuntarily, including legal risks, communication strategies and logistical planning. It’s important to work with Human Resources (HR) professionals or legal counsel to ensure compliance with all applicable laws and regulations, and to approach the process with empathy, transparency and a focus on finding a positive outcome for all parties involved.
If you’re looking for legal counsel, feel free to reach out to us here.
Consider Potential Legal Risks
Consider potential legal risks before terminating an employee. Review relevant federal and local laws and regulations to ensure compliance, and assess whether there are any factors that could lead to legal disputes or claims.
Some areas of concern may include:
- Employers must not fire employees based on protected characteristics such as race, gender, age, religion or disability. Any documentation supporting the termination should clearly outline all reasons for the decision. All decisions should be in compliance with state and federal equal employment opportunity (EEO) regulations to ensure the employee is not being discriminated against and protect against any discrimination claim. Should an employee be on leave or applying for leave (ex. family medical leave, parental leave, etc.), it will be especially important to consult with legal counsel to minimize any potential risk of an EEO claim.
- Retaliation and Whistleblower Protections. Employers must not fire employees in retaliation, directly or indirectly. Employers should be mindful of potential retaliation claims from employees who have engaged in protected activities such as filing complaints or reporting illegal conduct. Any filed complaints should be investigated and documented. This includes complaints made by employees who have reported illegal conduct or other violations within the company. It’s important to document all related details regarding related complaints leading up to the termination to provide a sound basis for the termination and protect against any retaliation claim.
- Contractual obligations. Employers should review any active contractual agreements held with the employee as they may impact the termination process, as well as state and federal regulations regarding termination-related timelines. This includes reviewing employment contracts, collective bargaining agreements and other relevant documents to ensure that all terms are followed. Employers may also consider reviewing any internal policies (i.e., standard operating procedures, the employee handbook, etc.) to promote equity in the organization’s approach across terminations.
By carefully considering these and other potential legal risks associated with a termination decision, employers can help minimize the likelihood of legal disputes or claims arising from their actions. It’s important to consult with legal counsel or HR professionals when making and communicating these decisions to ensure compliance with all applicable laws and regulations.
Providing a Clear Explanation
It is crucial to explain clearly and specifically why an employee is being terminated. This helps the employee understand the situation and avoid any confusion or misunderstandings. If relevant, refer to the internal documentation supporting the reason for firing to identify the core theme(s) that will be communicated to the impacted employee.
Deliver the explanation in a respectful and compassionate way while being direct and honest. It is recommended that this is delivered to the employee with at least two people present (for example, the direct supervisor and a member of Human Resources).
Common reasons for firing an employee include poor performance, violation of company policies or misconduct. Avoid vague or ambiguous language that may leave the employee uncertain about the reason(s) for their termination. It is most important that the information is clear.
It is recommended that it also be concise. Specifically, if there is even a slight possibility that the employee may perceive this termination as an act of retaliation, harassment or discrimination based on age, race, gender, disability, religion, sexual orientation or any other protected class/category, then you may face legal risks. Thus, it is wise to have clear internal facing documentation for the reason of a termination before terminating the employee. Consulting an HR professional and/or legal counsel proactively during this process is encouraged.
How to Respond to a Negative Reaction
If an employee responds negatively after being terminated, those who notified the employee of their employment status should remain calm and professional. They should avoid becoming defensive or argumentative, as this can escalate the situation and/or create additional risk for the organization.
Instead, leaders should listen actively and attentively to the employee. When possible, they should express empathy and understanding while also clearly reiterating the reason(s) for the termination and any next steps.
Those notifying the employee of their employment status may also choose to offer resources or support to the employee, such as access to an employee assistance program or counseling services, should they be available to all impacted staff. This can help demonstrate a commitment to the employee’s well-being and show that the company values their contributions.
However, the notifying staff should avoid making promises or commitments not previously approved by senior leadership and/or legal counsel. They must also ensure that they do not say or do anything that could be construed as retaliation or discrimination during or after the conversation in which the staff is notified of their termination.
The goal is to defuse any negative reaction and maintain a positive working relationship with the departing employee. It’s important to approach this process with empathy, respect and a focus on finding a positive outcome for all parties involved.
Separation Acknowledgment / Agreement
Clear documentation that the employment relationship has ended is important. This can be achieved through either a Separation Agreement or a Separation Acknowledgment.
