What is termination of employment? All you need to know

Losing a team member is never easy. Whether an employee’s departure is due to resignation, termination, or a layoff, the impact can be seismic. These transitions stir up a mix of emotions, operational challenges, and legal complications that must be handled with care and professionalism.

Strong best practices make the difference between a smooth transition and a disruptive one. Consistent, time-tested guidelines help organizations navigate the termination of employment with greater ease, minimizing legal risks and emotional stress. 

Here, we’ll help you develop a termination policy that covers all your bases and maintains a positive work environment.

What is termination of employment?

Termination of employment is simply the end of an employee’s time with an organization. Although “termination” might sound like firing, it refers to any scenario where the employment relationship ends, including a resignation, dismissal, or layoff.

Employers may terminate an employee’s contract for several reasons, including downsizing, redundancies, or breach of contract. Employees on extended leave or furlough are still considered employees until a formal termination notice is issued.

Different types of employee termination

When you end an employment relationship, the reason for termination dictates the offboarding process. Understanding the different types of employee termination is the first step to ensuring your termination process is smooth and legally compliant. 

Voluntary termination

When an employee decides to end their employment on their terms, it’s called voluntary termination. This includes everything from relocation or retirement to pursuing other opportunities. There are two types: 

Mutual agreement

Unfortunately, the employment relationship isn’t always a match. In this scenario, the employer and employee mutually agree to terminate the employment contract. Employees may give a specific notice period (such as two weeks) or agree to stay in their role until a new hire can replace them. 

In some circumstances, the employer might offer incentives (e.g., lump sum payment, continuation of benefits, outplacement services) to terminate the contract. Buyouts can help avoid prolonged disputes and reduce legal risks, allowing hiring managers to hasten staffing changes. 

Job abandonment

Not all voluntary terminations end on ideal terms. Sometimes, employees simply stop clocking in at work. Job abandonment is when an employee leaves without submitting a formal resignation notice. Many employers consider extended, unexcused absences as the voluntary closure of an indefinite contract. 

This type of termination straddles the line between voluntary and involuntary termination. The employee voluntarily chooses to leave and forces their employer to take action. No federal employment laws define job abandonment, so employers must define a clear company policy in their employee handbook and employment contracts. This helps manage expectations for dismissal, define severance packages, and mitigate wrongful termination lawsuits. 

Involuntary termination

Involuntary termination occurs when an employer decides to end the employment relationship. This type of termination covers several scenarios:

Termination for cause

Poor performance, insubordination, or misconduct are common reasons for firing an employee. Typically, termination for cause occurs after workers have been provided chances to improve the employment relationship. However, an employee may be fired immediately for harassment, violating strict company policy, or breaking the law. Regardless of the reason, employers should carefully document behavior to avoid wrongful termination lawsuits. 

Employment at will

U.S. employers can adopt at-will employment agreements that allow employee termination at any time for almost any reason, as long as it’s not discriminatory or illegal. At-will clauses are common for probationary employment but are also used for regular employees.  

Although federal and state laws provide protections against unfair dismissal, at-will agreements give employers the flexibility to end employment relationships based on factors such as cultural fit (e.g., negative attitude or poor communication), underperformance (e.g., chronic tardiness, regular absences, poor job performance), or other operational needs (e.g., budget cuts or changes in business strategy). 

Remember, at-will agreements go both ways. Employees can terminate their employment contract without advance notice or a specific reason.

Layoffs

Terminating employees isn’t always linked to individual job performance. External business needs, such as sudden budget cuts, strategic shifts, or organizational restructuring, might force employers to lay off part of their workforce.

Unlike terminations for cause, layoffs are typically driven by complicated financial or strategic factors. Laid-off workers are eligible for support systems, including severance packages and unemployment benefits. 

Common reasons for termination

Employment relationships end for a variety of reasons. Understanding the reason behind an employment termination provides valuable insights for both employers and employees. 

