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Updated Jan 30, 2024

Here’s Why Your Business Needs a Termination Policy

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Donna Fuscaldo, Business Operations Insider and Senior Analyst

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Terminating employees has serious repercussions, so it pays for your company to have an official termination policy. Although your state may not require such a policy, there are distinct advantages to establishing rules and procedures. If you’re thinking of developing a termination policy, read on to learn what it should include and why it’s essential.

What is a termination policy?

A termination policy is an official document that lays out the grounds and process for firing employees or otherwise terminating their employment. Most states don’t require employers to have a termination policy, but it’s still a good idea to develop one, no matter how many employees you have.

“Almost across the country, employment is at will, which means employees and employers can terminate relationships anytime with or without notice,” said Domenique Camacho Moran, a partner at ‎Farrell Fritz. However, “employers can’t fire someone for unlawful reasons, including gender, religion, race, ethnicities and [in some states] political activities.”

Why should you develop a termination policy?

Employers typically have high hopes for their new hires, but sometimes, it doesn’t work out. Whether you’re terminating an employee because of a performance issue, a downturn in your business or another factor, you should treat the employee with respect when it’s time to let them go. 

A termination policy supports respectful treatment and protects your business against the following risks:

  • Wrongful termination lawsuits: Business owners may still be susceptible to lawsuits even when employment is at will. Wrongful termination suits are plentiful in the U.S. and can be very costly. Without a termination policy or proper documentation of the reasons for firing someone, the company may face litigation from disgruntled employees or those who perceive the reasons for their firing as nefarious. “[Businesses] can be sued for damages and back pay, pain and suffering, punitive damages, and sometimes attorney fees, not to mention the litigation expenses both on the time and money basis,” Camacho Moran cautioned.
  • Sinking morale: If employees are shown the door unceremoniously, it could cause fear and resentment among the existing workforce. That could lead to low company morale, reduced productivity and retention issues. However, if you document the reasons for the termination and show that you’ve given the employee chances to improve, your remaining workers will be more understanding. “Your people are your greatest assets in your business and your biggest risk factor for your business,” noted Charley Moore, founder and CEO of Rocket Lawyer. “You have to hire wisely, communicate clearly and train your employees.”
FYIDid you know

If you’re terminating an employee for a specific infraction, you must outline how that action violated the employee’s original employment contract, which specifies what can and can’t be done within the scope of the job.

What should a termination policy include?

A termination policy should include the following elements:

Explanation of terminations

The termination policy should distinguish the types of terminations:

  • Voluntary termination: Voluntary termination occurs when the employee chooses to leave.
  • Firing: A firing occurs when the employer terminates the employee.
  • Involuntary termination: Involuntary termination happens when people lose their jobs because of downsizing, furloughs and layoffs, facility closings, or the shuttering or selling of a business.

The termination process

Even if you can fire employees at will, it’s a good idea to give them a chance to improve performance-related issues. Your termination policy should spell out that process so employees know what to expect.

For example, issuing a verbal warning for a first offense is standard practice. If the problem persists, written notices typically ensue. The number of warnings may depend on the severity of the offense.

Offboarding procedures

Your termination policy should spell out specific offboarding procedures. Lindsay Witcher, global managing director for Randstad RiseSmart, advises employers to be honest and empathetic when notifying an employee of a termination. 

“It’s tempting to want to do group setting [terminations], inviting all the impacted employees to a Zoom [call] and playing a video or reading a message. But it’s not the most empathetic way,” Witcher said. “The positives from doing it one-on-one far outweigh the risk of rumors starting to spread. As far as the message itself, be transparent, detailed and as clear as possible.”

Did You Know?Did you know

When you terminate employees remotely, offboarding procedures may include cutting access to the business’s online applications, remote work tools and accounts.

Severance pay and support

Consider how you’ll support terminated employees. While you may prefer to cut ties, providing support while they find a new job can protect your business’s reputation both internally and externally.

Depending on your budget and the reason for termination, consider offering severance based on the employee’s years of service, outplacement benefits, COBRA insurance and more. Determine if the departing worker is eligible for unemployment insurance and if any of their employee benefits carry over. 

You should also prepare a termination-of-benefits letter that outlines all pertinent information.

What to consider when implementing and enforcing a termination policy

In addition to the elements mentioned above, remember the following best practices when you’re developing your termination policy:

  • Treat employees with dignity and respect. Firing employees is sometimes unavoidable, but how you handle the termination process will affect your bottom line and reputation. It’s crucial to take the same amount of care whether you’re terminating one person or 50. That’s particularly true for small businesses, where staff members are likely to know each other well. “To do a cold, generic approach doesn’t honor their service to your company,” Witcher cautioned.
  • Include your termination policy in the employee handbook. Include the termination policy in the employee handbook to ensure transparency. “The employee handbook sets forth the rules of the road for the relationship between employers and employees and the business rules,” Moore said. “Walk them through the employee handbook, and document that you explained those policies. That can be powerful evidence in the event there’s litigation with an employee.”
  • Be clear and firm with your employees. As you terminate an employee, be clear when outlining the reasons and next steps. For example, if you’re communicating a layoff, explain this clearly to the departing employee. On the other hand, if they have a history of poor performance and hostile behavior, review the disciplinary action steps you took to address the issues. When in doubt, practice transparency and authenticity in your communication.
  • Have a witness with you. Many managers include a witness when terminating an employee. Multiple parties help you avoid miscommunication or potential legal trouble. Rarely, some employees might become angry or aggressive during the termination process, and having a witness can help prevent confrontations. 
TipTip

The best PEO services can help you develop a termination policy and conduct other HR processes, including hiring.

Termination policy FAQs

Most U.S. states follow the at-will employment rule, but some have exceptions. For example, the public policy exception rule prevents an employer from firing a worker if the company violates state or federal rules. Additionally, the implied contract exception prohibits an employer from firing an employee if the two parties entered an implied agreement.

Voluntary termination means the employee chooses to end their employment with the business.

Mutual termination means both the employee and the employer consent to ending their working relationship — for example, in a forced resignation.

A termination is difficult for all involved parties, but it’s best to be as clear and transparent as possible. Be direct and upfront in informing them they are being terminated, and make it clear that the decision is irreversible.

Even if an HR staffer is present during the termination to ensure HR compliance, ensure you’re available to answer the outgoing employee’s questions. It’s essential to show compassion during this challenging time. It’s also a good idea to speak to the rest of the staff afterward to address their concerns and prevent resentment and rumors.

Preparing your termination policy

When you’re preparing a termination policy for your business, be as detailed as possible to avoid potential miscommunication or legal trouble. Writing a termination policy might feel overwhelming, but it’s a necessary part of running a business and having employees. Your policy should help guide you during the complex and emotional process of terminating employees. Make sure to include your explanation of termination, process of termination, offboarding procedures, and severance pay and support. 

Sammi Caramela contributed to this article. Source interviews were conducted for a previous version of this article.

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Donna Fuscaldo, Business Operations Insider and Senior Analyst
Donna Fuscaldo has spent 25 years immersed in the intersecting worlds of business, finance and technology. As an expert on business borrowing, funding and investing, she counsels small business owners on business loans, accounting and retirement benefits. For more than two decades, her trusted insights and analysis have appeared in The Wall Street Journal, Dow Jones Newswires, Bankrate, Investopedia, Motley Fool, Fox Business and AARP. In addition, Fuscaldo has used her personal and professional experience to provide guidance on employment matters for the likes of Glassdoors and others. With a bachelor of science in communication arts and journalism, she is skilled at breaking down complex subjects related to business and careers for practical application.
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