Terminating an employee can be a very difficult decision, and one that may seem fraught with potential liability, stress and uncertainty. Small business owners are particularly vulnerable to unforeseen liabilities when terminating an employee. But the key to reducing uncertainty and liability is to plan for a termination at all stages of the employment relationship.
Taking the following three steps can mean the difference between a relatively straightforward termination with fixed and manageable costs, and one with significant liability and the stress of a potential lawsuit.
Hiring – The Importance of Employment Contracts
Many small business owners don’t see the need for a formal written employment contract, but not having one can create problems if it becomes necessary to terminate an employee in the future.
Employees who are terminated are entitled to what is called “reasonable notice” (unless employment is terminated for “just cause”, meaning serious misconduct). The failure to have a written employment contract that clearly sets out the length of reasonable notice can drastically increase the amount of working notice or paid wages in lieu, from a maximum of 8 weeks to several months and even up to 24 months for long-term employees.
A well-written and enforceable written employment contract has a broad range of benefits. Most notably, it provides certainty to all parties in regards to how much notice (or pay in lieu) an employee is entitled to when the employment relationship comes to an end.
During Employment – Beware of Changing Terms
Some employers may not know that it is possible to inadvertently terminate an employee. A small business owner facing financial hardship decides to cut employee wages by 20 per cent to prevent layoffs. Another small business owner in the same situation decides to lay off employees for several weeks. Both may be shocked to discover that these employees could resign and sue for wrongful dismissal.
When employers make a unilateral change to a key term of their employees’ employment, the employee can resign but claim they had been terminated in what is called “constructive dismissal”. A constructively dismissed employee is entitled to the same reasonable notice as any other terminated employee, which is another reason an employment contract is essential.
Fundamental terms of employment can include bonuses, benefits, hours and level of responsibility. Employers should seek advice from an employment law specialist prior to making any unilateral changes to what would be considered a key term of an employee’s employment.
Terminating Employment – Keep It Simple, But Human
Many employers unnecessarily increase the possibility of a lawsuit for wrongful termination by mishandling the communication and implementation of the termination. Employees who feel mistreated during this process may be more likely to sue. While a termination can be an uncomfortable and difficult experience for the bearer of bad news, there are some practical tips that can help.
Take a moment to prepare for the meeting. Rehearse what you want to say. Put yourself in the employee’s position. Ensure that you schedule sufficient time to sit down with the person. Understand that the employee may be shocked and have questions. Have a short answer to respond to the inevitable “Why?”, as a “for cause” termination may require more details. A bit of compassion can take away the sting, so let them know that you understand how difficult this is for them by providing information on next steps in writing.
Some employers may think that the best way to avoid financial liability is to terminate an employee for just cause. In such cases, employees are not entitled to any notice or pay in lieu. Keep in mind, however, that the legal standard for just cause is a very high one. An employer may face increased liability where an allegation of just cause does not withstand scrutiny.
By taking these three steps, and by seeking expert legal advice when needed, small business owners can feel more confident that they have protected their business should they need to terminate an employee.
This article is not intended to provide legal advice or act as a comprehensive guide to an employer’s legal duties and liabilities with respect to employee terminations. An employer who has questions about employment contracts and terminations is strongly advised to seek legal advice from an employment law specialist.
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Written in Conjunction with Contributing Editor, Matthew Larsen.