December 18, 2014
Special documents may be required when terminating an executive or other key employee, particularly when the termination is triggered by the employee’s failure to perform his or her duties and obligations to the employer. When a decision is made to terminate an executive or other key employee, it is important to draft a carefully worded termination letter that can be delivered to the executive or employee as part of the termination process. The termination letter serves several purposes from the perspective of the employee, including the following:
- Creates a formal record of the date and circumstances surrounding the decision to terminate the employment of the executive or employee.
- In situations where the termination is based on “cause,” provides an opportunity for the employer to summarize the basis for determining that “cause” exists.
- Allows the employer to describe how the final compensation payments to the executive or employee were determined.
- Provides an opportunity to explain the termination procedures the executive or employee will be expected to follow, such as an exit interview and return of the employer’s property.
- Creates a written record that the executive or employee has been informed of all post-termination obligations associated with the employment relationship, including protection of the employer’s confidential information and non-competition covenants (if any).
Ideally, the termination letter is not the first time the terminated employee has received notice of the possibility that the employment relationship will be ended. The termination should be preceded by a meeting among all parties concerned, including the employee, his or her supervisor(s) and a representative from the employer’s human resource department, to discuss any performance problems and provide the employee with an opportunity to raise any defenses. As a result of that meeting, interim disciplinary action may be taken (e.g., issuance of a written warning with specific guidelines as to remedial actions that must be taken by the employee). A written record of the meeting should be made and placed into the employee’s personnel file. Of course, there may be special circumstances that make it unnecessary or impractical to hold such a meeting prior to termination, such as where the employer discovers that the employee has been involved in theft or engaged in other acts that are materially injurious to the employer and obviously demand that employment be terminated immediately.
While some labor attorneys suggest that the termination letter provide the recipient with a detailed explanation of the reasons for termination, including evidence to support each of the reasons, the better practice is to provide a summary of the reasons with perhaps just two or three examples. The concern in providing too much detail is that the words in the letter itself may ultimately become the focus of a later dispute. As such, the drafter should provide sufficient information to put the employee on notice as to the particulars of the employer’s case against the employee but also make it clear the content of the letter is not intended to be exhaustive and the employer reserves all defenses it might have to a later claim of unlawful termination. In all cases, the letter should be professional, accurate and clearly worded, and every attempt should be made to avoid the use of language that is overtly hostile and offensive.
While every situation is different, it is useful from a drafting perspective to start with a standardized template that covers the universe of issues that should be addressed in a termination letter and then edit the template to fit the circumstances of the case. See Specialty Form at § 166:231. It is recommended that the drafter attempt to do the following:
- Begin by referring specifically to any written contract or agreement relating to the employment relationship. For example, if the employer entered into an employment agreement with an executive, reference should be made to the agreement and the date the agreement became effective.
- Briefly describe the circumstances under which the employment relationship may be terminated and, if applicable, the conditions that must be satisfied in order for the employer to assert that the termination is based on “cause.” Demonstrating “cause” is usually relevant when there is an issue as to whether the terminated employee is entitled to severance.
- State the main reasons for termination, such as “breach of fiduciary duty” or failure to follow the directives of the senior managers of the employer, and formally communicate the decision of the employer to terminate the employment relationship immediately or as of a specified date in the future.
- Provide a brief summary of specific examples to support each of the main reasons for termination (e.g., on a particular date the employee willfully disregarded the orders of his or her supervisor with respect to a particular matter that should be described in the letter).
- Describe the final payment(s) to be made to the terminated employee and indicate that a description of post-termination benefits (e.g., continuing health insurance under COBRA) will be provided separately.
- Describe any and all post-termination obligations of the terminated employee to the employer with respect to protection of the employer’s confidential information and refraining from engaging in certain competitive activities. As necessary, refer to specific provisions in any written employment agreement.
- Remind the employee of his or her obligation to complete the employer’s standard termination procedures, including exit interviews prior to leaving the facilities.
While, as mentioned above, the termination letter should specifically refer to post-termination obligations of the employee (and this topic should also be covered in detail in the exit interview), it is also recommended that the termination letter be accompanied by a separate certificate to be signed by the terminated employee confirming that he or she has complied with all duties relating to protection and use of confidential information during the employment relationship. See Specialty Form at § 166:232. The content of the certificate will mirror questions that would normally be asked during the exit interview as well as the specific requirements of any formal written employment agreement. The terminated employee should be required to sign and return the certificate by a specific date. Failure to comply can serve as additional evidence against the employee in a later suit for unlawful termination; however, the employer should be prepared to be proactive against the employee in the event the certificate is not returned and there is evidence to indicate that confidential information has been misused. This means sending a follow-up letter and, depending on the circumstances, even filing for injunctive relief in the event that information surfaces that the employee is violating his or her duties.
Termination of the employment relationship can also be memorialized in a number of other ways.
- A termination letter delivered to one of the founders of a closely-held corporation will typically include formal notification that his/her service as a director and officer of the corporation is also ending due to the termination of employment and that the corporation has elected to purchase his/her unvested shares in accordance with an option included in the stock purchase agreement for such shares. The letter should also include various reminders of the founder’s obligations with respect to protection of the company’s intellectual property and duties to return company property. See Specialty Form at § 166:231.50.
- In cases where an executive’s responsibilities are being terminated, a relatively straight-forward letter agreement may be used to establish the termination date, the compensation to be paid to the executive (including severance payments), and the executive’s post-employment covenants with regard to use of confidential information and competitive activities. See Specialty Form at § 166:233.
- In other situations, a termination agreement will be much more formal, and will include a detailed description of the final compensation to be paid to the employee, restrictions on the employee’s post-termination activities, and the employee’s agreement to release any claims he/she may have against the company. See Specialty Form at § 166:234.
- A so-called “transition agreement” may be used in situations where an executive employee, such as the chief executive officer, is being relieved of his duties and allowed to move to another managerial position for some limited period of time before it is anticipated that he or she will leave the company. See Specialty Form at § 166:235.
- If appropriate, the company may also secure from the employee a comprehensive general release and waiver of claims under the Age Discrimination in Employment Act (§ 172:100). See Specialty Form at § 166:236.