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And Now, The End Is Near — It’s a Business Owner’s Least-Favorite Task: Firing an Employee

When Ed Stern started his advertising business, Stern Agency, in 1991, he was the sole employee. Within 18 months he’d hired four more people; today his staff totals 12. But along the way Stern has also had to fire his share of employees. "It’s not something I like to do," says Stern, echoing the sentiments of the majority of employers. "In a couple of cases they couldn’t do the job; in the others there was a personality clash or an inability to work as part of a team."

Firing an employee is more than unpleasant: It can also be a legally dicey proposition. As a small-business owner, you want to make sure you’re on top of the situation at every step of the way.

Stern, for example, talked to the employees in question to let them know there were problems — giving them plenty of time to shape up. "I always mixed it with positive feedback," says Stern. "It was never a question of ‘You’ve got three months to fix this.’" When the problems continued and he had no choice but to let them go, Stern made a point of easing the exit, offering the individuals a chance to resign and the promise of a good reference — often asking them, What’s going to work best for you?

"In one case," says Stern, "Someone requested two or three month’s additional time so she could build up her portfolio." Stern agreed, and that exit went smoothly.

In another case, however, when Stern offered an employee the chance to resign, the woman became defensive. "She insisted she’d done a good job and was being treated unfairly," he recalls. "Then she said she was going to talk to an attorney." The conversation ended abruptly. "I told her she had a right to do that, then went and called my own attorney for advice." Two days later, however, the employee telephoned, asking if the original offer still stood. It did, and there was no more talk of attorneys or lawsuits. Other small-business owners haven’t been so lucky.


"In the past, small businesses experienced very little litigation because most employees went after large employers with deep pockets," says Phil Barquer, president of HR Alternatives, Inc., a consulting company in Irvine, California, that handles human-relations issues for small- and mid-sized employers. "But now the individual has become very astute about how to make a quick buck and the small employer is no longer immune."

While Fortune 500 companies have the legal and financial resources to defend a case as it drags through the courts, that’s not true of small businesses. "When small employers are sued, they’ll very often settle the claim rather than go to the expense of litigation," says Barquer. "They couldn’t survive a lawsuit. They run their business so close to their operating costs it would be devastating."

A lawsuit doesn’t even have to make it to court to cost the small business owner a bundle, as Wayne Munyer can attest. Munyer is the sole human resource presence at Ventura-Lesbro, a Long Beach, California, transportation company with 90 employees. "There was no basis for the charge from the start," recalls Munyer of the defamation suit brought against the company by a terminated employee, "but we had to hire an attorney and go through all the depositions, etc. At some point, our attorney contacted the plaintiff’s attorney, told him he didn’t have a case, and threatened to seek reimbursement for our costs." The lawsuit was dropped the day before the hearing. In this instance, the plaintiff wasn’t particularly astute, and the case never went to trial; nevertheless, says Munyer, "It cost us approximately $20,000 just to hire an attorney and go through all the preliminaries."

Even when cases do make it to court, the outcome may have no bearing on the worthiness of the charges. "By and large, jurors tend to identify with employees," says Fred Steingold, an Ann Arbor, Michigan small-business attorney. Steingold is author of The Employer’s Legal Handbook (Nolo Press, 1997), and his column, "The Legal Advisor," appears in more than 30 trade publications. "We like to think they listen to the facts, but even if an employee’s legal grounds aren’t totally secure, the jury will still try to find some way to side with the individual. That’s why small-business employers are nervous, and it’s one of the areas where they have to be more careful." How can you avoid a lawsuit when you fire an employee? It all starts with smart hiring.


"Entrepreneurs have great ideas, but they typically don’t like structure. That may be great for the entrepreneur, but it’s not so great from an employment-law angle."
            —Judy Geller, President of J.B. Consulting, Inc.

If you’re like most entrepreneurs, you’re too busy growing your business to pay much attention to the finer points of federal and state employment laws, which are confusing and often contradictory (See "Which Law Applies to You?" sidebar).

You probably know enough not to advertise for a young man to help load trucks or an attractive young woman to work the front office. And you’re almost certainly aware of the laws forbidding discrimination on the basis of race, religion, gender, age, or national origin. But an employee handbook? Job descriptions? Who has time?

Put It In Writing …

Creating an employee handbook does not have to be a big deal; in fact, Steingold recommends that someone with just a handful of employees keep it short and sweet.

