Termination of Employment Contract: Requirements & Implications

In this post, we will go over the termination of employment contract guidelines for employers. We will look at the various types of employment contracts, termination of employment reasons, and legal requirements for employers. We will also go over checklists and tips for dismissing an employee the right way and avoiding wrongful termination.

Termination of Employment: Firing an Employee the Right Way 

A termination is any conclusion to a contract of employment, voluntary or otherwise. An employee’s rights to notice, pay, and other considerations depend on the terms of their contract of employment. In addition, the policies and procedures in your company also have an influence. The illegal firing of an employee can be costly, so it is important to ensure you are up to date with federal and state laws regulating dismissal from work

Employment contracts are negotiated between the employer and the selected candidate at the point of employment. The three most important things to negotiate in an employment contract are job duties, salary, and details of employment termination. This can sometimes include a severance package and termination notice requirements. Executive employment agreements, for senior members of staff, also tend to include a well-defined resignation notice clause and higher levels of severance pay in lieu of notice.

Common reasons for termination of employment contract include:

  • Incompetence, including lack of productivity and/or poor-quality work
  • Attendance or timekeeping issues
  • Insubordination and other conduct issues, including harassment and other discriminatory behavior
  • Theft or other criminal behavior, including violence or aggression

Termination Notice Period and At-Will Employment

The termination notice period is the time between the communication of dismissal or resignation and the end of the last working day. In the UK, the legal minimum notice period (for employer or employee) is one week, providing the employee has been employed for at least one month. Termination without notice is only permitted if there is evidence of gross misconduct.

The employee termination laws in the U.S. are different for notice periods as most contracts are “at-will” and at will employment laws are far less restrictive. At will employment states that both the employer and employee have the right to terminate employment at any time and for any reason. Although this means that no notice period is required by law, most companies tend to follow the two-week rule.

Employment Separation Letter

An employment termination or separation letter is a formal written notice of termination of employment. It is usually communicated further to a termination meeting where the employee is verbally advised of the situation.

To ensure compliance with labor laws, an employment separation letter should include the following information:

  • The reason for the dismissal
  • The termination date
  • Whether the notice period will be worked or paid in lieu
  • Arrangements for payment of unpaid accrued holidays
  • Post-termination restrictions
  • The need to return property and information belonging to the employer
  • The right to appeal against dismissal

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Types of Termination of Employment Contract 

An employment contract is an agreement between employer and employee. These contracts set forth the terms of employment, including salary, position, duties, and hours. An employment contract will also detail any notice requirements and severance clauses if applicable. Contracts can be fixed-term, temporary or permanent.

There are three main types of employment contract that can be terminated by an employer:

  1. At-Will Employment Contract: as we saw above, this is the most common contract type in the United States. An at-will contract means that an employee can resign or be fired at any time and for any legal reason, without notice. At-will employment contracts only exist in the U.S. In the UK, all employment contracts detail the conditions under which an employee can be terminated, and they cannot be terminated without good reason and notice.
  2. Written Employment Contract: A written employment contract sets out specific terms and obligations for both the employer and the employee. In the UK, an employee cannot be terminated unless they violate the terms of their contract.
  3. Oral Employment Contracts: Oral contracts are legally binding. They have the same authority as written contracts. However, a breach of contract is much harder to prove.

Wrongful Discharge Explained 

Wrongful dismissal, also known as wrongful termination, unlawful termination, termination without cause, and wrongful discharge, is a claim of a breach of the terms of an employment contract, or of a statutory provision or rule in employment law.

In the UK, there is a distinction between unfair dismissal, which is a statutory right under the Employment Rights Act 1996, and wrongful discharge, which relies solely on the terms of the employment contract. In order to file a wrongful dismissal claim, the employee must establish that they were dismissed in breach of the employment contract or with less than the statutory minimum notice period. They must also prove that they suffered a loss as a result (i.e. lost wages).

However, in the United States, there is no single “wrongful termination” law. Instead, employees are protected by state and federal labor laws. Also, as most employees are “at-will”, they can be fired any time and for any reason, so long as the reason is not discriminatory, retaliatory or otherwise illegal. In the event of the latter, employees can sue for wrongful termination. This includes wrongful termination at will and wrongful termination during probation.

Wrongful Termination Examples

Common examples of wrongful termination include: 

  • Termination based on race discrimination. Claims can be filed against the Equal Employment Opportunity Commission (EEOC)
  • Termination based on age. Claims can be filed against the Age Discrimination in Employment Act (ADEA) which protects people over 40 years of age from age-based discrimination.
  • Termination based on health reasons that result in FMLA violations. The Federal Family and Medical Leave Act (FMLA) includes the right to return to work and be free from retaliation from taking leave, including dismissal.
  • Termination based on gender, religion, disability, or pregnancy.
  • Workers can also file a complaint with the Equal Employment Opportunity Commission if they are dismissed for being a whistle-blower, or subject to constructive discharge.

Termination Pay & Other Considerations 

Severance or termination pay is often granted to employees upon termination of employment. Although there is no legal requirement enforced by the Fair Labor Standards Act (FLSA), many employers include a severance agreement in the terms of the employment contract, especially in the case of senior employees and directors. This is typically one to two weeks for every year worked but can be more.

Aside from termination pay, employers also need to consider the implications of insurance coverage and pensions plans. Clear policies and procedures need to be created for this purpose so that employees are aware of their rights in the event of contract termination. We’ve included a checklist below so that you are aware of all matters that need to be taken into consideration.

Employee Termination Checklist

Below is a handy checklist to help you cover all bases once you have decided to fire an employee. This will help you avoid wrongful termination claims and lawsuits which can be time-consuming and costly for your company.

Employer obligations when they terminate an employee:

  • Last paycheck: in the U.S. there is no deadline set by Federal law for payment of the final paycheck further to dismissal. In some states, final paychecks must be paid immediately, in others it is paid on the next scheduled payday. Make sure you check the laws in your state.
  • Pensions: if the terminated employee is signed up to a company retirement plan, they must be informed of their rights further to dismissal so that they can contact the plan administrator to discuss options. This includes 401ks and private retirement plans.
  • Insurance: federal law dictates that employers must talk with terminated employees to discuss the possibility of continuing health, life, and disability insurance coverage for a period of time if needed. The Consolidated Omnibus Budget Reconciliation Act (COBRA) allows for the temporary continuation of health insurance policies held with previous employers for up to 18 months, although it can be costly. Terminated employees may also be eligible to sign up for a plan on the Affordable Care Act (Obamacare) system.
  • Tax forms: ensure copies of all relevant tax forms are provided to the terminated employee. This includes a P45 in the UK, and pink slips and W2 at the end of the financial year in the US.
  • Unemployment benefits: depending on the reason for termination, a terminated employee may be eligible for unemployment benefits against your company’s unemployment insurance. If you believe the terminated employee is not entitled to benefits you have the right to defend against their claim.
  • Medical leave: if an employee is terminated directly after returning to work after medical leave, there may be implications relating to the provisions of the Family Medical Leave Act (FMLA). Ensure terminations are conducted in line with FMLA regulations.
  • Company property: finally, upon termination of employment contract, companies must restrict access to internal systems and platforms. Make sure that all terminated employees return company property, including ID badges, laptops and company phones.

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Written by Cat Symonds

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