It’s an unwelcome responsibility, but almost every business owner and manager will eventually come face-to-face with the disagreeable task of terminating one or more employees. “Firing people is one of the toughest, most unpleasant things you do as an employer,” says James Walsh in his book Rightful Termination (Merritt Publishing 2006). “Your stomach tightens and your throat gets dry as you prepare to call someone in for the meeting that begins, ‘There’s no easy way for me to do this ….’”

Fiscal reality sometimes makes layoffs unavoidable. When your payroll costs climb to unacceptable levels, or when an employee’s performance is unacceptable, it’s best to take appropriate action sooner rather than later.

“Many owners and managers delay layoffs out of concern for their employees,” says Kerim Fidel, general counsel for SOI, Charlotte, N.C., a professional employer organization. “This may result in deferring layoffs beyond an economically rational point.”

“Some of our clients facing the troubling possibility of employee layoffs have sought our advice and guidance in how to navigate a workforce reduction while avoiding potential legal pitfalls,” says Sandra Dickerson, president of Your People Professionals, Santa Maria, Calif. “Each situation is unique, but if the employer follows some basic steps, many problems can be avoided.

“First, carefully consider whether there might be viable alternatives to a layoff. Perhaps you can find other cost-cutting measures that will let you preserve your major investment in your employees. Consider the long-term costs of replacing your talent investment when the economy picks up and satisfactory workers are again in short supply.”

Costs and cost cutting

“While layoffs are seen as a cost-cutting measure, there are significant costs associated with them,” Fidel says. “These include potential increases in unemployment contribution rates, severance pay and exposure to layoff-related legal action. Soft costs include loss of confidence among customers and remaining employees, and forcing talented employees to find work elsewhere, possibly with your competitors.”

Still, there are times when layoffs are the only practical choice. “When that happens,” says Dickerson, “you must follow the most objective and uniform selection criteria possible. Be careful to ensure the layoffs will not have a disproportionate effect on employees in a protected class. Protected classes include minorities, women, older workers and the disabled.”

Dickerson also cautions against using layoffs as an opportunity to eliminate difficult or disliked employees. “That’s the wrong approach if you want to avoid legal challenges,” she says. “Remember, unlike a termination for cause, a layoff is the elimination of a position, not a particular employee. Focus on the skills you will need to keep your business viable and be sure to document the criteria you use to decide who stays and who goes. The size of your business may also subject you to legal notice requirements. Before you make layoff announcements, seek professional advice if you have more than a few employees.

“Lastly, be sensitive and make every effort to protect employee privacy and dignity throughout the layoff process. Be prepared to address the increased stress levels of your remaining employees who may be assuming added responsibilities and facing their own uncertainties about what the future holds.”

Today, with the increasing risk of costly legal complications when discharging an employee, even for purely business reasons, it’s important to be aware of the legal pitfalls surrounding that task.

What’s legal?

Every year, thousands of employers, from the largest to the smallest, are being hauled into court by former employees claiming that they were fired illegally—and many of them are winning substantial judgements.
“It costs nothing for an employee to file a charge with the U.S. Equal Employment Opportunity Commission or state fair employment practices agency,” cautions attorney James P. McElligott Jr., McGuireWoods, LLP, Richmond, Va. “State and federal agencies can investigate employers for retaliation charges based on OSHA [Occupational Safety and Health Administration], wage and hour, environmental, FMLA [Family and Medical Leave Act] or other violations. In addition to the expense of legal fees, employers often must spend hours trying to reconstruct and justify their actions. Moral: do it right the first time.”

Be especially sensitive to the risk of lawsuits based on some form of discrimination. “Every employee has a race, a gender, a religion,” says attorney Beth Schroeder, Silver & Freedman, Los Angeles, Calif. “So every employee, even new and probationary ones, falls into at least one so-called protected class.”

To help avoid the nightmare of a wrongful termination lawsuit:

Keep lines of communication open. Many wrongful termination lawsuits have their roots in a misunderstanding on the part of the employee. “Many employers are under the impression that the less communicated to an employee about the termination, the better. My 18 years of experience in both counseling employers and defending lawsuits suggests otherwise,” says attorney Schroeder. “The more an employee understands about where he or she stands and the reason for the employer’s actions, the less angry, frustrated and suspicious that employee is likely to become. It’s that anger, frustration and suspicion that drives terminated employees to attorneys.”

Layoffs due solely to poor business conditions aren’t likely to be the cause of legal problems. However, it’s critically important that the employee be made aware that the separation was not due to his or her job performance.

Put it in writing. Careful documentation is an essential part of every employee termination, especially a termination for cause. Incidents or behavior leading up to termination for a reason should be recorded at the time of the incident, or as soon afterwards as possible. The documents should be respectful of the employee, but detailed, listing events or issues in a logical or chronological order.

“At the very least, you should put the reason for the termination in writing,” says Schroeder. “The employee is likely to be emotional and upset and may not hear what you said in the termination interview. If the terminated employee goes to a lawyer, the lawyer will hear the story in the employee’s words and will decide whether to take the case based on the employee’s description.

In that case, the attorney may not hear your side of the story until after a lawsuit has been filed.”

Be careful of “constructive” discharges. The courts sometimes rule that an employee was indirectly fired, known legally as a constructive discharge. This can happen if the employer creates a hostile or abusive work environment, places unreasonable demands on the employee or issues a “quit or be fired” ultimatum. If a constructive discharge is ruled, the employer’s responsibilities will be the same as for a direct firing.

Conduct regular employee evaluations. Under the law, your employees are entitled to be kept informed of how well they are meeting your expectations. It’s easy to overlook this step until a terminated employee files a lawsuit that claims you made no attempt to inform him or her of your dissatisfaction. Your evaluations needn’t be elaborate or follow any specific format, but it’s best to put them in writing, even if it’s only a short paragraph or two.

Attorney McElligott advises, “Always be consistent in evaluating and disciplining your employees, and be sure to review previous evaluations and disciplinary actions if any have taken place.” Many human resources professionals recommend that you allow employees to review their written evaluations. Then, ask them to initial the document. If the employee declines, indicate that on the record.

Deal promptly with performance problems. Many managers find reasons to delay firing a problem employee, perhaps thinking that his or her performance might improve, or that living with the problem might be the lesser of two evils. But if you’ve followed the above guidelines and are confident that a termination is justified, delaying the action is probably not in your best interest.

“Not firing a problem worker is often the worst thing you can do,” says author Walsh. “It keeps the problem worker around to create more trouble, making a bad situation worse. That’s not fair to you or to your other employees.” McElligott goes further: “Don’t procrastinate or wait for the next evaluation,” he says. “Do it now!”

Employee layoffs, even those that are the direct result of poor business conditions, hold the potential for both legal and morale problems. Following these ground rules will help to lessen the chances for costly complications.

William J. Lynott writes on business-related topics.