Your handbook should describe the terms and conditions of employment, including working hours, vacation and sick leave, health and pension benefits, and disciplinary and termination procedures, including circumstances that warrant instant dismissal. That outline, no matter how simple, says Steingold, is proof that you’ve adopted fair and uniform policies for all employees, and could be invaluable in the event of future disputes. You can get boilerplate handbooks that can be easily adapted to your particular needs from a variety of sources, but be sure to have a labor attorney check out the finished product to make sure you’ve covered all the bases. Then have each employee sign to acknowledge receipt of his or her copy.

… but be careful what you promise.

Unless there’s a written contract stating otherwise, such as a union contract, all employment is "at will," which means it can be terminated at any time by either the employer or the employee (Montana is the sole exception to this law). That sounds simple, but it’s not. Ignore federal and state laws against illegal firing and you’re asking for trouble.

Moreover, an at-will rule can be invalidated by a seemingly well-intentioned remark, warns attorney John True, who handles employees lawsuits for Rudy, Exelrod, Zeiff and True in San Francisco. "At-will is only a presumption, not an ironclad rule," says True. "It’s not at-will if the employer make promises."

Promises don’t have to be in writing, and even remarks made without witnesses may assume legal status. "Employers make promises in an effort to hire someone or keep them happy once they’re hired." says True. "They may tell an employee, ‘I like what you’re doing; you’ll always have a job here.’ Then something happen
s, they break that promise, and they get hit with a breach-of-contract suit."

Steingold recommends that small-business owners protect themselves against such lawsuits by including in the employee handbook a written at-will employment policy that not only defines the policy, but warns that written or verbal statements to the contrary by the company’s officers or managers are not legally binding.

Job Descriptions

Trust us: It may sound like a lot of work, but well-thought-out job descriptions will not only help you hire the right person, but will provide a ready frame of reference when it’s time to do performance reviews — and performance reviews can be critical.

Again, it doesn’t have to be a big deal, but you’ll want to define the basic responsibilities of the job, the secondary duties, and the experience, skills, and educational level required to do them.

Hiring Help: The First Legal Pitfalls

Don’t even think about asking an applicant questions involving his or her age, marital status, pregnancy plans, religious affiliation, health status, or national origin. You’ll run afoul of federal anti-discrimination laws — and maybe some state and local ones — and could end up being sued regardless of whether you hire the person or not.

It is legal to ask applicants if they’ve ever been convicted of a crime, or if there’s an outstanding felony charge against them, but you can’t ask if they’ve ever been arrested.

Does the job description require that your employee handle money or have responsibility for a budget? The Fair Credit Reporting Act permits you to check an applicant’s credit record, but you have to have a good business reason to do so. Even if there is one, Steingold recommends you have the applicant give written permission, just to be on the safe side.

What about so-called aptitude tests or drug screening? Watch out: Not only could you be in conflict with privacy laws, but some aptitude tests reflect only an applicant’s ability to take tests and, as a result, could be perceived as discriminating against certain groups.

Legal issues aside, "The biggest mistake small-business owners make is hiring a friend," says Barquer. "It doesn’t mean they’ve got a competent employee, it just means they’ve got a friend. So they hire this person, find out they’re not competent, and don’t want to deal with it. Eventually, they get to the point where the problem has caused so much damage that they start to dislike the person. Then they deal with it."


"It’s a big mistake not to give employees advance notice that there’s a problem, and that they’ll be fired if they don’t shape up. They’re taken by surprise and feel they weren’t given a fair chance to improve — and juries are sympathetic."

—Fred Steingold, Attorney

Friend or no, most employers hate to tell an employee they need to shape up.

"It’s human nature to avoid difficult situations," says Judith Geller, of J.B. Geller Consulting, Inc., in West Dennis, Massachusetts; Geller recommends that employers conduct performance reviews every six months at least. "In a large corporation, you have a structure that guides people, that says, This is what you do and when you do it. So you can go to an employee and tell them, ‘This is what they tell me I have to do.’ But because entrepreneurs tend to have no structure and strategy — or if they do, it’s all in their head — they let things go and often don’t confront an issue until it blows up in their face."

One way to avoid having to tell an employee to shape up is to let them know what’s expected of them right at the start. "You can’t expect people to know what they’re supposed to do if you don’t tell them, so employers need to do the initial training and coaching," says Geller.

Unfortunately, entrepreneurs don’t have a lot of time. "They relinquish the training and then the employee bombs," says Geller. Without regular reviews, it’s impossible for small-business owners to prove they’ve been consistent in handling a problem. Says Geller, "They can’t remember what they said two years ago."

