How to Discipline and Fire Employees This is a situation no entrepreneur wants to face. But when it happens, you need to know how to do it sensitively--and legally.

Termination can be just as devastating for the person doing the terminating. The Wall Street Journal has reported that firing someone is one of three situations that make company presidents most anxious. It's probably safe to assume there's plenty of stress inside the person saying, "You're fired."

Aside from the emotional strain on both owner and employee, there are also legal ramifications involved in the act of termination. The following article is geared towards outlining ways of dealing with problem employees and making sure the company doesn't suffer in the long run.

Disciplinary Problems and Probationary Periods

Establishing clear and logical rules, along with an atmosphere of trust between management and labor, will minimize disciplinary confrontations with employees. Often it's the manner in which rules are established and enforced that makes the difference between a smooth-running operation and a company plagued by employee-related disruptions.

First, any rules established by the company should be reasonable, and workers should be consulted before the rules are adopted. The rules--and consequences for breaking them--should be known and well-understood by all workers. They should be impartially enforced, with any punitive actions understood by employees beforehand. You should be flexible in the enforcement of certain rules, taking into account extenuating circumstances when applicable. Communications channels should also remain open so that employees feel free to question rules they feel are unreasonable.

If a circumstance arises in which an employee warrants punishment, you should develop an employee warning system which should be implemented in a predictable and logical sequence, and should be easily adaptable to varying circumstances. For example, you might devise a system by which the employee is gently reminded of company policy on a certain issue the first time such a warning is warranted. The second time, a sterner warning is given, often in the form of a written reprimand outlining past performance and the prior warning(s) given; a probationary--and final--warning can be issued the third time, with a thorough accounting of employee performance and a clear understanding that violating the probation will result in dismissal. All such warnings must be done in private so as not to embarrass the employee, with counseling offered on improving performance. The warnings should also be recorded in the employee's personnel file, as mentioned in more detail below. Also, warnings must carry weight behind them or they won't be taken seriously; if a probationary warning is given, there should be systematic follow-through the next time serious disciplinary action is needed. Probationary periods should have an established time limit. The probationary warning should make clear what you expect in the way of performance improvement and over what time frame.

Try to Salvage the Job

Terminating an employee in haste or on the basis of fuzzy evidence can cause more problems in the long run than the ones you think you're solving. In these cases, it's better to try to turn the employee around than go through the painful firing-hiring process--unless the person has committed acts that are clear grounds for immediate termination, such as impropriety, gross incompetence or theft.

First, ask yourself who is really at fault in the situation. Perhaps the employee has had little or no control over his or her performance. Often in small companies, job assignments are poorly defined. This is one of the reasons writing down a job description when you are hiring is so important. Yet it is a sad fact that lack of adequate support and communication are often the real reasons behind poor results from an employee.

If the employee is actually at fault, a performance review can allow the person a fair chance to change. Remind the employee what is expected of them and that continued failure to perform will lead to dismissal. You must lay your cards on the table and establish goals from him or her to achieve.

Document Poor Performance

You should get an agreement on these goals and deadlines in writing and have the employee sign the form, so you have complete documentation on file. This written process forces you to analyze exactly what poor performance means to you. Misunderstandings about job duties will be brought out in the interview, as well as personal problems that are affecting performance. Sometimes these problems are temporary and can be worked around.

The most important reason for fully documenting performance reviews is to protect yourself in the event that the employee must be fired later. You will have clear and objective information on which to base your decision. The employee can't say he or she wasn't warned or given a chance, and you will have vital written evidence for use in supporting your case.

In fact, we recommend a performance-review policy for even the smallest of companies with only one or two employees. Basic to this procedure is a personnel file for each new employee hired. Into the file go the job description, job application (signed), resume, if any, and regular performance reviews.

Every six months, reviews or efficiency reports should be conducted for each employee after an initial probationary period. Review should be more frequent during the probationary period, perhaps monthly. Write a dated memo for the person's file whenever performance problems arise between reviews. Disputes among employees, missed assignments and the like should be documented in writing. This not only helps you do a better evaluation, but serves as evidence if you need to produce later.

