When you run a small business, you rely on your employees to maintain operations. If a worker fails to do their duty and your business suffers as a result, you may have to fire them. While it's an unpleasant thought, it's a simple reality of the business world. Taking the step to terminate a poor performer is critical to safeguarding your entrepreneurial venture.

Before you cut the cord, there are important legal and contractual implications to consider. Everything from why you fire someone to when and how matters. You don't want to risk breaking any federal or state laws regarding employee rights. A lawsuit can be time-consuming, costly, and stressful — plus, it can contribute to a bad business reputation.

Never fired someone before? Don't worry. The below guide explains some of the legal and contractual considerations you must take before firing someone, and provides a step-by-step guide to how to fire an employee while minimizing legal risks.

Legal and Contractual Considerations When Firing Someone

When you're running a business, it's logical that if an employee isn't meeting expectations, you'll fire them. However, there are many state and federal laws protecting workers' rights in the United States. You need to make sure you act in accordance with these before you issue any kind of termination notice, written or verbal. There are two points to consider: legal and contractual.

Legal Considerations

Many small business owners assume that if they have hired a worker on an "at will" basis, they can let them go without a second thought. In an "at will" arrangement, the employer can fire the employee without reason, at any time. Conversely, the employee can leave at any time without providing an excuse. However, certain employment laws can impede an at-will employees' firing.

U.S. law bars you from firing anyone on the basis of their national origin, race, physical disability, sexual orientation, gender, religion, physical disability, or other protected characteristic . The U.S. Equal Employment Opportunity Commission, EEOC, provides a full list of protections according to employment discrimination law.

While this seems obvious and you would of course never consciously do this, it's important to recognize the risk of so-called "retaliation lawsuits." If a worker isn't happy with how you let them go, they may claim that they were discriminated against. Thus, you need to cover all your bases to ensure you are demonstrably firing someone for an acceptable reason, such as documented under-performance or consistent tardiness jeopardizing client relationships.

Discrimination law is just one legal aspect that can complicate an at-will firing. There is also public policy to consider. For example, if the courts order you to garnish an employee's wages to help pay for back taxes they owe the Internal Revenue Service, you can't then fire them just because you don't feel like dealing with the paperwork.

Finally, even if you've technically hired someone on an at-will basis, if you take steps to imply a more formal employee contract — such as telling them you'll fire them only for "just cause" — you can be held to that implied contract. If you then try to fire them without just cause, you can be found in breach of this implicit contract agreement.

Contractual Considerations

Whenever you have a formal employment contract with an employee, you must respect the conditions of that document. For example, say the contract stipulates that the employee may only be terminated for just cause and via a unanimous vote from your company's board. If you violate those conditions, you can be found in breach of contract and accused of wrongful termination.

Union employees are subject to their union CBA, collective bargaining agreement. If the employee is a union member, there are also terms and conditions relevant to the union to consider. This usually lays out details like under what conditions a union member can be fired as well as procedural details for legal firing.

How to Fire an Employee Legally: A Step-by-Step Guide

Employee termination is never easy. Advanced preparation will help ease the process. Follow these steps for a streamlined layoff when you fire employees.

Consider the Legal Implications

Take a moment to review the legal and contractual considerations described above. Do they impact your termination decision? Be especially careful with protected class workers, such as individuals with disabilities. If you aren't confident in the termination process, consult a law firm for legal counsel before proceeding.

Review Your Human Resources (HR) Policies

Review your company policy and employee handbooks to confirm the conditions under which you are allowed to fire someone. For example, even if you have an employment at will situation, if the individual received a handbook declaring that they can be fired only for just cause and with one month's notice, you must abide by this.

Check the Employee's Contract and HR File

Further, check the employee's specific contract. Again, if there are any details here regarding firing employees, you have to abide by them. Also take the time to go through the employee's HR file. You want to ensure there is sufficient proof of poor job performance (e.g., negative performance reviews from the past) to warrant a termination in the eyes of the law.

In general, aim to institute a progressive discipline policy in your workplace. With this approach, you provide documented warnings to employees to address behavior or performance problems. Start with a verbal warning followed by a second warning in writing and then a third and final written warning. The employee may then be subject to a termination review. Having proof of this progressive disciplinary action process in the worker's HR file will help justify their firing.

Write a Formal Termination Letter

Before scheduling an employee termination meeting, write a formal termination letter. For legal reasons, it's best to issue a termination in writing and not just verbally. In case of a lawsuit, you will have a paper trail. The termination letter should define the reasons for termination, provide an overview of any company property that is to be returned, and specify the end-date of employment.

Again, if you are hesitant about the termination in any way, have an attorney review this document. You will issue the letter to the employee in a formal termination meeting. You should also provide them with a digital copy after the meeting (e.g., via their company email). Again, this is about documenting the firing for your own legal protection.

Tell the Employee in Person

Finally, you can schedule your termination meeting. Make sure to bring a copy of the termination letter, unemployment information, benefits details, and any severance agreement. There may also be state-mandated paperwork (e.g., in relation to health insurance). Check with an attorney familiar with your state's laws to be sure.

When breaking the news, make sure you are in a quiet setting with no interruptions. Be factual and to-the-point. Avoid elaborating. Generally, the less you say, the better. It's best to keep the discussion as brief as possible. The employee will likely also be glad to keep it short once they realize the point of the meeting.

Wrap Up HR Offboarding

Your termination meeting doesn't conclude the firing process. You still have to manage offboarding. Does the terminated employee have keys, access codes, equipment, technology, uniforms, or other company property to return? Will they be eligible for unemployment benefits? Do you plan to issue severance pay?

There is also the question of the final paycheck as well as winding down company-sponsored health insurance, retirement plans, etc. It's important to take care of all relevant paperwork and to maintain documentation of this in the ex-employee's personnel file. In case of future legal issues, it's critical to have a complete HR file on hand.

Track Employee-Related Financials With Skynova

When letting an employee go, it's important to retain a comprehensive overview of all payments and benefits paid to them. This may be required for various purposes, from social security to tax filing. Skynova's accounting software can help you track your business expenses, ensuring you always have clear oversight of your business's financial situation. Find out more.

Notice to the Reader

The content within this article is meant as general guidance only. Always consult a lawyer with knowledge of the relevant state and federal employment laws before terminating any employee. Further, when adopting new accounting software, consult a certified accounting professional to ensure you are adhering to relevant regulations and maintaining accounting best practices.