Managing an employee when their contract ends can be difficult. It is important to handle the situation with care and professionalism. Managers must follow the correct legal process to ensure fair outcomes for all parties.
Contract termination refers to a situation where one or more parties decide to end the contract earlier than originally planned. When a contract is terminated, the responsibilities and obligations initially set out by the parties end.
A contract can be ended for a variety of reasons, including breach of contract, poor performance, gross misconduct or mutual agreement.
In this article, you can find out what steps you should follow when an employee’s contract comes to an end.
Review the contract terms and conditions
In most US states, employees are hired on an “at-will” arrangement. This means they can be fired by their employer at any time, provided that the reason for terminating the contract is not unlawful.
This is the presumed relationship between employers and employees in the US unless a formal contract or agreement is in place. It accounts for approximately 74% of the US workforce.
However, if a formal contract or agreement has been put in place, the employee and employer must ensure there are legitimate grounds to terminate it.
Examples of reasons why a contract might be ended prematurely are usually set out in the contract or employee handbook.
Employers and employees must follow the explicit terms set out in the contract if they want to terminate the agreement, including any agreed notice period. If a notice period is required by either party, this must be factored in when working out the contract termination date.
It is also important to check whether the contract includes a renewal clause. If the contract includes a renewal clause, appropriate written notice to terminate the contract must be given.
As such, managers and employees should carefully read through any employment contract or agreement before deciding to terminate a contract of employment.
Prepare the necessary paperwork
After the contract paperwork has been checked, the following documents must be prepared:
- Termination letter. This is a formal letter, which informs one party to the contract that the other party wishes to cancel or terminate the employment relationship. It must include the reason that the contract is to be terminated and the proposed final date of employment (in line with any contractual notice period).
- Final pay calculations. It is important to check the appropriate state laws when calculating and paying an employee’s final paycheck. For example, in California, final wages must be paid immediately, including any accrued payment for vacation leave. If the employee resigns with immediate effect, the final paycheck must be paid within 72 hours. If the employee provides more than 72 hours’ notice, the employer must pay them immediately. In New York, employers are allowed to pay the final paycheck on the next payday.
- Tax forms. When calculating an employee’s take home pay, employers must deduct federal income taxes, FICA taxes (social security and Medicare) and state income taxes. The total amount to be withheld for the employee’s final paycheck depends on the information they provided on the Form W-4, including their filing status, number of dependents and total income.
Employers must also check the employment contract to establish whether the employee is due any severance pay.
Provide advance notice
As a responsible employer, it is important to provide advance notification of contract termination. This information must be set out clearly, in writing, and include the following information:
- Effective end date
- Final paycheck details
- Instructions for returning company property
Equally, if the employee wishes to terminate the employment contract, they must offer advance notice in line with the employment contract.
Conduct an exit interview
Exit interviews offer three main benefits:
- Allows employers to gather useful information relating to employee turnover, which can be used to reduce future turnover
- Offers insights into organizational issues from an employee perspective
- Encourages the employee to offer constructive feedback on their employment experience and leave on a positive note
It is best to conduct the exit interview as soon as possible after notice of the contract of termination is given, as you are more likely to gather fresh and relevant information.
Where possible, managers should provide a written summary or questionnaire of the topics to be discussed prior to the exit interview, as this provides structure to the meeting and helps the employee know what to expect.
Organizations should avoid asking the leaving employee’s line manager to conduct the exit interview.
Where possible, exit interviews should be conducted by a neutral person, as the leaving employee is more likely to speak honestly about their experience.
Often, a member of the HR team is a good option, although some companies prefer to hire external consultants to conduct exit interviews.
Create a transition plan
Transition plans are a useful way to ensure a smooth handover process when an employee leaves.
The transition plan should include details of the leaving employee’s main roles and responsibilities.
It is a helpful document for both the new employee, supervisor and management team. It should include:
- Details of the standard duties of the job role. Including information on the day-to-day responsibilities helps the management team to identify which duties can be allocated to other members of the team during the transition period. When the new post holder starts, they should have a good idea of what to expect from the role. It can be helpful to break this section down into daily, weekly, monthly and annual responsibilities.
- Information on current projects. For each, the employee should provide a description of where they are up to, details of the next steps and any relevant dates and deadlines.
- Tasks to be completed prior to the contract end date. Including this information helps the leaving employee to manage their time during their final weeks of employment. It also helps to show the management team which projects are already being taken care of.
- Details of any useful professional contacts. If the employee regularly speaks to internal colleagues or external contacts, they should include a brief summary of their name, contact information and the projects they can help with.
Offer support and assistance
When an employment contract ends, the HR team can provide a variety of support and guidance throughout the offboarding process.
Above all, both HR and management should strive to leave a positive lasting impression on the employee by treating them with respect throughout the process.
Depending on the reason for the contract termination, this may include facilitating conversations between the departing employee and their manager, conducting an exit interview, organizing employment references or offering support from the occupational health service team.
Review and settle final payments and benefits
When an employment contract is terminated, the organization must review and settle any relevant final payments, including the employee’s final paycheck and any outstanding benefits owed to them.
When calculating the final payment, managers must consider vacation pay, paid time off (PTO), sick pay and any other financial benefits or bonuses that are due to the member of staff. Managers must also issue the relevant tax forms and make arrangements to reclaim company property, including uniforms, IT equipment and communications devices.
In relation to PTO, managers must check federal laws, company policy and the employee’s contract. In some cases, employees will be entitled to receive some or all of their unused vacation leave or sick leave. In some states, this is limited.
Usually, entitlements to company private health insurance stop on or around the employee’s leaving date. It is important to check the employment contract for more information on this.
When an employee leaves a job, their 401(k) will remain with their employer-sponsored plan until they take action. Some people might choose to leave the account alone if the account balance is high. Other people prefer to move the money into a new plan or individual retirement account (IRA).
Celebrate the departing employee's contributions and achievements
It is important to celebrate the departing employee’s contributions and achievements. One study identified that 37% of employees feel motivated to improve their performance if they are recognized for their achievements.
Every employee is different, so it is important to talk to them about their preferences. Some people will be delighted to attend a big goodbye party, whereas others would prefer a quieter celebration with their immediate colleagues.
If you want to offer a gift, be sure to review the company’s gift-giving policy and make sure that it will not leave the departing employee subject to any tax implications.
You may choose to send a sincere thank you letter to acknowledge their service and achievements during their employment. Whatever you decide, it is important to show gratitude to the employee and end the working relationship positively.
Ending an employment contract requires planning and care. This helps to ensure the process remains in line with federal laws and employment legislation.
Employment contracts can end for a variety of reasons. Some employees leave employment to pursue other job opportunities; other contracts are terminated for poor performance, misconduct or capability.
Although the basic process is the same, each situation will be slightly different, so managing contract termination on a case-by-case basis is important.
June 26, 2023
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