Worker turnover can be high in startups given their fast growth, changing needs, and uncertain cashflow. Sometimes relationships end naturally, such as the conclusion of a consulting project or an employee’s resignation to join another company. Other times, the relationship ends involuntarily due to poor performance or other reasons. While in most cases the startup’s employment relationship with the employee will be “at-will”— meaning that either the startup or the employee can terminate the relationship for any reason, at any time, with or without prior notice and with or without cause involuntary terminations can be challenging for startups and require care and attention to detail to avoid, or at least mitigate, legal liability.
- For involuntary terminations, employees must receive their final paychecks on time (based on state and federal law – e.g., on the last day of employment in California, at the end of the established pay period in Washington, and by the regular payday for the pay period when the termination occurred in New York). In addition, startups should provide required state and federal termination documentation (e.g., unemployment insurance notice), as well as shut off the employee’s email and systems access and collect the employee’s company property and passwords. Moreover, it is highly recommended to offer severance in exchange for a release agreement whenever a startup involuntarily terminates an employee in order to protect the startup from legal claims (e.g., harassment, discrimination, retaliation, or wage and hour violations). However, it is not required and some startups choose to offer severance in exchange for a release only when they think there is a risk that the employee may sue the startup based on the facts and circumstances of the employee’s employment and termination. Investors and acquirers like to see signed release agreements for involuntary terminations because this signifies that the startup has controlled its liability. Startups should consider the reason for the termination, any supporting documentation (especially for performance-based terminations), and any risks in terminating the employee (e.g., the employee falls into a protected category based on age, race, gender, disability, etc.). In addition, startups should consult with counsel to assess the risks and whether or not to offer severance in exchange for a release.
- If an employee voluntarily resigns, the startup should identify the employee’s last day and have the employee submit their resignation in writing in order to have a record of the resignation. Although startups can offer release agreements to employees who resign, this should be considered on a case-by case basis to determine if it is warranted.
- The relationship with a contractor should be terminated based on the terms of the written consulting agreement. Such agreements often require advance written notice of the termination. Startups should discuss the termination of the agreement with the contractor and then follow the required steps in the agreement. Unless otherwise specified in the agreement, written notice can be sent by email, which serves as solid evidence of termination since it is date and time stamped.
For more detail on hiring and terminations for startups, click here.