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Employment Terminations: Reduce Your Liability and Risk of Litigation

Business owners can't always hire the perfect worker and keep them forever. Few people enjoy firing employees—no matter what the reason. There is also a risk of litigation if owners mishandle firing an employee.

Nothing can prevent an employer from being sued if an employee wants to make a claim. But small business owners can reduce the litigation risk by following good business practices and treating all employees according to company policies.

Every termination is unique, so having a “termination checklist" in place is difficult for every situation. But owners should consult a business attorney to have an outline ready for when it's time to call someone to the back office.

Before Termination

Some things can limit your liability before you hire your first employee. If you have a sole proprietorship, consider incorporating. Remember, in the event of a lawsuit, a judgment can reach into your personal assets if you have a sole proprietorship. A limited liability company or corporation protects your assets.

  • Consider using a separate at-will agreement. In an at-will state, the employee contract must contain language stating that the employee or employer may terminate the employment relationship without cause or notice.
  • Train management on all employment practices, including disciplinary procedures. Emphasize that management must follow disciplinary practices uniformly to limit liability.
  • Create and follow thorough record-keeping procedures. Document all employee disciplinary actions carefully.
  • Document and investigate all employee complaints and claims of workplace harassment.

Before any disciplinary process begins, smart business owners will have a complete record of the employee's work hours, performance reviews, complaints, and other actions.

The Termination Process

Business owners should get legal advice if they have any questions about terminating an employee. There may be situations when termination is desirable but not possible. In those cases, you may need to consider other alternatives.

  • Follow the steps leading to termination if you have a progressive disciplinary process. Even with at-will employees, your termination procedure should follow the process outlined in the employee handbook.
  • Follow industry best practices for the termination itself. Never fire an employee in front of other workers. If your state requires a final paycheck or other documents, prepare those before the termination.
  • If possible, provide the worker with copies of all performance reviews and disciplinary actions. If you've been following your disciplinary policy, the employee should have their own copies but provide additional copies during this meeting.
  • Recover all company equipment from the employee. Allow the employee to get their personal items from their desk or locker. If the employee has any keys or other equipment at home, arrange a date and time for their return. In general, limit the reasons the employee may have to return to the property.

After Termination

The Fair Labor Standards Act (FLSA) requires companies to maintain employment records for two years. The FLSA doesn't specifically tell businesses to keep records for terminated workers. But you can reduce your litigation risk by maintaining these records. If there is a legal dispute, you may need to produce evidence of any actions taken. Other steps to take to protect yourself from litigation include:

  • Do not discuss the termination with other employees. Don't allow rumors or gossip to spread. Refer all questions to human resources or legal counsel.
  • Cooperate with any investigations by the Equal Employment Opportunity Commission (EEOC) or other agencies. If requested, take part in arbitration or mediation.
  • Ensure your former employee receives all post-employment benefits, such as COBRA, 401(k), and pension documentation.

Termination Do's and Don'ts

If the termination is due to business needs, such as downsizing, be honest with your employees. Although HR professionals advise against reference letters in most cases, you may want to ask a business lawyer about doing so in these cases. Use your best judgment to avoid sending good workers to your competitors.

No matter what the circumstances, never:

  • Fire an employee for exercising a constitutional right. The National Labor Relations Act (NLRA) protects workers' right to unionize, discuss collective bargaining, and strike for better wages and working conditions. Don't suggest that you will fire workers engaging in union activities.
  • Fire anyone for reporting harassment, a workplace violation, or illegal activity. State and federal governments take retaliatory termination seriously. Businesses face steep penalties for such violations.
  • Give the appearance of discriminatory firing. Careful record-keeping helps reduce this liability. Never terminate workers in a way that makes it appear you are selectively firing women, people with disabilities, or other protected classes.

In general, state and federal laws will protect employers and employees as long as termination is job-related.

Insurance Coverage

Most businesses carry basic business insurance. But general liability insurance won't protect you against an employee lawsuit for wrongful termination. No matter how careful you are, nothing can stop an employee who wants to sue you. An experienced attorney can minimize harm, but litigation is always expensive.

Employment practices liability insurance will cover legal action at an additional charge. When purchasing business insurance, you should discuss the pros and cons of such insurance with your liability insurer.

Legal Help

No small business owner likes the thought of firing a worker. Litigation is no better. Speak to a business law attorney to learn options for protecting your business.

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