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The end of the employer-employee relationship is an inevitable part of running a business and requires special care. To help you manage your next employee separation, we address some common misconceptions about the termination process.

Myth #1: “At-will” means you can fire an employee for any reason.

Fact: While “at-will” employment generally means you can terminate an employee for any reason, it must be a lawful one. For example, various federal, state, and local laws prohibit employers from retaliating against individuals for exercising their rights under the law. Employees are also protected from discrimination based on protected characteristics, such as age, race, religion, disability, gender, national origin, and military status. If you terminate an employee for engaging in protected activity or because of a protected characteristic, you may be subject to a claim or lawsuit, regardless of the employee’s at-will status. There are also other exceptions to at-will employment created by contract, statute, the courts, or public policy.

Note: At-will employment is recognized in all states but Montana.

Myth #2: When an employee fails to return company equipment, you can withhold their final pay.

Fact: Regardless of whether the employee has failed to return company property, you must meet federal and state final pay deadlines. Federal law requires final pay at the next regular payday, but some states require final pay sooner, such as at the time of termination.

Deductions: While withholding an employee’s final paycheck is not allowed, there are some cases in which deductions may be permitted under federal law. For non-exempt employees (employees who are entitled to minimum wage and overtime), the Fair Labor Standards Act (FLSA) permits deductions for unreturned equipment as long as it does not reduce the employee’s pay below the minimum wage and does not cut into any overtime pay. Some states prohibit this practice or have additional requirements, so check your state law before making a deduction. Deductions for unreturned equipment are never permitted for employees classified as exempt from overtime.

Note: Under the FLSA, employers are generally required to obtain an employee’s consent before making a permissible deduction. The agreement must specify the particular items for which deductions will be made (such as company uniforms, equipment, or employee theft) and how the amount of the deduction will be determined. It is a best practice to obtain the employee’s authorization in writing and consult legal counsel before making this type of a deduction.

Myth #3: Employees aren’t entitled to pay for unused vacation when they leave the company.

Fact: There is generally no requirement under federal law to pay employees for unused vacation or paid time off (PTO) when the employee leaves the company. However, some states do have requirements, such as:

  • Expressly requiring accrued, unused vacation/PTO to be paid out at the time of separation.
  • Requiring pay out at separation, unless the employer has a policy that expressly states that it won’t pay employees for accrued, unused time.
  • Requiring pay out if the employer has promised it.

Check your state law for more information.

As a best practice, outline your company’s policy on vacation and other time off in writing and clearly explain what happens to accrued, but unused time at separation.

Myth #4: If an employee tells you he/she quits, there is no reason to get their written resignation.

Fact: It is a best practice to obtain the employee’s resignation in writing (in a hard copy or electronic format), even if he or she has already notified you verbally of their resignation. You may need this documentation if the employee ever challenges the reason for their departure (for example, if the employee subsequently seeks unemployment benefits or files a complaint).

Myth #5: Employees who quit are never entitled to unemployment benefits.

Fact: While most employees who quit aren’t eligible for unemployment benefits, the fact that an employee quit doesn’t always disqualify him or her. To receive benefits, employees who resign must generally show that they quit for “good cause” (typically attributable to the employer). While “good cause” varies by state, employees who quit as a result of retaliation, to care for a sick family member, or a significant reduction in hours/pay may be eligible for unemployment benefits. Eligibility rules vary greatly, so check your state law for details.

Myth #6: Once an employee leaves, the company no longer needs to keep their records.

Fact: Federal, state, and local recordkeeping rules require employers to keep certain records for a set duration. Rules vary by jurisdiction and some require employers to retain certain records well beyond the employee’s length of employment. For example, employers must keep I-9 forms for at least three years from the employee’s date of hire or for one year following termination, whichever is later. Additionally, under certain federal nondiscrimination laws, employers must keep personnel records for at least one year from the date of an involuntary termination. If an employee files a discrimination claim, employers must keep these records until the claim is resolved. Check federal, state, and local laws for more information on your specific recordkeeping requirements.

Myth #7: Exit interviews are a waste of time.

Fact: Turnover can be costly, and exit interviews can help you identify the reasons employees resign. As you start to see trends, you can address weaknesses before more employees decide to leave. Exit interviews can also be used to transfer knowledge to a successor or replacement.

Conclusion:

Treat employee terminations carefully, follow a consistent process, and develop policies, procedures, and training to ensure compliance with all applicable requirements.

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