What is 'Termination of Employment'

Termination of employment refers to the end of an employee’s contract with a company. An employee may be terminated from a job of his/her own free will or following a decision made by the employer.

An employee who is not actively working due to an illness, leave of absence, or temporary layoff is still considered employed if his or her relationship with the employer has not been terminated formally with a notice of termination.

BREAKING DOWN 'Termination of Employment'

Voluntary Termination

Termination of employment can be voluntarily done by an employee. An employee who makes the voluntary decision to terminate his employment status with a company usually does so when he finds a better job with another company, retires from the labor force, resigns to start his own business or take a break from working, etc.

Voluntary termination of employment could also be a result of constructive dismissal. This means that the employee left the company because they had no other choice. S/he could have been working under significant duress and difficult working conditions under the employer. Cited difficult conditions include lower salary, harassment, new work location that is farther than the employee can reasonably commute to daily, increased work hours, etc. A forced discharge of an employee, whereby he is given an ultimatum to quit or be fired, also falls under constructive dismissal. In these cases, if the employee can prove that the employer’s actions towards him during his tenure with the company was unlawful, he may be entitled to some form of compensation or benefits.

An employee who voluntarily leaves his employer may be required to give advance notice to his employer, either verbally or in written form. A two-week advance notice is usually required in most industries. In some case, notice is given to the employer at the time of termination or no notice is given at all as seen when an employee abandons the job or fails to return to work.

Involuntary Termination

Involuntary termination of employment occurs when an employer lays off, or dismisses or fires an employee. A layoff or organization downsize is a decision taken by a company to reduce the number of its staff in order to reduce its cost of operations, restructure its organization, or because the employee’s skill set is no longer needed. Employees are usually laid off due to no fault of their own, unlike workers who are fired.

An employee is usually fired from a job as a result of unsatisfactory work performance, poor behavior or attitude that does not fit with the corporation’s culture, or unethical conduct that violates the company’s policies. Following At- Will Employment laws recognized in some states, an employee that finds himself performing poorly or violating some form of the company’s rules may find himself dismissed without warning. In fact, the company does not have to give a reason for why the employee’s job is being terminated.

While employment at-will contracts do not require an employer to warn or give reason for a dismissal, an employer cannot fire a worker for certain reasons. An employee who refuses to work more than the hours specified in his contract, takes a leave of absence, reports an incident or a person to the Human Resources department, whistleblows to industry regulators, etc. cannot be fired for these reasons. An employer who discharges an employee for exercising his or her legal rights has done so unlawfully and may be liable for wrongful termination in the courts.

An illegal dismissal also occurs when an employee lets an employee go for discriminatory reasons such as religion, race, age, gender, disability, or nationality. An employer who has been found guilty of wrongful termination may compensate the wronged employee and/or reinstate him or her into the company.

Other than at-will conditions of employment, an employer could fire an employee for cause– known as termination for cause. A termination for cause clause may require the employer to put the employee on an improvement schedule, say 60 or 90 days, during which the employee is expected to improve his work ethics. If the employee does not improve after the probationary or corrections period, he could be terminated for cause and dismissed with prejudice.

In some cases, an employer may dismiss an employee without prejudice. This indicates that the employee was let go for reasons other than incompetence, insubordination, or misconduct in the workplace. In such situations, the employee may be rehired for a similar job in the future.

Termination Compensation

In most cases where an employee who has worked with a given company for at least three months has his employment involuntarily terminated, the employer may provide him with a notice of termination and/or a termination pay (i.e. severance pay). Under the Fair Labor Standards Act (FLSA), a company is not mandated to provide severance packages. A company that offers severance does so following an agreement made privately with the employee.

Also, employers are not required by federal law to give the terminated employee his or her final paycheck immediately. State laws may operate differently in this regard and may mandate the employer to not only immediately provide the affected employee with his or her final paycheck, but to also include accrued and unused vacation days.

A worker who is unemployed through no fault of his own may be eligible to receive unemployed benefits. Each state administers separate unemployment insurance payments program to offer temporary financial assistance to people who are unemployed and looking for a job. The United States Department of Labor (DOL) provides more detailed topics on benefits that unemployed workers may be entitled to. Please visit the DOL website for more information.

  1. Notice of Termination

    A notice of termination refers to how an employer notifies an ...
  2. General Employer

    An employer who loans an employee to another business, and who ...
  3. Zero Layoff Policy

    A type of company policy that dictates that no employees would ...
  4. Constructive Discharge Claim

    An insurance claim made by an employee who has quit his or her ...
  5. Key Employee

    A staffer who is a stakeholder and in a decision-making role ...
  6. Unit Benefit Formula

    A method of calculating an employer's contribution to an employee's ...
Related Articles
  1. Personal Finance

    How to Lay Off Staff

    Firing employees isn't easy, but it is simple: Be honest, be compassionate and be quick.
  2. Financial Advisor

    Life Insurance Plans to Help Your Small Business Retain Employees

    How to use and design cash value life insurance plans as an incentive to help attract and retain key employees.
  3. Insurance

    Life Insurance as a Bonus Plan for Key Employees

    A Section 162 plan is a life insurance plan provided by an employer to key employees.
  4. Managing Wealth

    Top Job Perks You May Not Have Heard Of

    Companies are becoming increasingly creative with their benefits packages, in order to attract younger employees.
  5. Managing Wealth

    The Difference Between Being Fired And Resigning

    Here's a rundown of how the two scenarios differ and what you need to know about each.
  6. Financial Advisor

    Understanding Rules on Defined Benefit Pension Plans

    Defined benefit plans offer advantages to both employers and employees. Employers must understand the federal tax rules when establishing these plans.
  7. Personal Finance

    8 Things Employers Aren't Allowed to Ask You

    In their eagerness for gainful employment, many people may overlook these improper interview questions.
  8. Retirement

    Is a SIMPLE IRA Right for Your Small Business?

    Here's how small businesses can benefit from offering a SIMPLE IRA to their employees.
  9. Small Business

    How Corporate Culture Affects Your Bottom Line

    Here's a look at how companies can be successful financially by promoting a positive work atmosphere for employees.
  1. What can cause the terminal growth rate to be negative?

    Learn about the assumptions built into terminal valuations and in what circumstances the applied terminal growth rate might ... Read Answer >>
  2. Can LLCs have employees?

    Discover how limited liability corporations (LLC) can have an unlimited number of employees and the legal steps required ... Read Answer >>
  3. What does a merger or acquisition mean for the target company's employees?

    Learn about the likely impact of a merger-and-acquisition deal on the target company's employees, including their benefits ... Read Answer >>
Trading Center