Liability from Downsizing | Employee Suing After Termination

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When Your New Year’s Resolutions Entail Letting Go of an Employee

January 11, 2011

For many businesses however, the last days of 2010 signaled the closing of the fiscal year, along with the annual performance assessment of their employees. So it’s not uncommon to start the new year with new resolve to either downsize or let go of less productive employees. If hiring the right person is never easy, it’s still a breeze compared to having to terminate an employee.

Fair employment practices are governed by federal, state, and local laws. Thus, a proper employment agreement must factor in many legal and statutory considerations so that termination does not open up the floodgates to private lawsuits for wrongful dismissal. Employee contracts also minimize the risk of discrimination claims that might be brought by the many government agencies governing employer/employee relations. (See the US Department of Labor and the Washington State Department of Labor & Industries websites to learn more about government agencies charged with protecting and enforcing workplace rights.)

In Washington State, as in most US jurisdictions, the basic principle is that employment is “at will” (unless the parties agreed to a specific term, e.g. one year). This means in essence that both employer and employee may terminate the employment at any time without any reason, cause, or even notice. However, an employer cannot discriminate in exercising its rights to terminate, subject to some exemptions for small businesses, as discussed below.  In reality, when an employer intends to terminate an employee for lack of performance or any other reason, it’s strongly recommended to prepare accordingly by thoroughly documenting the causes for termination and the process followed. As always, companies can minimize the downstream risk of litigation by a combination of careful contracting and best practices. 

Clear contracts. Both the job offer and the employment contract should explicitly state that the employment is "at will and that either party is free to terminate the employment without cause or notice." The employment contract should also contain other basic terms of employment: salary, vacations, benefits and the like. Benefits not yet in existence should not be referenced in the contract, or, at the very least, be conditioned upon actual implementation (E.g. “Employee shall be entitled to benefit from Company’s health benefit plan after 90 days of continued service, subject to the availability of such a plan at any given period”…)

Best practices. Employee agreements should always set forth clear performance goals. Where feasible, objective metrics, such as weekly or monthly assessments against performance goals, are a great way to document an employee’s performance or lack thereof. Clear and well-communicated policies, such as employee handbooks and company policy memos, demonstrate an employer’s good faith efforts to inform employees about how to succeed in their jobs. However, when things just aren't working with an employee, several options are available to the employer, based on the particular situation as well as how the employee is likely to react:

  • Friday afternoon termination with immediate effect. The element of surprise is the main advantage of this option. It reduces the risk that a disgruntled employee will do or say things she might later regret or that disrupt other employees. It also acts as a preemptive strike by avoiding for instance that as an employee who sees the writing on the wall might suddenly go on sick leave or suddenly "declare" a handicap in bad faith. On the downside, this method could damage company morale if the employer is perceived as disrespectful, arbitrary or paranoid.
  • Termination with notice in lieu of severance. Very similar to a layoff, this approach is typically caused by a need to downsize or eliminate positions, rather than a lack of individual performance, although it could be either. It can feel more respectful to employees and makes for better transition. However, there’s always the risk of creating bad blood if the person lingers too long. In a worst case scenario, a disgruntled employee might misappropriate trade secrets or other confidential information before termination. See the October issue of POINTERS for an in-depth discussion of trade secrets.
  • Termination with immediate effect, with severance. Although not required, an employee severance generally allows the employer to demand that the employee sign a full separation agreement and release of all claims in exchange for a severance package.  As with termination with immediate effect, this approach buys an element of certainty that there will be no subsequent claims of wrongful dismissal or discrimination. On the other hand, severance is an additional expense for a company that is not required by law. Furthermore, it could embolden an employee to be more aggressive and demand more than what is being offered in good faith.

Exceptions for small businesses - Discrimination. It goes without saying that a discrimination charge can lead to a costly and time-consuming lawsuit, not to mention negative press.  However, in a small business setting, company morale and personality fit are especially important, and entirely subjective. Accordingly, most Washington anti-discrimination laws (with the exception of gender-based wage discrimination) do not apply to employers with seven or fewer employees, and they do not cover religious or sectarian non-profit employers in general. Note that Washington’s anti-discrimination protection goes beyond the Federal Equal Employment Opportunity laws (including Title VII of the Civil Rights Act of 1964), which covers employers with 15 or more employees.

Unemployment insurance considerations. Reasons for termination may impact an employer’s unemployment insurance premiums. The more ex-employees are eligible for unemployment, the more expensive the premiums will be for the employer, although those costs are not linear. In order to be eligible for unemployment in Washington, the requirements are simple: employees must have worked 680 hours in the previous year and earned wages in Washington, and they must be physically able, available, and actively seeking a job. Employees who were laid off for lack of work are usually eligible for unemployment. Eligibility is subject to agency determination where an employee voluntarily quits his job, was fired, suspended or placed on a leave of absence. In order for a terminated employee to be denied coverage, a showing of "good cause" (such as theft, embezzlement and the like) is often required. An employer must be prepared to show evidence of employee misconduct – not just an error in judgment, a one-time mistake, or simple poor performance.   

Exit interviews. Before the employee walks out of the building for the last time, a wise employer will conduct exit interviews, during which post-employment obligations are reviewed with each employee. During these discussions, the employee is reminded of his continuing legal duties to his former employer, which were hopefully communicated at hiring and formalized in the employee contract. Contract clauses related to non-compete, nondisclosure, non-disparagement and so forth should be brought to attention. Providing a copy of that employee agreement during the exit interview is a best practice. If a separation agreement is to be put in place, it should be tendered during this interview, but the employee should be given the opportunity to retain counsel before signing. 

New Years resolutions can be initially painful:  trimming the fat with a healthy diet, speeding up one’s metabolism with a new exercise regimen, and dusting out the cobwebs. Making a decision – and implementing that decision – to downsize and/or let go less productive employees is similarly painful. However, cleaning house will be much more painful unless well-crafted employee contracts are put in place in the front end, meaningful best practices exercised during the employer/employee relationship, and a careful process is followed at the termination period. Minimize your pain by enlisting the help of an attorney experienced in contracts specific to the needs of companies in the technology sector. If done right, this painful process might even turn into an opportunity for a fresh start for everyone concerned.

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