- Separation Acknowledgement — This is a simple, dated, one-page document that notifies the employee that the employment relationship has ended and reminds the (now former) employee of the existing obligations under the employment agreement. It is signed by the company only and does not require the departing employee’s signature.
- Separation Agreement — This is a lengthier document detailing the termination of the employment relationship, covering intellectual property issues and releasing the company from any future claims by the employee. The company needs to provide some consideration for the employee giving up their right to sue, so the separation agreement requires some amount of severance payment. The separation agreement is generally a few pages longer and requires a signature from both parties. It also includes an effective date.
Consult with your HR professional or legal counsel to determine which document best suits your situation. If you need legal counsel, feel free to contact us here.
Stock Power
The stock power is a short document, usually one paragraph long, that allows the company to repurchase an employee’s unvested shares. It is typically one of the last pages of a restricted stock purchase agreement (RSPA) and is generally pre-signed by the employee when the RSPA is first executed.
The stock power is necessary because of the way that a vesting schedule works. Initially, the employee is issued all of the shares in the equity award, but the company has the option to repurchase the shares. As the employee continues to provide services to the company, the company loses the right to repurchase a portion of those shares and they become fully vested. For example, if the vesting schedule is four years, the company loses the right to repurchase 1/48th of the total equity award each month.
If there are unvested shares, the company has to actually repurchase them (typically at a nominal value) in the stock power. Generally, there are a few blanks that need to be filled in by the company. Then, the company cuts a check to the employee for the owed amount; the company now owns the unvested shares, which generally go back into the employee pool.
Lastly, it is important to remember to update the cap table after the repurchase.
Final Paycheck and Benefits
Ensure that the departing employee gets a final paycheck. That paycheck should include all accrued but unpaid wages. Additionally, ensure that there is a clearly communicated process for the termination of benefits and insurance. Work with your HR professional to ensure that each of these steps are complete and compliant.
Reviewing Non-Compete and Confidentiality Agreements
It’s important to review any signed non-compete or confidentiality agreements with the terminated employee or to include reminders in separation acknowledgments/agreements. These agreements may limit the employee’s ability to work for competitors or disclose confidential information about the company, etc.
Employers should ensure that they have copies of all signed agreements and review them carefully to highlight whether any restrictions apply after termination. This may include limitations on the employee’s ability to work in a certain industry or geographic area, as well as requirements for maintaining confidentiality of company information.
By reviewing non-compete and confidentiality agreements with terminated employees, employers can help minimize potential legal disputes and protect their intellectual property and trade secrets. It’s important to approach this process with care and attention to detail in order to ensure compliance with laws and regulations. To learn more about non-compete provisions click here. [Link to: Non-compete]
If there are concerns about potential violations of these agreements, employers should consult with legal counsel to determine their options for enforcing them. It may be necessary to seek legal action in order to protect the company’s interests.
Collecting Company Property from the Terminated Employee
When an employee is terminated, employers should collect any company property that was issued to them during their employment. This can include items such as keys, access cards, laptops, phones, uniforms, and any other equipment or materials belonging to the company.
Collecting company property in a timely and efficient manner can help prevent loss or damage to these items and ensure that they are available for use by other employees. It may also be necessary to recover confidential information or intellectual property that was stored on company devices such as customer lists, code base, business, financial or legal documents.
To facilitate this process, employers should create a checklist of all company property issued to the employee and ensure that all items are returned before final payment or severance is provided. Employers may also choose to conduct a physical inspection of the employee’s workspace to ensure that all items have been returned.
Employers should communicate clearly with the terminated employee about the process for returning company property and provide them with specific instructions for how to do so. They should be respectful and professional throughout this process, avoiding any confrontational or accusatory language.
If the terminated employee fails to return all company property in a timely manner, employers may need to take legal action or withhold final payment until the items are recovered. By taking proactive steps to collect company property from terminated employees, employers can protect their assets and minimize potential disruptions to business operations.
Conducting an Exit Interview
When an employee leaves the company, employers may choose to conduct an exit interview to gather feedback and insights about their experience. This can provide valuable information about areas where the company may need to improve, such as communication, training or management practices. It can also help identify potential legal issues or concerns that may need to be addressed. This is often conducted by an HR professional who is not the direct supervisor of the transitioning staff member.
