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How to Let an Employee Go, for Small Businesses

A woman in a black shirt is standing and holding with both hands a small cardboard box. In the box are some folders, a spiral notebook, and a pen holder with a pair of scissors with red handles sticking out. This is the classic photo of what happens after you let an employee go.

Things don’t always work out. And this is true, too, where it comes to employees. Sometimes, it’s because the person you hired can’t or won’t do the job you need them to do. Other times, it’s you: you didn’t scope the job out correctly, so you hired a wrong set of skills. Or you’ve run out of money and have to lay employees off. Whatever the reason, you have to let the employee go. What are the rules you have to follow when you let an employee go, so you don’t get into trouble?

There are two types of trouble you might get into: legal trouble and inter-personal trouble. The legal trouble is easier to explain, so we’ll start there first. Then, we’ll get into the harder inter-personal side of letting an employee go.

Most States Have At-Will Employment, but With Limitations

In the US, every state except Montana follows the at-will employment doctrine. This means that your employee can quit at any time for any reason or no reason. And you can let an employee go at any time, for any reason or no reason. (Montana is at-will only during an employee’s probationary period right after they start the job. You need to have “good cause” to let go of an employee after that.)

But many at-will states have added some limitations to the at-will doctrine, at least for employers. This usually means you do need to be somewhat reasonable and follow common sense when you let an employee go.

So, if the employee makes mistakes, you might want to correct them a few times—and keep a record of that correction—before making a final decision to let them go. Of course, this is within reason. If you discover the employee has been stealing from the cash register, you can fire them right away.

Watch Out for Anti-Discrimination Laws When You Let an Employee Go

Even though employment at-will is the general rule, you still have to pay attention to anti-discrimination laws. For a refresher, take a look at our article covering various workplace laws.

Basically, you can’t let an employee go for discriminatory reasons such as race, age, national origin, etc. But, if they violate your workplace rules or simply violate the law, you can let them go for those specific reasons even if they’re also a member of a protected class.

This makes keeping disciplinary records of employees important. So, be sure to stay vigilant and up-to-date on these records. Make sure the record is in writing, and, when appropriate, have the employee sign the paperwork acknowledging they understand what they did wrong.

There are quite a few federal laws that may apply when you let an employee go. The WARN Act, for example, requires you to give employees 60 days’ notice before you can lay them off. But the WARN Act only applies to employers with 100 or more employees. So, as a very small business owner hiring your first employees, this and other federal laws typically won’t apply to you.

There may also be state laws on letting go of employees that you might need to know. For example, California law requires you to pay the former employee their last paycheck within 72 hours of letting them go. Check your state’s department responsible for workplace rules for these laws. Usually, it’s the same department that takes care of unemployment insurance.

Letting an Employee Go May Raise Your State Unemployment Insurance Rates

When you let an employee go, sometimes, this will affect your business’s state unemployment insurance rate. This rate is based on your business’s employment record. So, the more often your former employees claim unemployment insurance, the higher your rate will be.

Usually, you won’t have to pay unemployment insurance if the former employee hadn’t worked for you for long. Check your state’s payout threshold to understand how long they have to have worked for you before they can claim unemployment. Typically, it’s about a year.

As well, if you let an employee go for proper cause, you won’t have to pay unemployment. This means your insurance rate won’t go higher. Check your state for the proper reasons for your state, but the reasons typically include:

  • Voluntarily quitting (there are some exceptions depending on your state laws)
  • Fired for misconduct related to work (misconduct includes acting a certain way or failing to act in a certain way)
  • Not being able to work or available for work (except under circumstances protected by law such as the FMLA). The employee must be able, ready, and willing to accept suitable work
  • Refusing an offer of suitable work
  • Making false statements to obtain benefit payments
  • Other reasons specifically set out by your state

Should You Tell the Former Employee Why You’ve Let Them Go?

If you ask a lawyer, they’ll usually tell you to not tell the former employee why you’ve let them go. This is to prevent you from accidentally saying something that can be interpreted as letting someone go for discriminatory or defamatory reasons. Having to defend such a lawsuit can get expensive, even if you end up winning.

But, if you don’t tell the employee why you’ve let them go, they could turn around and claim unemployment insurance. Usually, the state will pay unemployment to the former employee unless you tell them why they shouldn’t. But telling the state the reason means the former employee will find out the reason too. And so this could open you up to a lawsuit that you’ve been trying to avoid.

This is a tough decision to make. But, if you’ve kept good disciplinary records and you decide you should object, then at least there’s a chance you might succeed without getting dragged into a lawsuit.

Beware of the Concept of Constructive Discharge

When there are rules, there will be people trying to game the rules. This applies to employers and unemployment insurance.

