Understanding and Implementing Employee Termination Procedures

When an employee leaves your business, there are certain payroll and HR tasks you must do. It doesn’t matter if the employee is voluntarily or forcibly terminated. Employee termination procedures guarantee that your business remains in compliance with federal and state laws.

Employee termination procedure

Whether the employee quits, was fired, or laid off, use the following employee termination procedures.

1. Issue the last paycheck

When an employee is terminated, you must pay out all outstanding wages, expenses, unused vacation pay, and any other compensation owed to the employee.

When the final paycheck is due is based on state laws. The final paycheck might be due upon termination or within a certain number of days. Despite state laws, it is often good practice to have the final paycheck available right away. That way, you don’t have to mail it and the employee doesn’t have to come back to get it.

You cannot attempt to deprive the employee of their wages. You’re not even allowed to add a condition of receipt. For example, you cannot require the employee to sign a form saying they will never sue you to get their final wages.

Remember, the final paycheck is different than severance pay.

2. Give severance pay

Severance pay is not a requirement, but you can give it to a terminated employee. Typically, severance pay is only reserved for layoffs, job eliminations, and mutual agreements to terminate employment.

Severance pay can help the employee ease the transition from employment to unemployment. You can make receipt of severance pay conditional so you get something out of it too. For example, you can require the employee to give up their right to sue you to get the severance pay.

Psst–Want more payroll articles like this?

Get the latest payroll news delivered straight to your inbox.

Subscribe to Email List

3. Retrieve business property

Before the employee leaves your business for the last time, make sure you get back all of your business property. This includes keys, computers, phones, ID badges, and credit cards.

Make sure you also remove the employee’s access from any company accounts. You might be able to log into your account and revoke access. Or, you might need to collect and change passwords.

4. Explain COBRA

Your employees might be eligible for continued medical coverage through the Consolidated Omnibus Budget Reconciliation Act (COBRA). Because of the act, businesses with 20 or more employees that provide health insurance must give terminated employees the opportunity to remain on the insurance policy for 18 months after termination. However, the former employee must pay the premiums themselves.

Tell the employee how they can sign up for COBRA continuation coverage. Let them know what forms they need to fill out and how long their coverage lasts.

5. End child support withholding

If you withhold child support from the terminated employee’s pay, you must report that the employee no longer works for you. Report the termination as soon as possible to the child support agency, court, or attorney that issued the income withholding order.

Beyond employees with child support withholding, you do not need to report employees to state or federal governments.

6. Conduct an exit interview

On the employee’s last day, hold an exit interview. This is an interview where you ask the employee about their experience at the company and why they are leaving.

Find out why the employee is leaving. Ask what the employee liked and disliked about your business. You might learn something from the interview that can help you improve your business.

During the interview, explain the employee’s final pay, end of benefits, and COBRA.

If the employee has any questions about their termination and future interactions with the company, answer them during the interview.

7. Update your payroll

Updating your payroll is an important part of the dismissal procedure. You don’t want to accidentally run payroll for the terminated employee in the future. Take the employee off your payroll. But, make sure you keep your payroll records for them. You must still send them a Form W-2 at the end of the year.

You must keep your payroll records for the employee for at least three years. And, you need to keep employment tax records for at least four years.

8. Talk to remaining employees

Your remaining employees need to know about the termination. Tell them only what they need to know about why the employee is leaving, especially if you fired the employee.

Tell employees when, or if, the position will be filled. Explain how the employee’s duties will temporarily or permanently be reassigned.

9. Handle unemployment benefits

If the employee was laid off, they might be able to claim unemployment benefits from the state.

If the employee files for benefits, the state unemployment department will contact you to verify their unemployment claims. Respond as soon as possible so the former employee can receive their unemployment benefits.

If you believe that the employee doesn’t deserve the benefits, you can say so.

If you need an easy way to run payroll and keep payroll records, check out Patriot Software’s online payroll software. It uses a three-step process so you can handle payroll in no time. Get your free trial!

This article has been updated from its original publication date of August 13, 2018.

This is not intended as legal advice; for more information, please click here.

Stay up to date on the latest payroll tips and training

You may also be interested in:

Most popular blog categories