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Differences Between Laying Off and Firing an Employee

Skye Schooley
Skye Schooley

Learn the differences between firing and laying off employees to determine if one is right for your business.

10/26/2020 4:30 am

  • Employees are often laid off for economic reasons, like lack of available work or funding.
  • Employees are often fired for poor performance or misconduct.
  • Although most states have at-will employment, you must abide by several laws when terminating an employee.
  • This article is for small business owners and HR professionals who have staff and are trying to understand the different ways to terminate an employee (i.e., firing vs. layoffs).

If you have employees, at some point you may face the decision of whether to lay one of them off or fire them. Although the two actions have the same result (ending an employment relationship), the reasons behind them are different. Each also comes with its own set of legal obligations. It is important to understand the similarities and differences between laying off and firing employees to determine which one is right for your business's situation.

Laying off vs. firing employees

Laying off and firing employees both mean permanent termination. However, firing an employee is often the result of poor performance or misconduct, whereas a layoff is often due to a lack of available work or funds. Firings are usually an individual occurrence, while layoffs can involve multiple employees at a time.

To avoid litigation, be sure to follow federal, state and industry laws regarding how to lay off or fire an employee.  

Key takeaway: A layoff is typically the result of problems at the business level, whereas a firing is usually the result of problems with the employee.

How do layoffs work?

Layoffs often occur during times of financial hardship or economic distress when a company downsizes to save money. It is essentially the same as any other termination, as it completely severs the employment relationship. However, in the case of a layoff, the employer and employee both acknowledge that the employee's behavior is not the reason for termination.

Some industries have seasonal workforces, like tourism and hospitality, and essentially lay off their staff regularly with the intent to rehire – typically within six months. Employers and employees should both understand that these "temporary" layoffs are still terminations and not guaranteed future employment. 

There are several potential implications for a company laying off employees. For example, employers must follow the notification requirements under the WARN Act, which says that certain types of businesses must provide at least 60-day written notice for mass layoffs or plant closures.

Trisha Barita, managing partner of Barita Law Firm and founder and owner of Legal Skinny, said there is also the possibility of individual or class-action claims of discrimination if the employer lays off workers who all fall into a certain protected class, such as a layoff that only involves Hispanic employees.

Pros and cons of laying off an employee

Before conducting layoffs, you need to weigh the pros and cons of the decision. For example, laying off employees may be financially beneficial in the short term, but it comes with legal risks and implications. We spoke with experts to identify some of the top potential advantages and disadvantages of laying off employees.

Advantages of laying off employeesDisadvantages of laying off employees
It reduces employment costs, saving your business money in the immediate term.Terminating, recruiting and hiring employees is expensive if you later find you need a larger workforce again.
You can amicably part ways with employees and maintain a positive reputation.Laid-off employees might file claims or lawsuits against you for wrongful termination.
It gives employees a clean break, with no ambiguity as to their employment status with your company.It can reduce company morale and increase the risk of employee burnout.
It can stabilize your business for future growth.It can reduce your company's production capabilities.

Key takeaway:
Laying off employees reduces short-term costs and can stabilize your business, but it carries risks of litigation and low employee morale.

How to handle laying off an employee

An employee layoff, also known as a reduction in force if more than one employee is involved, can have a drastic impact on your business – both positive and negative. Given the risks, you should seek legal counsel when conducting employee layoffs. Here are some other steps to follow when laying off employees to avoid legal repercussions.

1. Look for layoff alternatives.

If you are contemplating an employee layoff due to financial hardship, Barita suggests seeking potential alternatives first.   

"Prior to the layoff, the business should explore if there are potential alternatives to the layoff to consider, such as reassignment, reduction in work hours, across-the-board salary reductions, a brief shutdown, elimination of wasteful spending, hiring freeze or even a voluntary resignation program," Barita told Business News Daily. "Since a layoff is often related to a business reason, the business should be prepared to identify a legitimate, nondiscriminatory business justification supported by sufficient documentation."

2. Identify legal policies and contracts.

If you've determined that a layoff is your best (or only) option, start by identifying any legal policies that might dictate which employees you can lay off and how. Analyze any existing employee contracts, company policies or potential collective bargaining agreements. Be sure to comply with any layoff requirements outlined in these documents.

3. Choose employees in a nondiscriminatory manner.

Barita said businesses should take objective criteria into account when selecting employees to lay off. For instance, you might choose a particular group of employees based on full-time or part-time status, a particular department, redundant positions, performance, seniority, or a combination of these factors.

"In the selection, it is important to avoid any intentional discrimination against an individual or a disparate impact on any group of individuals in a protected class under federal laws such as Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act as Amended, Age Discrimination in Employment Act, and the Older Worker Benefits Protection Act," Barita said. 

Several state and local laws, which often have broader protections than federal legislation, protect employees against discrimination in a layoff.

4. Take a consistent approach.

To avoid discrimination lawsuits, approach each layoff the same way. Plan out the layoff process ahead of time, and communicate the situation to affected employees early to avoid as much workplace disruption as possible.