Employee reviews should be based on subjective expectations and include anecdotal examples whenever possible. They don’t have to be formal, and they don’t have to be merely a recital of problems; this is also the time to tell someone how well they’re doing. Steingold suggests busy owners keep a short note of what was said to an employee and when. In the event a fired employee goes to court with a complaint, says Steingold, "It’s a whole different ballgame if there have been regular evaluations that prove the employer has treated the employee fairly."

If performance doesn’t improve, you can change the job, accept the lower performance, or release the employee.


"The fastest-growing cause of employee lawsuits is wrongful discharge, which isn’t as straightforward as harassment or discrimination claims. More and more people are fighting back simply because they feel they’ve been treated unfairly."

—Barbara Kate Repa, Attorney

"Most terminations involve performance and revolve around two criteria: technical skills and behavioral attributes," says HR Alternatives’ Barquer. "Most people aren’t terminated for lack of skills, because many employers can provide technical training. But when you terminate someone because of their inability to get along with others, you have to be prudent — because there’s a very good likelihood you’ll have to explain it to a third party."

"If the owner’s attitude is, ‘Hey, I’m the boss; I don’t like you and you gotta go,’ it’s a recipe for disaster," warns Steingold. Ideally, he suggests, "Tell the employee you’d like to work things out in a civilized way. Try to negotiate so the person isn’t abruptly told that all income and benefits are going to be suddenly cut off. If possible, give the employee a couple of months to find another job, or offer a severance package, or maybe pay for, say, medical coverage for a period of time." In return, says Steingold, have the employee sign an agreement saying that he or she has no claim against the company.

Gearing Up For A Firing

If you’re planning to fire an employee, take a couple of steps in advance:

  • If you’ve never fired anyone before and are apprehensive about the process, you may want to arrange a half-hour conference with a labor attorney to make sure you’ve covered all the bases.
  • Review the employee handbook to make sure you’ve taken all the necessary steps with regard to prior warnings.
  • Prepare any relevant documents in advance, including a letter notifying the employee of the termination and, if appropriate, a letter of resignation, confirmation of any severance benefits, and, if those benefits are accepted, a letter to be signed by the employee releasing you and your company from any future liability.
  • Prepare checks for any money due the employee: severance pay, salary, vacation earnings, etc.
  • Write an informal "script" to help you stay focused during the termination meeting.

The Termination Meeting

Conventional wisdom has it that the "best" time to fire someone is early in the day so that all parties can presumably then get on with other, more positive, activities. Truth is, there’s probably no ideal time to fire anyone.

You’ll want to keep the termination meeting brief: say, 15 minutes or so. If you can, invite a third party, perhaps the employee
‘s manager, as an observer, and try to hold the meeting in a place where others won’t be aware of what’s happening. Review the steps leading to the termination (this is where those regular performance reviews come in) and describe any severance benefits the company may be offering. Give the employee a chance to respond, but avoid getting into an argument about the merits of the case.

"Employers need to think about what’s humane," says Barbara Kate Repa, attorney and author of Avoid Employee Lawsuits (Nolo Press; 1998). "Very often, an employer will fire someone, then immediately call a security guard to escort that person off the premises. In some instances that’s called for, but just the inference of an armed guard escorting someone out of the building in front of co-workers and clients could be construed as unreasonably hard and inhumane." Employers need to consider that option carefully, she says, since courts have consistently ruled that employers must tie such actions to a specific business need.

Entrepreneurs busy building a business may be tempted to put employee-relations issues on the back burner, but the more people they employ the riskier that gets. Both Geller and Barquer report that small-business owners generally start looking for professional human resources help — either by outsourcing it through consultants like themselves or by hiring an in-house HR manager — once they exceed 15 employees. "It starts to hit home with 10 employees," says Barquer. "At about 20 they realize they need a human resources infrastructure."

A consultant also knows when to refer a client to a labor attorney. "Small-business owners must have an attorney or a CPA to help them develop and run the corporation," says Barquer. "But they don’t have to have a labor attorney." Too often, he says, small-business owners call on their regular attorney when an employee problem comes up. "By the time they figure out they need the expertise of a labor attorney, the situation has blown out of control."

It’s a situation that no small business can afford to face; that’s why, in the realm of labor laws and employee relations, an ounce of protection is worth a pound of cure.

Writer: Annette Winter

All rights reserved. The text of this publication, or any part thereof, may not be reproduced in any manner whatsoever without written permission from the publisher. This article first appeared in Entrepreneurial Edge — Volume 4 — 1998.