Terminating An Employee: Part One–From An Employer’s Perspective

By: Richard E. Korb, attorney ©2011[1]

Terminating An Employee

Any business that engages and interacts with others faces the risk of being sued.  Businesses can be sued for a variety of reasons, including personal injury, breach of contract, unfair competition and antitrust to name a few.  Litigation can cost your business vast amounts of time and financial resources.  In some cases, lawsuits can pose irreparable damage to the reputation of your company.

Lawsuits can be filed against your company, not only by customers and other companies, but also by your employees. The most common lawsuit employers face from their former employees is for wrongful termination. In order to minimize your chances of facing a wrongful termination lawsuit, you must understand when you can legally fire your employees, and when you cannot.

When Can I Legally Fire An Employee?

Under California labor law, all employees are presumed to be “at will.”  Essentially, this means that most California employees are hired and fired at the will of their employers absent an agreement to the contrary.  “At will employment” allows employers to release employees whose attitude, skills, or performance do not meet the expectations or duties of their position. It also gives employers broad discretion in whether or not to retain their employees. Typically, under the “at will employment” system, an employer can fire his or her employees for any number of reasons.

What are the limitations of “at will employment”?

“At will employment” does not apply under certain circumstances. Being aware of these circumstances will minimize your chances of facing a wrongful defamation lawsuit.

At will employment is not applicable if you (the employer)  have a written contract with an employee, specifying how long he or she will be working for your company.  For instance, assume you hired an employee named John to work at your company. Upon hiring John, you drafted a contract stating that he would work for your company for at least five years.  You would then be unable to fire John before five years has passed absent misconduct (e.g. theft) or some exceptional situation.

At will employment is also invalid if you have an “implied contract” with an employee or your employees implying that they cannot be fired except for “cause.”

One example of an “implied contract” is an employment policy manual that states it is the company’s goal to retain employees indefinitely and/or specifies under which circumstances an employee can and cannot be fired. If an employer distributes such a manual, there are steps it can take to minimize the chances that it will face a wrongful termination lawsuit on the basis of an “implied contract.”  Often, if it includes a disclaimer in the employee manual declaring that employees are still considered to be “at will”, then a court will likely rule in its favor if a wrongful termination suit arises.

While an employee manual is the most common form of an “implied contract”, it is certainly not the only type.  In fact, positive comments made to an employee emphasizing the desire to keep the employee on board on a long-term basis or repeated comments about his or her future at your company can create an implied contract.

An implied contract can also be created when an employee receives consistent salary increases or promotions coupled with consecutive years of employment. The longer an employer has employed an employee, the harder it is to terminate the employee without cause.

Finally, at will employment is not applicable if your employees belong to a union.  Union contracts, referred to as “collective bargaining agreements”, make it extremely difficult to fire union employees without facing a wrongful termination lawsuit.  If you hire unionized employees to work for your company, you should be aware of the terms of their collective bargaining agreements.  This will inform you under which circumstances these employees may be released from their positions. 

If  “at will employment” is not applicable, this does not mean you can never fire this employee.  Rather, you must have “good cause” to release this employee.  “Good cause” is broadly defined as “fair and honest reasons… that are not trivial, arbitrary, capricious, unrelated to business goals [or] needs.”(cite?). So for example, even with a long-term employee with whom there exists an implied contract, an employer can still terminate the employee for a reasonable reason such as a downturn in business requiring a lay-off. But beware, long-term employees can still sue and argue the termination was for some other unlawful reason such as age or salary level.

In addition, an employer should not fire an employee immediately after an issue arises.  In order to have “good cause” to fire an employee, you should first inform this employee orally and in writing of the issues with his or her job performance, and tell him or her when these issues must be resolved by.  In fact, the courts have established that “good cause” requires “substantial evidence … that includes notices of the claimed misconduct and a chance for the employee to respond.” (Of course, certain types of misconduct can justify immediate termination (e.g. an uncontraverted theft of company).

Some examples of firing an employee with “good cause” include firing an employee who consistently lacks punctuality, fails to attend conferences or other business meetings, engages in deception or brings firearms to the workplace, or sexually or verbally harasses other employees.  Keep in mind, however, that in the event of a wrongful termination lawsuit, you will need to document that you had “good cause” to release an employee, not just claim that you did.

