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7 Legal Tips for Startups Laying Off Employees

By George Khoury, Esq. | Last updated on

If your startup's projections are starting to look bleak, or a re-organization is in order, you may be considering laying off some employees. In a startup environment, conducting layoffs can often be more difficult due to the close knit team environment enigmatic to startups. However, if you are in a larger startup with over 100 employees, you may need to WARN your employees.

If you are concerned over legal liability for a wrongful termination claim, get help from an experienced business attorney before starting the termination or layoff process. Below, you'll find some tips on how to make sure your layoffs don't lead to legal trouble.

1. Don't Use Layoffs as a Pretext

If you want to terminate an employee for poor performance, a personality problem, or any other reason, don't use a layoff to accomplish that end. Don't attempt to mask a discriminatory or retaliatory termination via a layoff. If you do, you may be unable to prove that the layoff was a legitimate business decision later on in court. Also, if it is learned that you hired someone after the layoff to fill the same roll, that will raise a major red flag.

2. Are There Alternatives?

Sometimes there are alternatives to laying off staff. Especially on small startup teams, losing a few people might actually mean losing a third or half the staff. If you have a really small team, you could consider discussing the financial problems to see if your team might be willing to take an across the board pay reduction, or reduction in hours, to avoid losing the team members.

3. Beware of Employment Contracts

If you have hired contract employees, agency employees, or had your employees sign an employment contract, you should re-read their contracts before including them in any layoffs. Some employment contracts are for a term, or provide for specific terms upon termination, which means that if you layoff the employee, they could potentially be entitled to the consideration that was agreed upon in the contract if they are terminated.

4. Don't Challenge Unemployment Claims

If you are laying off an employee, that employee will likely have a claim for unemployment benefits. In order for that employee to receive those benefits however, you, as their former employer, will have to respond to a request for information or verification regarding your former employee.

If you told your employee they were being laid off, giving the unemployment investigator a different reason could lead to a delay in processing your former employee's claim, as well as raise red flags for the employee that the layoff was not legitimate. If the claim gets denied because of the information you provide, you may have to defend the matter in an administrative hearing.

5. No Further Explanation Necessary

Although you may be compelled to be completely transparent and explain to the employee or team in great detail why they are being laid off, this is not required. Most regular employees are considered "at-will" employees, which means that you can terminate them for any legal reason, and they can quit at any time. If you are concerned about the reason you plan to give, consult an attorney to see if not providing a reason is in your best interest.

6. Last Hired, First Fired

Frequently, when conducting layoffs, employers will use the "last hired, first fired" method. Basically, this method involves laying off the employees with the least seniority. Conducting layoffs in this manner provides the most senior employees with a sense of job security, which can be important to company morale.

Using objective, performance-related criteria can also allow layoffs to be less biased. However, these will tend to impact morale more so than a seniority based layoff.

7. Require Release for Severance

An employer that is worried about a lawsuit can seek to have their employee sign away their rights in exchange for a severance package. If you choose to go this route, have an attorney draft your severance agreement to include a release of all legal claims, as a poorly drafted release may not be worth the paper its printed on. Also, note that some claims, like unemployment claims, may not be release-able.

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