How you release a staff member from service can have financial implications for your business. Learn the difference in this quick guide.
As a business owner, understanding how to separate an employee is just as important as hiring an employee — the decision to lay off or fire an employee can have ripple effects across your business.
Determining which type of separation can result in legal and financial implications for your business and impact future employment for the separated individual. It’s a best practice to know what each category means and how it can affect staff members and your business in the short and long term.
In some situations the separation is the fault of the employee: their actions have resulted in the need to remove them from the workforce.
Other situations are no fault of the employee: business conditions have made it impossible to keep them on the payroll.
Employee termination: Layoff
For a staff member you cannot afford to keep — but would definitely rehire in the future — consider a layoff. This type of separation implies there will be a job waiting for the employee when business conditions improve.
Employees who work in construction, for example, and are unable to perform their duties in the winter, are often laid off for the season with the promise of returning to work when conditions improve.
In other industries, layoffs could result from loss of business, contract delays, or during slow times. The employee is off work, but they have the expectation that when things improve, they’ll be back on the job at the same rate of pay and with the same employment conditions.
What layoffs mean for business owners
Laid off employees are eligible to collect unemployment compensation. Unemployment insurance is available to workers who lose their job due to conditions outside their control.
All businesses pay for state or federal unemployment insurance through payroll deductions in accordance with Federal or State Unemployment Tax Acts (FUTA or SUTA). These taxes provide limited payments for laid off employees. If your company is making FICA deductions for employees, you’re already paying into FUTA/SUTA, so funds are available to staff members.
Long-term unemployment claims can be costly. For new businesses, the federal unemployment rate is 6% of the first $7,000 of employee wages.
Contributing to state unemployment funds can reduce FUTA in some cases. But the more “experience” a company has with unemployment claims, the higher the percentage due for future staff members.
The lower the experience — or fewer claims — the lower the employer contribution would be. The fewer layoffs a company makes, the lower their costs for unemployment insurance.
Another consideration for business is the potential long-term loss of the employee. A laid-off employee may look for another job, even if they’re eligible for unemployment compensation. Businesses risk losing that staff member permanently when they lay staff off.
What layoffs mean for employees
Laid off employees are eligible for unemployment compensation. For some, these stop-gap payments are sufficient to tide them over until they are called back to work. For others, the lower unemployment payments are not sufficient — they may have to find another job.
Employee termination: Firing
For staff members you would never want to go back on the payroll, firing is the correct option. These staff members have committed a significant rule break or major policy infraction on the job. Whatever the reason to terminate them, their professional relationship with your company is at an end — they would be ineligible for rehire in the future.
What firing means for business
When an employee is fired, the professional relationship is at an end. If there was sufficient cause to separate the staff member, they should be ineligible to collect unemployment compensation.
Workers who lose their jobs due to conditions outside their control are eligible for unemployment payments. An employee who breaks a known rule or policy had control over their termination, which makes them ineligible. Companies who fire employees for cause should realize some savings when it comes to unemployment insurance experience.
What firing means for employees
Employees fired for cause are ineligible to collect unemployment compensation. They may need to quickly find another job to maintain their financial fitness.
Reasons for terminating employment
To avoid unemployment liability, business must be specific and methodical when they terminate an employee. Telling a staff member “it’s just not working out” isn’t sufficient reason (or cause) to fire someone that will inviolate an unemployment claim. There must be a specific business reason why the staff member was fired and the reason must have been within the employee’s ability to control.
Managers should document rule breaks or infractions through progressive disciplinary action, but some are so unacceptable they may not require progressive discipline.
Staff members that are habitually late, for example, can be terminated for cause. A history of notifications, warnings and even suspensions should have led up to the firing.
This establishes the staff member was terminated for cause — they had ample opportunity, within their control, to correct the behavior but did not. The company had no choice but to fire them.
For some policy violations, a single offense may be sufficient to terminate for cause. Employees who arrive at work wielding a firearm, assault or pose a threat to others can (and should) be immediately terminated. In support that the employee was fired for cause, the business must be able to document the behavior was a violation of policy.
For significant violations, employee handbooks and policies must warn staffers that disciplinary action, up to and including immediate termination, may result in the event of such a serious policy/rule breach.
Are there legal differences?
Legally, the difference between layoff and firing is important. In addition to the implications for unemployment benefits, fired employees may consider legal action, such as discrimination or harassment claims or lawsuits.
With the hope of returning to work, laid off staff members will not likely file a claim, unless they believe their layoff is in violation of their protected class.
For workers who were fired, however, there’s nothing to lose and potentially much to gain in filing a harassment or discrimination claim. Organizations should have sufficient documentation of any progressive disciplinary steps taken before they terminated the employee to mitigate any damages.
The final consideration for business when deciding whether to fire or layoff is reference information. While many companies avoid providing references for past staff member’s altogether, providing references can impact future employability.
Employees who are laid off have a better response when asked why they left their last employer. Terminated employees may find difficulty finding another job if they reveal they were fired.
Some companies provide neutral references only: verifying dates of employment and job title. Others provide more in-depth reference information.
However you decide to handle references, make sure they’re provided consistently for all past employees – whatever their reason for separation. Whatever your policy, make sure it’s evenly applied no matter who you’re being asked about.
Managing the separation meeting
If you must fire or lay off an employee, the separation meeting should be planned and managed. For laid off employees, provide a letter outlining the terms of the layoff.
What goes in a termination letter?
Include when it begins and when it’s anticipated (not promised) to end. If insurance premiums are discontinued during the layoff, provide the employee any necessary COBRA eligibility and payment information.
Some businesses allow staff to run out any earned sick, vacation or personal time during a layoff. You’ll want to let you staff member know what, if any, accrued time is available.
A checklist of company property that must be returned during the layoff period can guide business to collect any outstanding equipment, keys or materials.
You’ll also want to let employees know that because they’re being laid off, they are eligible for unemployment insurance. Some businesses provide information on where staff members can fill out the necessary paperwork to begin that process.
For employees being fired for cause, prepare the necessary paperwork that outlines the reason for the separation — include a termination letter with any disciplinary action documentation attached.
Be ready with a checklist of company property, keys, equipment, etc., to be returned during the separation meeting. If the employee was covered under insurance benefits, you will need to issue COBRA forms.
Any earned sick, vacation or personal time accrued may also need to be paid out to the employee, depending on your policies and whatever the law in your area requires.
Whether you’re laying off employees or terminating them for cause, it’s a best practice to understand the best choice for you and your employees and prepare for the separation meeting accordingly.