Discharging Employees In Today's Economy

Whether terminating an employee simply to cut costs, or because of performance problems or even misconduct, the ability to effectively terminate people is a skill all business managers should have mastered.

The United States is in the midst of its worst business downturn in 70 years. Many businesses have faced necessary straightforward reductions in force (RIFs) and others are taking steps to consolidate operations for greater efficiencies, with RIFs being a necessary by-product. While the legal ins-and-outs of RIFs are a topic for a separate article, not every business reduces costs by wholesale RIFs. Oftentimes (even in times of prosperity), businesses let people go, even if they are one or two, typically highly paid, employees.

Whether terminating an employee simply to cut costs, or because of performance problems or even misconduct, the ability to effectively terminate people is a skill all business managers should have mastered, as miscommunication, misperceptions, revenge and the continuing increase in laws protecting adverse employment actions lead employees to challenge their discharges. An example is the recent Illinois Employee Privacy Act, effective January 1, 2011, which mandates that covered employers do not (1) obtain credit reports of applicants or employees, (2) use a consumer reporting agency to look into an applicant’s or employee’s credit report, and (3) take adverse employment action against an applicant or employee based on his or her credit report. In this regard, Illinois joins a growing number of states who have adopted similar legislation that may well exist or is soon to exist in your state.

Absent an employment agreement limiting grounds for termination, and the myriad of employment statutes protecting employee terminations (e.g., race, age, and other discrimination laws, privacy act laws, etc.), most employees are employed “at-will,” and under the general laws in the United States can be discharged at any time, for any or no reason, and with or without notice. The unexpected, unexplained employment termination is one of the more challenging for employers, as it leads employees to speculate “why me?” and for their emotions and plaintiffs’ lawyers to take control of the event. So, what can employers do to minimize this risk?

Truth & Openness Reduces Risk

While the law does not require an employer to provide a reason for discharge, common sense surely does. So does Risk Management 101. Missteps managers make in the termination process can lead to serious consequences and financial risk for a distributorship, as employers have a lot at stake in handling terminations appropriately. Best practices dictate that an honest and legitimate reason for termination be made known to terminated employees, and that the termination meeting be one witnessed by an independent party, with time provided for a limited but reasonable discussion of the particular termination decision, to ensure the employee understand the company’s decision. The discharge of a highly-paid, senior executive with a spotless record, handled without this type of open and clear communication, has one client of mine looking down the barrel of an age and discrimination suit. If not settled, this will likely be decided by a jury – a dangerous place to be for employers in this day and age.

Before the point of termination, a good manager should have also laid the proper groundwork. Well-documented performance problems show that an employee was made aware of issues and given time (and presumably ample time) to improve. In cases where costs are involved, statistics to show the costs savings and why one or more employees were selected for discharge not only provides a platform for open communication, but also evidence to fend off any subsequent challenge. The last place an employer wants to be, from a legal standpoint, is a “he said, she said” scenario as to the reasons for an employee’s discharge. In addition, the employer could face a court date, or worse, a trial.

Communication Is King

Employees need to know what is expected of them when they are hired. They also need to be advised if they are not meeting expectations. Employment terminations do not typically happen “on the spot” (even those driven solely by cost savings), but rather the underlying events built over time. Direct and clear communications on these fronts not only helps employees understand what is expected of them or how their role fits within the current economic environment in which the business operates, but they can also shield employers from potential claims and litigation.

When the decision to terminate is made, schedule a face-to-face meeting with the employee. Managers should be firm. This is not a debate and there should not be significant back and forth discussion as to the propriety of the decision – but clarity can be healthy if it is required for the discharged employee. It is important to treat the discharged employee with respect throughout the entire process. An employee who feels respected is less likely to want to turn a termination into a legal dispute. Documentation and a witness can help soften the blow, as can a severance package (particularly for non-misconduct terminations). Of course, any severance package needs to comply with applicable law (like the Old Workers Benefit Protection Act waiver requirements) and will contain a release of liability in favor of the employer.

What Is Left?

While some people thrive on confrontation (especially in my profession), most of us do not. We hope that all of our meetings are pleasant experiences. Why bring up something negative? Dignity and respect can go a long way when the message delivered in a meeting is unpleasant and potentially negative (e.g., “your performance is just not cutting it anymore or our budget just doesn’t allow for us to have four people in the accounting department – we need to consolidate, reduce costs and increase efficiencies.”). The better course of action, from a legal and managerial standpoint, is not to leave the rationale for an adverse employment decision up to the listener. While litigation is not inevitable if an employment termination is not handled as suggested in this article, these steps can significantly reduce the risks of potential litigation. When in doubt, you may be well-served by consulting with outside counsel that is familiar with the employment and labor laws in your state.

Fred Mendelsohn is a partner in the law firm of Burke, Warren, MacKay & Serritella, P. C. in Chicago. If you would like more information on labor and employment law issues, or the topic of this article, please contact Fred at 312/840-7004 or fmendelsohn@burkelaw.com..