In addition, California labor law requires “good faith and dealing” apply to every contract.  “Good faith and dealing” means that you must “treat your employees fairly and honestly.”

When is it ILLEGAL to fire an employee?

Even under an “at will employment” system, there are some circumstances in which it is entirely unacceptable to fire your employees.  Federal and California state law prevents employers from engaging in discriminatory practices, meaning you cannot fire someone because of certain inherent characteristics about them.

For example, under federal law, you may not fire an employee because of an employee’s…

•  Race or ethnicity.
• Gender.
• Marital status.
• Pregnancy.
• Religious affiliation.
• Genetics (i.e. if your employee is genetically at risk of developing a certain illness).
• Being forty years of age or older.

Disability: Nor can an employer fire an employee because of a disability under the Americans With Disabilities Act (the “ADA”) unless that disability prevents the employee from performing the job (E.g. an employer cannot be expected to hire or retain a wheel-chair bound employee for a job that requires him to perform lifting or standing). But employers do need to make reasonable accommodations for a given disability. (E.g. an employer must provide chairs with adequate back support for workers and must give reasonable breaks to workers with carpel tunnel syndrome.)

There is not one rule that fits all cases; courts normally apply a balancing test: What does the accommodation cost the employee vs. the benefit to the employee. The courts will take into account the employer’s size and financial resources as well. Notwithstanding, certain requirements are mandatory and are not negotiable or subject to a balancing test (e.g. wheelchair access.)

Additionally, California law prohibits employers from firing employees because of their sexual orientation.  This law specifically protects homosexual, transgender, and bisexual employees from discrimination.

You also cannot fire employees for engaging in certain activities, or refusing to engage in others.  Some examples include, but are not limited to:

• Attending jury duty
• Leaves work to vote
• Using vacation time to attend to your medical needs, or the medical needs of your children
• Files a sexual harassment complaint
• Reports illegal activity being conducted at your company
• Refuses to take a polygraph test or any other similar tests

What steps can I take to decrease the chances that my business will face a wrongful termination lawsuit?

In addition to understanding when you can and cannot legally fire your employees, employing good business practices will also minimize your chances of facing a wrongful termination lawsuit.  More specifically, you should be sure to treat all of your employees fairly.  You should be especially sure to treat your employees fairly when disciplinary actions are necessary.  You should create an established and consistent punishment system.  This should minimize the chances of your business facing a discrimination-based lawsuit from a bitter or upset employee.

You should also keep thorough written or electronic records of all disciplinary actions and performance reviews completed at your company.  These records can protect you and your company in the event of a wrongful termination lawsuit.  In regards to disciplinary actions, you should keep a record indicating why an employee was punished, what changes were expected of the employee, and what would happen if these changes were not made.  If you keep such a record, it will become difficult for an employee to falsely accuse you and your company of firing him or her for sexist or racist reasons.  Similarly, performance reviews can also protect your company in the event of a wrongful termination lawsuit.  If you have a record indicating a certain employee was not meeting the expectations of his or her job and setting a time frame to start meeting these expectations, it will once again be difficult for an employee to false accuse you and your company of firing him or her for discriminatory reasons.

Finally, an employer can minimize its chances of facing a wrongful termination lawsuit by asking departing employees to sign a severance agreement waiving all rights to sue the employer for wrongful termination.  By signing this agreement, an employee may, in some cases, lose his or her legal rights to file a wrongful termination lawsuit.  Typically, however, the employer will need to provide some form of financial incentive above and beyond any compensation owed and not simply use the severance agreement to operate as a waiver of rights to sue.

For example, the agreement could contain several provisions relating to different post-employment issues such as return of company property, preservation of trade secrets and include a waiver of any termination. Strategically, it may be wise to ask employees to sign a severance agreement with a waiver whenever litigation is a possibility. Even if the employee does not have a valid basis for filing such a lawsuit the litigation process itself can cost your business vast amounts of time and financial resources.  Since every business is different, it is important to analyze what risk management strategies are best suited to your needs and minimize the risk of a lawsuit.  One cost-effective way to do this is to have an experienced attorney review your company policy manual and conduct a confident legal analysis of the risk prevention measures that are appropriate for your business.

If you have any questions, please contact Berkeley-Oakland-Walnut Creek Business attorney, Richard Korb at 510-524-0903 for a free consultation.