From the employer’s perspective

You strive to build the perfect team. However, workers don’t always fit in as expected, and the employee life cycle is cut short. Here are a few common reasons to terminate an employee: 

• Unmet expectations: Employees are hired to fulfill a specific need. When they consistently fail to meet performance standards or job requirements, they can negatively affect the organization’s productivity and performance. Examples include regularly missing deadlines, lacking essential skills, or struggling to work efficiently with their team.
• Poor behavior: A breach of company policy, disruptive behavior, and inappropriate conduct can undermine the entire organization. Poor behavior can weaken team morale and, in severe cases, lead to serious legal complications. Company policy exists for a reason, and breaking employee-employer trust is a good reason to end the relationship. 
• Security breach: When sensitive information is compromised, it can lead to numerous problems, including lawsuits, poor brand image, and lost clients. Whether data is leaked or mishandled, significant breaches often lead to immediate employee termination to protect a company’s safety. 

From the employee’s perspective

It’s rarely easy to leave a job, even when personal priorities, career goals, or workplace conditions are clear. Understanding the motivation behind a job termination will help you create a more supportive and responsive work environment.

• Better job offer: Workers often terminate their employment contract when they find greener pastures. This could mean a higher salary, more substantial benefits, or more promising career advancement opportunities. Although your employees may not be dissatisfied with the organization, a better job offer is a wake-up call to improve your competitiveness in the job market. 
• Toxic work environment: Negative workplaces gradually erode employees’ motivation, pushing them to seek new opportunities. If an employee cites poor management, lack of support, or hostile work culture in their exit interview or resignation letter, take it seriously. Workplaces where employees feel undervalued and stressed stimulate high turnover, which can negatively impact team morale, productivity, and your bottom line.

How to properly terminate an employment

Losing an employee is challenging, regardless of the reason for termination. Best practices can smooth the process for everyone. Here’s how to terminate an employee while ensuring compliance and respect:

1. Determine the reasons for termination

Clearly articulate the reasons for termination, whether it’s due to poor performance, rule violations, or downsizing. A detailed explanation helps the employee understand the decision and minimizes the risk of misunderstandings, retaliation, or legal disputes. It also ensures transparency and documentation, which are necessary for legal compliance. 

2. Streamline your termination policy

No two employee terminations are the same, but the termination procedure should remain consistent. Develop a straightforward company policy that outlines protocols such as notice periods, documentation requirements, and steps for handling disputes. A well-defined company policy ensures that terminations are handled fairly and legally. Clear procedures also help you focus on the emotional aspect of terminating employees rather than getting hung up on the step-by-step process.

HR should keep standardized documents on file, including an employee termination letter template and informational packets about unemployment compensation, severance agreements, and support networks for former employees.

3. Inform the employee

Deliver the termination news to the employee in person. If an in-person meeting isn’t feasible, schedule a video call. Informing an employee with a termination letter is insensitive and unprofessional. It should be reserved for extreme circumstances, like job abandonment, where a face-to-face or video meeting is impractical. 

Professional meetings and follow-up exit interviews send the employee off on a positive note and give everyone an opportunity to offer constructive feedback and clearly discuss the next steps. These meetings can maintain a positive relationship and provide valuable insights to improve the workplace. Plus, exit interviews help you gauge whether a former employee will seek a wrongful termination suit or other legal grievances.

4. Determine the final details of the severance package

Include the details of any severance payout in a formal termination letter. This should cover the amount, payment schedule, and any conditions for receiving severance. Clear information about severance pay helps the employee manage a stressful transition and reduces the likelihood of disputes.

Global compliance in every stage of the employee lifecycle 

Every termination requires strict adherence to company policy, protocols, and international employment laws. Fortunately, Oyster guarantees compliance for the entire employee lifecycle in more than 180 countries around the globe. Let us worry about severance agreements, unemployment benefits, and employment laws so you can handle terminations with care and professionalism.

About Oyster

Oyster is a global employment platform designed to enable visionary HR leaders to find, engage, pay, manage, develop, and take care of a thriving distributed workforce. Oyster lets growing companies give valued international team members the experience they deserve, without the usual headaches and expense.

Oyster enables hiring anywhere in the world—with reliable, compliant payroll, and great local benefits and perks.