To conduct an effective exit interview, the interviewer should create a safe and comfortable environment for the departing employee. They should be prepared with a list of open-ended questions that encourage honest and constructive feedback. Questions may include topics such as:
- What did you enjoy most about working here?
- Were there any challenges you faced while working here? If so, what were they? How might we lessen or eliminate those challenges?
- Did you feel supported by your manager and/or colleagues? Why or why not?
- Were there any specific incidents or situations that impacted your decision to leave?
Interviewers should share how responses will be used and what will or will not be confidential. They should listen actively and attentively throughout the interview, avoiding defensiveness or argumentative responses. They should take notes and follow up on any concerns or issues raised by the departing employee.
Conducting an exit interview can be a valuable tool for improving company culture and addressing potential issues before they become larger problems. By approaching this process with openness and a commitment to improvement, companies can continue to grow and evolve even in times of transition.
Communicating the Decision to Other Employees or Stakeholders
When an employee is terminated, it may be necessary to communicate this decision to others within the company. This situation requires professionalism, sensitivity and discretion. It is appropriate to acknowledge that an employee is no longer employed with this company and share the effective date. For example, one may say “As of today, the employee is no longer with the organization.”
It may not be necessary or appropriate to communicate the decision beyond those directly involved. However, if there are concerns about how the decision may impact others in the company or stakeholders outside of it, address these concerns proactively.
If the termination was due to performance issues or misconduct, it’s important to avoid sharing confidential information about the employee with others. Should an explanation be required, provide a general explanation for why the employee is no longer with the company, such as “the employee’s position was eliminated” or “the employee and company had different visions for their role.” If you have a separation agreement with the exiting employee, be sure that this explanation is in alignment with any terms within about how to communicate the employee’s exit.
Communication should be clear and direct while also being respectful of everyone involved. Avoid gossip or speculation about why an employee was terminated and instead focus on moving forward in a positive direction for the company as a whole.
Developing a Plan for Workload Redistribution
After an employee is terminated, it’s important to develop a plan for redistributing their workload to other employees, short-term or long-term. This can help ensure that work continues to be completed effectively and efficiently without causing undue stress or burden on other team members. Ideally, this occurs prior to communicating the departure to others outside of the direct supervisor to help support those receiving news of their colleague’s departure to understand the implications of that transition.
One way to approach this is by assessing the employee’s responsibilities and identifying which tasks can be absorbed by existing team members. Prioritize tasks based on their urgency or importance to the overall success of the company. Keep in mind minimizing the risk of burnout by staff while delegating new work. If possible, discontinue low-priority tasks.
Once tasks have been identified, communicate with remaining team members about the changes in workload and how they will impact their daily responsibilities. This can help avoid confusion or frustration and ensure that everyone is aware of what is expected of them moving forward, while also creating space to identify any risk of being over capacity.
It may be necessary to adjust deadlines or project timelines to accommodate changes in workload distribution. Employers should take care not to overload any one individual with too much additional responsibility, as this can lead to burnout or decreased productivity.
Addressing Negative Impact on Team Morale
Employee termination can have a significant impact on team morale, especially if the employee was well-liked or had a strong presence within the team. Employers should take proactive steps to address any negative impact.
One way to approach this is by holding a team meeting to discuss the termination and provide an opportunity for open communication and feedback. Employers should be transparent about the reasons for the termination and emphasize that it was a difficult decision made in the best interests of the company.
In addition, employers should take steps to ensure that remaining team members feel valued and supported during this transition period. This may include providing additional training or development opportunities, offering flexible work arrangements, or recognizing outstanding performance through rewards or bonuses.
By taking proactive steps to address any negative impact on team morale, employers can help maintain productivity and ensure that remaining employees are engaged and motivated. It’s important to approach this process with empathy and understanding while also maintaining a focus on business goals and objectives.
Conclusion
In conclusion, terminating an employee is a difficult decision that requires careful consideration of potential legal risks, clear communication and proactive planning. By taking steps to minimize potential disputes or claims, providing a clear explanation for the termination, and treating departing employees with respect and compassion, employers can help maintain positive relationships and protect their business interests. It’s important to work with HR professionals and/or legal counsel to ensure compliance with all applicable laws and regulations, and to approach the process with empathy, transparency and a focus on finding a positive outcome for all parties involved.