Some employers will try a lot to keep their unemployment insurance rate low. So, instead of letting an employee go, they try to “push” an employee to voluntarily quit. Typically, this means they reschedule or change the employee’s job duties to something highly undesirable. But, the employee is sometimes protected by the concept of constructive discharge.

The US Department of Labor explains constructive discharge as when an employee leaves the job because the employer has created a hostile or intolerable work environment or has applied other forms of pressure or coercion which forces the employee to quit or resign. The exact fact pattern is applied under state law, so you need to check with your state or ask a lawyer to make sure.

We think the better approach is to be above board and unambiguously let the employee go. Don’t try to game the system. It can backfire.

If the Employee Fails to Show Up for Work, Does This Mean They’ve Quit?

The opposite of constructive discharge is when the employee simply fails to show up for work. The law does allow you to fire the employee at some point. Sometimes, you can fire them right away if this is a part of your employment policy.

Of course, a more reasonable approach when an employee fails to show up for work is to make a good faith effort to contact the employee to understand the reason for their absence. Then, you can either record the incidence so that you’ll have a record for establishing a pattern of bad behavior or to confirm that the employee has indeed quit.

Operational Considerations When Letting an Employee Go

After you’ve let an employee go, you should tell your other employees that the person is no longer working at your business. You don’t have to explain anything, and you probably shouldn’t say too much. An angry ex-employee could always threaten a defamation lawsuit.

Be sure to take back company property, reclaim access keys, change computer passwords, and take similar security measures. If the former employee dealt with your customers or clients, tell them that the former employee no longer works at your business, and assign a new point of contact.

If the former employee has personal items at work, you can let them collect the items themselves or assign someone to collect the items for them. Sometimes, you might have to ask another employee/security personnel to escort the former employee off the premises.

Make sure you have the former employee’s contact information and forwarding address. You’ll need to send them their W-2 form at the end of the year.

Usually, there’s no need for you to notify the state or federal government that you’ve let an employee go. But, you’ll need to pay the former employee their final paycheck as soon as possible. The payment deadline depends on your state, but it can be as soon as right away (e.g. In California, you have to pay within 72 hours).

How Long do You Have to Keep the Former Employee’s Personnel File?

You’ll need to retain the employee’s records for a period of time, after you’ve let them go. Exactly how long depends on different laws.

For example, the EEOC only requires you to keep the file for 1 year, the IRS recommends 4 years, and there are some information where you must retain for 5 years. Given how easy and cheap it is to store electronic documents, we recommend you scan the documents and keep the electronic file for at least 5 years.

Don’t forget to formally close the file before you store it away. Make a final entry describing why the employee has been let go.

Inter-Personal Factors to Consider When You Let an Employee Go

It’s typically very difficult to let go of an employee. After all, you’ve worked side-by-side for a while, and you’re often friendly with the person you’re letting go.

Still, sometimes, you do have to let the person go. Whatever the person’s behavior that has led to this point—maybe not showing up for work, maybe repeated mistakes at the job—if you keep letting the person violate your workplace rules without repercussions, this can create morale issues for your other employees.

And, of course, sometimes, you simply over hired or didn’t anticipate a downward turn to your business.

Whatever the reason for letting go of the person or persons, we think you should follow the Golden Rule when you break the news to them: treat others as you would like others treat you.

Be as kind as you can about this. The world is smaller than you think, and what goes around often comes around. Even if you don’t care for the employee as a person, one day, you might need a job from them. Or you might be doing business together. You just never know.

We End with a Personal Note

There are a lot of studies on the devastating mental impact of job loss. A lot of people—especially high achievers who live, eat, and breathe the job—tie their self-worth to the job. Being suddenly without that job can be devastating.

Not only that, losing a job often creates financial stress for the person. You just don’t know the details of the person’s life outside work. They might be dealing with difficult situations. And the impact of losing a job can create a (faster) downward spiral to the person’s mental well-being.

We used to work in a field with a high suicide rate. A lot of it was triggered by losing one’s job. We personally know of one, possibly two, such suicides.

It’s a fact of life that jobs end. For whatever reason, the person leaves or you make them leave. It’s never an easy process. But, in remembrance of our former colleagues who are now gone, we ask you to be as kind as you can.

Interested in starting and running a small business? Here’s the beginning of our step-by-step guide: What to do right after getting that great business idea.

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DISCLAIMER: This article does not constitute legal or accounting advice. Instead, it contains general information. The information gives you the background you’ll need to hit the ground running when you do go get advice from a lawyer or accountant. Only lawyers and accountants properly licensed in your state/country are qualified to give you legal or accounting advice.

Questions? Comments?