If your employee doesn't make a comeback in performance after being put on notice, you must replace that person. The best way to approach this situation is quickly, without procrastinating. Use compassion and sensitivity when dealing with this task, avoid lecturing and, above all, do not resort to a shouting match. Limit yourself to facts supported by written documentation. Some labor attorneys counsel that a witness should be present at a firing for better protection in the event controversy arises later.

In recent years, labor boards and courts have sided with terminated employees more and more by awarding punitive damages or requiring payment of compensation in cases where termination grounds were unclear. The number of terminated employees who seek judicial relief is clearly on the rise, due in part to the impact of well-publicized sums of money awarded, job reinstatements with retroactive pay, etc.

Written evidence is the only material acceptable to labor boards and the courts. You can't afford to rely on your memory. A hazy recall of the facts or reasons for dismissal will tip the scales toward the employee in almost any case where cause for termination is questionable. It's worth your time to seek the help of a competent attorney familiar with labor laws in your state. He or she will help you understand the steps you should take to protect yourself from the nightmare that a botched firing can cause.

Other Issues to Consider Before Firing

There are other legal and operational problems you should take into account before you fire a person. Many growing companies have employment contracts with key executives, and these should be carefully checked for terms. Union employees will have collective bargaining agreements that must also be considered.

If the employee is an officer or director of the corporation, no matter how small your corporation is, firing that employee does not terminate his or her appointment as an officer or director. Get a resignation or vote as required by the corporate bylaws, recording any such actions in resolutions as required by the corporation commission(s) in your state. Remember that the applicable law is based on the jurisdiction in which your business is incorporated, not where you're located.

If you've given the person signature power at the bank, withdraw it immediately. Anyone with the power to write checks against your account may be tempted to do so. Likewise, don't forget to take back any keys, credit cards, samples or other company property in his or her possession. The best way to keep track of this is a checklist of items given to the employee (and signed for) to be kept in his or her personnel file.

Be careful about benefit plans, and be aware of their terms in the event of termination. The Employee Retirement Income Security Act protects the rights of terminated employees and requires strict compliance. There are penalties for failure to pay vested interest in profit-sharing plans, for example. Even health-insurance plans are covered under this act. If you fail to inform an employee of their rights under health plan, you can be held liable.

Resist the temptation to transfer the employee to another job in the company if it's done solely as a means of delaying the inevitable. Sometimes a person can be better suited for another job in the organization and you should consider this alternative. But in most small businesses, there's no useful place for the person to go.

Don't delay firing an employee out of kindness, and don't notify the person too far ahead of when the termination will be effective. An employee who has been notified of termination rarely has their mind on the job and can end up disrupting other employees.

An even worse mistake is allowing an employee on his way out to train his replacement, although that has been done in some instances. Train the replacement yourself so that the mistakes and attitudes of his predecessor are not continued. Another approach is to groom a replacement over time so that someone on staff is ready to step in.

Consequences of Firing

A small-business owner who got into an argument over policy matters with his manager canned the subordinate on the spot. Within two weeks, the manager had formed his own company and attracted several major clients from his old firm as well as two key employees who felt the manager had gotten a raw deal.

Whether you call it terminated or axed, there's no easy way to fire someone who works for you. But if it's poorly handled, it can be a disaster. In addition to loss of business as in the case above, there are legal pitfalls as well. A lawsuit, win or lose, involves legal fees and the time lost defending yourself in court or before the Department of Labor.

While there is no one "right" way to handle a dismissal, there are certain steps can take to balance the rights and interests of the individual against the needs of your company. This is particularly vital in a small company where the severance of a key employee can be crippling.

Cushion the Blow

Shock, anger and surprise are common reactions to getting fired, even among employees who know their performance has been slipping and have been warned in advance. The important thing to remember in dealing with such reactions is that a person who wasn't right for you can be right for someone else.

There are several ways you can make an exit easier on the departing employee. Timely payment of all money due the person is important and will keep you from running afoul of the applicable state laws covering employment.

