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How to Fire an Employee and Stay within the Law

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How to Fire an Employee and Stay within the Law

By Caron_Beesley, Contributor
Published: February 22, 2012 Updated: August 19, 2015

Several blog posts on SBA.gov offer plenty of advice on how to hire, mentor, and motivate employees. We also frequently tackle the issue of dealing with difficult or disruptive employees. But what happens when you find yourself at the end of the road with no choice but to terminate an employee?

What steps must you take? What does the law require? What are the employee’s rights? What should you do about employee benefits and continuing health care coverage?

Doing everything right won’t always protect you from a lawsuit, but it will show that the termination was justified, legitimate, and handled within the law.

This blog post explains six essential things you need to know about firing employees within the law:

1. Understand the Employment at Will Policy

Every state (except Montana) gives employers the option of adopting an “at-will” employment policy, meaning that an employer may terminate any employee at any time, for any reason, or for no reason at all. Sometimes employee agreements or contracts contradict the “at-will” policy, so check the wording to make sure where you stand. 

2. Know When it’s Illegal to Fire an Employee

Your power to fire is not unlimited. Here are some things you can’t fire someone for:  

  • Discrimination – Federal anti-discrimination law prevents employers from firing employees based on age, race, gender, religion or disability.
  • Whistleblowers – You can’t fire employees for complaining about any illegal activity, health and safety violations, or discrimination or harassment in the workplace. These statutes and laws vary by state, so check with a lawyer if, for example, you wish to fire someone who has complained or testified against you in court.
  • Exercising Legal Rights – You can’t fire employees for taking family or medical leave, military leave, time off to vote or serve on a jury.

3.       Be Sure to Document Performance Issues

Despite the “at-will” policy, you should document instances of poor performance and tardiness, and maintain good records of employee performance reviews and any previous disciplinary interventions. This will provide legitimacy to your actions and prevent any complaints, lawsuits or accusations that termination was discriminatory. Protect yourself by retaining these records, even after the employee has left, and have a cheat sheet of documented performance lapses on hand to refer to during the termination meeting.

4.  Understand Employee Rights – Benefits, Unemployment Insurance, 401ks

What benefits are your employees legally entitled to if they are fired or terminated? Here are the main benefits that employees may be entitled to if they are fired:

  • Continuation of Health Insurance CoverageCOBRA is a federal law that applies to employers with more than 20 employees. If these employers administer a group health plan, they are required to offer terminated employees, their spouses and dependents the option of temporary continuation of health coverage at group rates. If you have fewer than 20 employees, check with your state; some have comparable laws for smaller employers. Another caveat of COBRA is that terminated employees may be excluded from the plan if they were fired for “gross misconduct.” The law, however, doesn’t describe what is meant by “gross misconduct,” leaving it open to interpretation. This blog offers guidance on this matter: COBRA: What is “Gross Misconduct.”.As an employer, you can require individuals to pay the full cost of coverage, which can be significantly higher than group premiums.
  • How to Enroll Fired Employees in COBRA – You’ll need to notify your group health plan administrator within 30 days of firing or terminating your employee to kick start the COBRA process. You may even want to call in an outside HR firm to help you save time and confusion in the long term. SBA.gov also provides COBRA FAQs and more information here (scroll down).
  • Unemployment Insurance – It is your legal obligation to notify fired employees of their possible eligibility for unemployment insurance. By knowing their rights, employees are more likely to file a timely claim (and you can avoid being sued).
  • Vested Retirement Plans – Fired employees must remain eligible to receive vested 401(k), profit-sharing or pension benefits.

5.  The Final Paycheck

Employers are not required by federal law to immediately give former employees their final paycheck. Some states, however, may require immediate payment, and are specific about what should be included in the final paycheck, such as accrued or unused vacation days. Contact your State Labor Office for information on employer requirements in your state. The Department of Labor also provides a Last Paycheck guide that explains applicable laws and regulations.

6. What About Severance Pay?

There is no requirement in the Fair Labor Standards Act that you provide severance pay. This is a matter of agreement between an employer and an employee. Read more from SBA.gov on how to handle severance pay.

About the Author:

Caron Beesley


Caron Beesley is a small business owner, a writer, and marketing communications consultant. Caron works with the SBA.gov team to promote essential government resources that help entrepreneurs and small business owners start-up, grow and succeed. Follow Caron on Twitter: @caronbeesley


Protect yourself by retaining these records, even after the employee has left, and have a cheat sheet of documented performance lapses on hand to refer to during the termination meeting. cheat sheets you meant??????????????
Great article. Terminating any employee is never an easy task. The tips that you gave are very true and helpful. Of course following your current company's policies are a must and going through HR is essential.
I have a quick question. If an employee calls the labor board because employees are not getting paid for all the hours they work, can that employee legally be fired, or does that fall under the "whistle blower" category? I would personally think it fell under that category, but have found nothing truly definitive on it. It recently happened to someone I know, and I am curious. This person was in a managerial position, and she lost her job because she was trying to make certain the employees were paid what was owed them. From what I have heard, this is not the first time this particular institution has had the labor board called for withholding pay (though it was the first time this employee called the labor board). Thanks!
It's always a tough decision when you need to fire someone for performance issues rather then behavioural. I think the documentation is key. Good documentation of performance issues will make sure that the employer is covered from a legal standpoint should the employer take the decision to a tribunal
Wonderful blog! This is steering to be the best weblog for anybody who desires to know about this subject.
It always good to keep records and document poor performance. Another good article about same issue: How to Fire an Employee
Its not at all easy to fire an employee who worked with you. Terminating employee is not at a easy task for a manager, that's why every company go with regular performance module as to avoid any termination.
Fire a employee without any reason is not good and every employee (who is fired) have rite to know what is the reason behind it and law that can help him to sue his/her boss. This article helps me to know all rites of an employee. 2011 turbo tax
The tips you wrote here are very useful and suit the realities of the business world today. Terminating an employee has always been a gruesome task for every manager. Nobody wants to fire an employee in the first place. That's why most screening process are very tough.

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