"The business should have a consistent approach and notice to provide to the employee regarding the layoff and the next steps for final pay or consideration of a severance package, if offered, and who the employee's point of contact will be moving forward," Barita said. "At this point, the business should be prepared to retrieve all company items in the employee's possession, including any confidential items, company key card, laptop or cell phone." 

5. Support your remaining team.

The employees being laid off are not the only ones this affects. Your remaining employees, customers and clients will likely be affected by the transition as well. It is important to keep open lines of communication with them to ease the transition.

Key takeaway: You must conduct employee layoffs in a nondiscriminatory manner that abides by all federal, state, and local laws and minimizes the impact on your remaining employees.

How does firing an employee work?

Although most states have at-will employment – meaning you can fire an employee at any time, for any nondiscriminatory reason – employers should tread carefully when terminating an employee. For example, you can terminate an at-will employee for repeated poor performance or misconduct, but if you terminate them the wrong way, they may be able to file a lawsuit against you.

"Regardless of the reason for termination, employers often face wrongful termination claims by aggrieved former employees," said Dani Fontanesi, founder and managing partner of Fontanesi Legal Consulting. "Even if the claim is meritless, it can cost tens of thousands of dollars or more to defend a claim."

Barita said that many employers make the mistake of firing an employee based on poor performance that has not been well documented or targeting a specific employee's performance because of personality differences. 

"A business should also consider whether the employee could claim retaliation for recently taking a protected leave of absence, making an internal complaint of discrimination or a hostile work environment, complaining of wage violations such as not paying overtime, or any whistleblower activities," Barita said.

To avoid legal repercussions, businesses should carefully document their reasons for termination and abide by all employee protection laws. 

Pros and cons of firing an employee

Firing an employee can improve the overall performance of your workforce, but it has several legal risks, including potential litigation. The experts we spoke with identified some potential advantages and disadvantages of firing an employee.

Advantages of firing employeesDisadvantages of firing employees
Firing an employee can save you money if you don't need to replace them or they were making a higher salary than average.Terminating, recruiting, and hiring employees is expensive and time-consuming if you do need to replace the terminated individual.
Removing or replacing a toxic employee can boost company morale.A fired employee might file a claim or lawsuit against you for wrongful termination.
Removing or replacing an underperforming employee can increase the team's productivity.A fired employee might take your company information or data to competitors.
If you do it correctly, you will have supporting documentation to defend your reason for terminating the employee.A fired employee might try to damage your company's reputation.

Key takeaway:
Firing underperforming employees can boost your team's productivity and morale, but it carries risks like litigation and damage to your company's reputation.

How to handle firing an employee

As with layoffs, you should consider conferring with your legal counsel before you fire an employee. Here are some other steps to take to avoid potential lawsuits.

1. Document the offenses.

The best way to track an employee's progress or regress is to document their performance or offenses throughout their employment at your company. Written documentation can serve as proof that the termination is due to poor performance or misconduct, as opposed to a discriminatory reason.

"An employer is not generally required to issue a formal letter to terminate an individual's employment, but it's a good idea to document the termination in writing, including the reasons for termination, and to maintain the documentation in the employee's personnel file," Fontanesi said.

2. Consider employment laws and legal protections.

"Prior to termination, the employer should conduct an analysis of any company policies surrounding termination, contractual obligations with the particular employee, collective bargaining agreement limitations if it is a union employee, and the federal, state and local laws that may limit or guide termination of an employee," Barita said.

This analysis will help you determine your legal obligations and maintain regulatory compliance in the termination process.

3. Prepare for the termination.

Establish a standard policy for how you terminate employees. It is often best to have two employer representatives present during the termination (e.g., an HR representative and hiring manager). Have each member prepare what they intend to say in the meeting, and draft any legal documents or notices you may need to provide the employee, like a termination letter.

"A termination letter will typically include the effective date of termination, the reason for termination, the final payment to be made to the employee (including accrued but unused vacation or sick pay), information regarding the continuation of health coverage, and a reminder of the employee's obligation to return company property and/or comply with other ongoing obligations, such as confidentiality or noncompete obligations," Fontanesi said.

4. Terminate the employee.

Terminate the employee in clear and concise language. Give them any supporting documents they may need, like a termination letter, COBRA details, and information on unemployment benefits or severance pay. Collect their company property, give them their final paycheck, and remind them of any legal obligations they are bound by, such as nondisclosure or noncompete agreements.

"Best practices typically involve communicating the decision to the employee in a private setting, away from earshot of other employees, [with] a written follow-up formally documenting the decision and recapping the reasons for the decision," Fontanesi said.

Key takeaway: Before firing an employee, consider all federal, state and local laws that may protect them from termination. Follow the proper process for documentation and communication of the reasons for termination to protect your company legally.

Image Credit: Photodjo / Getty Images
Skye Schooley
Skye Schooley
Business News Daily Staff
Skye Schooley is a staff writer at and Business News Daily, where she has written more than 200 articles on B2B-focused topics including human resources operations, management leadership, and business technology. In addition to researching and analyzing products that help business owners launch and grow their business, Skye writes on topics aimed at building better professional culture, like protecting employee privacy, managing human capital, improving communication, and fostering workplace diversity and culture.