Downsizing and Firing Employees in California

WilmerHale Attorney Julie Murphy Clinton is a co-author.

Most companies will eventually face the unpleasant task of terminating an employee or group of employees. When they do, it’s critical that they follow best practices and comply with applicable laws for many reasons, ranging from maintaining employee morale to minimizing legal risk. As a founder, here are some of the steps you should take when faced with a potential employee termination.

Identify the Reason for the Termination

The reason behind either an individual or group termination may determine much of the strategy and analysis behind how you implement it. You need to understand the business considerations driving the decision, and think about how you will present the decision to the employee(s) affected and to the rest of the company.

If terminating an individual, consider whether it is due to that person’s poor performance or lack of a particular skill set. If terminating an employee or group of employees for economic or operational reasons, identify whether it is due to cost-cutting measures, a shift in the company’s business focus, a reorganization or something else.

In the case of a group layoff, you need to determine which areas of the company are being targeted and ascertain the business reasons behind such targeting. If there are multiple employees in a particular position and only some are being terminated, identify why those employees are being selected and whether the reasons are employee-specific or company-based. Take care to avoid basing your decision on reasons that might suggest any bias, and consider any relevant company policies and past practices.

Whatever the reason for the termination, don’t give employees false information about it. Telling the truth will prevent employee claims of fraud, misrepresentation or pretext, and is also likely to reduce the impact on morale.

Consider the Legal Risks

Any employee termination has legal risks, and your goal should be to minimize them. To identify legal risks, determine whether any employees selected for termination are in a class protected from discrimination by federal, state or local law. You should also determine whether any affected employee has filed or raised any complaint of discrimination or harassment, made a request for an accommodation, or “blown the whistle” on a company practice—if so, that employee might be protected from retaliation by the company. Finally, consider whether any employee selected for termination has any benefit that is due to vest in the near future. If so, the company might be exposed to legal risk based on denying the employee that benefit.

If an employee selected for termination is at a higher risk of bringing a legal claim against the company, it doesn’t mean that the company can’t let that employee go. It does, however, mean that you should strongly consider whether the company has legitimate, non-discriminatory business reasons to do so.

Determine the Company’s Obligations

Once the company has identified employees for termination, be certain to review any written employment agreements and related documents. Consider whether the employees are employed at-will (meaning that they can be terminated at any time and for any reason), or whether any employees have employment contracts, letters or other agreements (including collective bargaining agreements, if there are unions involved) that impact the termination. Similarly, consider any policies that would impact the termination.

Also, consider any applicable state and federal laws. Regardless of whether employees are being asked to sign releases (which are discussed in more detail below), they are always entitled to receive payment for wages earned through their last day of employment, payment for accrued but unused vacation, and whatever benefit continuation they are eligible for under COBRA or other benefit plans.

Although federal or state notice requirements are unlikely to apply to smaller start-up companies, you should still be aware of them. Under the federal Worker Adjustment and Retraining Notification Act (WARN) and similar state statutes such as California’s WARN law, larger employers must provide advance notice of certain events such as a plant closing, relocation or mass layoff. 

Consider Whether to Seek Releases From Claims

If there is not a severance pay plan or policy, you should consider whether to seek releases from employees in connection with their terminations. While obtaining a release of claims can be beneficial for the company, you must provide some form of consideration in for a release. If choosing to provide releases to employees, know that your company must meet very specific requirements in order to obtain valid releases of age-related claims from employees who are age 40 and over (additional requirements for release of such claims also apply if the termination involves two or more employees).

Decide How to Handle the Actual Termination

When it comes time to notify the employee, have the meeting in a private place with only appropriate parties (such as a human resources representative and the employee’s supervisor) present. It’s best to have more than one company representative attend. The meeting should take place during work hours, and the people representing the company should be prepared with talking points that are honest and simple. And be sure to collect any company property, including passwords, from the departing employee.

Whether or not a release is involved, give the employee a letter with all relevant and necessary information about severance programs, COBRA rights, vesting, outstanding wages and vacation payments, and a reminder concerning ongoing obligations under any confidentiality/proprietary rights agreements with the company. States may have other requirements in place: under California law, for example, employees must receive their final pay on their last day of work, along with other documents including a pamphlet describing unemployment benefits. 

Make a Plan for Moving Forward

Employee terminations can have repercussions beyond the impact on those who are let go. Before a termination happens, consider how you will describe it to remaining employees, clients, customers, vendors, partners and even the media. Having an appropriate response prepared can be critical to employee morale, client and customer relations, and public relations.

We encourage you to consult legal counsel for assistance in dealing with any questions related to employee termination.