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Here's Why Your Business Needs a Termination Policy

Donna Fuscaldo
Donna Fuscaldo
Senior Finance Writer

You can fire someone at will in most states, but there are disadvantages to doing so. Having a termination policy can help.

  • How and when you terminate an employee will determine whether it harms morale.
  • Having an official termination policy can minimize the risk of termination lawsuits.
  • Your termination policy should be clear, concise and seen by everyone.
  • This article is for business owners who are thinking about creating an official termination policy.

Terminating employees has serious repercussions, so it pays for your company to have an official termination policy. Although your state may not require it, having established rules and procedures has many advantages. If you're thinking about developing a termination policy, read on to learn what it should include and why it's important.

What is a termination policy?

A termination policy is an official document that lays out the grounds and process for firing employees. 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," Domenique Camacho Moran, a partner at ‎Farrell Fritz, told Business News Daily. However, "employers can't fire someone for unlawful reasons, including gender, religion, race, ethnicities and [in some states] political activities."

Key takeaway: A termination policy states the grounds and process for terminating employees.

Why should you develop a termination policy?

Employers always have great 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 some other factor, you should treat the employee with respect when it is time for a separation. Having a termination policy helps you do that and gives you protection against these two risks:

  • Wrongful-termination lawsuits. Even when employment is at will, business owners can still be susceptible to lawsuits. Wrongful-termination suits are plentiful in the U.S., and they can be very costly for businesses. If a business doesn't have an employee termination policy or documentation of the reasons for firing someone, the company may face litigation from disgruntled employees or those who perceived the reasons for their firing were nefarious.

    "They 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 said.
  • Sinking morale. If employees are showed the door unceremoniously, it could cause fear and resentment among the existing workforce. That could lead to low morale, reduced productivity and retention issues. But if you documented the reasons for the termination and gave 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," said Charley Moore, founder and CEO of Rocket Lawyer. "You have to hire wisely, communicate clearly and train your employees."

Key takeaway: Having a termination policy reduces your risk of wrongful-termination lawsuits and prevents reduced morale.

What should a termination policy include?

A termination policy should include the following elements:

Explanation of terminations

The termination policy should explain the differences between the types of terminations. Voluntary termination occurs when the employee chooses to leave. A firing occurs when the employer terminates the employee. Involuntary termination happens when people lose their jobs because of downsizing, facility closings or the shuttering or selling of a business.

The process for termination

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

For example, it's standard practice to issue a verbal warning for the first offense and, if the problem persists, to follow with written notices. It could be one, two or three written warnings, depending on the offense.  

Offboarding procedures

Though it's never easy to terminate an employee, it is especially difficult during the pandemic; some companies have had to fire employees via video conference instead of having those discussions in person. Regardless of how you notify the employee, make sure to be honest and empathetic, said Lindsay Witcher, vice president of practice strategy at Randstad RiseSmart.

"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."

Severance pay and support

Consider how you'll support terminated employees. You may just want to cut ties, but to protect your reputation internally and externally, it's a good idea to provide some support, particularly during the COVID-19 pandemic, when finding a new job may be tough.

Depending on your budget and reason for termination, you can offer severance based on the employee's years of service, outplacement benefits, COBRA or all of the above. You should prepare a termination-of-benefits letter that outlines all of the key information.

Other considerations

In addition to including the aforementioned elements, keep these points in mind when 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 your reputation. It's important 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 the service they've given to your company," Witcher said.

  • Include the policy in the employee handbook. Your staff must see your termination policy, which is why it should be included in your employee handbook.

    "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."

Key takeaway: All termination policies should include descriptions of the termination types, the steps in the termination process, offboarding procedures and information about severance support, if applicable.

[Looking for help with your termination and other HR processes? Read about the best PEOs of 2021.]

Termination FAQs

Can you terminate an employee without warning?

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

Does quitting count as termination?

No, quitting doesn't count as termination because it refers to the employee's decision to leave the company. By contrast, a termination occurs when the employer decides to let go of the employee.

What does voluntary termination mean?

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

What should you not say when terminating an employee?

A termination is difficult for all parties involved, but it's best to be as clear and transparent as possible. Be direct and upfront in informing them they are being terminated, and then explain why.

Even if you have an HR staffer present during the termination, make sure you are available to answer any questions the employee may have. It's important to show compassion during this tough time. It's a good idea to speak to the rest of the staff afterward to address their concerns, before resentment or rumors start to fester.

Image Credit: AndreyPopov / Getty Images
Donna Fuscaldo
Donna Fuscaldo
Business News Daily Staff
See Donna Fuscaldo's Profile
A lifetime New Yorker, I am a veteran finance and business journalist that has contributed to several national media outlets including Forbes, Investopedia, and Bankrate.com. I have spent my career providing consumers and business owners with advice and guidance to help them navigate the world of finance. As a senior finance writer, I report on all aspects of finance from managing cash flow to choosing the best accounting software.