Some companies let a departing key employee use an office and secretarial help for free or at modest cost while he or she looks for other employment. Allowing the terminated person to submit a letter of resignation is another means of removing the stigma of being fired and makes it easier to find other work.

A letter of recommendation that does not exaggerate abilities or cover any problems may be appropriate, as may pointing the person in the direction of job opportunities that you may know about. In some cases, companies have found it worthwhile to pay for the services of an outplacement firm that helps key individuals pick up the pieces and find another job. This is done, of course, out of enlightened self-interest on the part of companies who can easily be exposed to litigation by a disgruntled ex-executive.

In the final analysis, a firing can be best for all parties concerned if it's handled properly. When problems do occur, it's often because business owners weren't aware of the potential pitfalls and did not plan for them in advance. It's clear there are no easy ways to fire someone and no simple guidelines to follow. But a business owner who is compassionate and sensitive can avoid nightmarish legal and operational problems that result when a firing is viewed simply as giving person walking papers at a moment's notice.

Avoiding Discrimination Accusations

An at-will employee may be terminated by an employer at any time with or without cause and with or without advance notice, as long as the reason for the termination is not prohibited by law. For example, federal laws prohibit discrimination in employment based on certain protected classifications, including race, color, sex (including pregnancy), religion, national origin, age (40 or over) and disability. Therefore, an employer is prohibited from terminating an employee if the basis of that termination is his or her membership in any of these protected classifications.

If an individual believes he has been discriminated against with respect to an employment decision, he must file a complaint with the Equal Employment Opportunity Commission (EEOC) or the state counterpart thereof before he can file a lawsuit alleging that an employer violated those laws.

While there is no absolute way to prevent a terminated employee from filing an EEOC charge, there are steps you can take to minimize the chances that such a complaint will be filed. Moreover, there are steps an employer can take to put itself in a better position to respond to the EEOC, if and when a charge is filed.

With respect to attempting to resolve a dispute with an employee regarding termination of employment--including any potential discrimination claims--employers sometimes offer severance packages. These packages provide some form of consideration (typically, payment of a particular amount) in exchange for a release by the employee, requiring the employee to agree to release and waive any and all claims arising out of the employment relationship between the employee and the employer. Note, however, that even if the employee signs the release and accepts the consideration, the United States Supreme Court has held that this does not absolutely preclude the employee from filing a charge with the EEOC, although it does prevent him from recovering any monetary damages. However, the EEOC is not bound by the release, and thus, under these circumstances, the EEOC can take action upon the charge, assuming it believed that a discriminatory act had occurred.

If an employer offers a severance package to an employee who is over age 40, and the employee is asked to sign a release, specific requirements must be met in order to comply with the Older Worker's Benefit Protection Act (OWBPA), which amended the Age Discrimination in Employment Act of 1967 (ADEA), in order for the employee's waiver of rights to be valid. Among other requirements, the release must include a 21-day review period as well as a seven-day revocation period; the language of the release must be understandable to the average protected employee; and the employee must be advised in writing that she has the right to consult an attorney prior to signing the release. (Please note that this article is not intended to address all the requirements under the OWBPA. Employers should speak to their local counsel for guidance when these specific issues arise.)

Whether or not a severance agreement is offered and/or signed, there are other ways you can put yourself in a better position to defend an EEOC charge, which we mentioned earlier in this article: Communicating with employees when performance and/or work-related issues arise; documenting all important communication and relevant workplace events as they occur; having witnesses present when communication is oral; and having employees sign all written communication about the issues. Additionally, an employer should enforce its policies and procedures uniformly and consistently.

None of these suggestions guarantee that an employee will not file an EEOC charge or guarantee a successful defense or favorable outcome if an EEOC charge is filed. But if done correctly, they do provide important protection to the employer.

This article was excerpted from The Small Business Encyclopedia, except for the discrimination section, which was written by Larry Rosenfeld and appeared on Entrepreneur.com as the article "Protecting Yourself When Terminating Employees."