What do I need to do when an employee is fired?

When you fire a startup employee, follow six steps:

1. Check the legal risk first.
2. Deliver the decision in person, with a second person present and a short reason.
3. Pay final wages on your state’s deadline (in California, that’s immediately).
4. Give the required notices, including health insurance continuation.
5. Handle their equity.
6. If you want a release of claims, offer severance in exchange for one.

Never hold back a final paycheck until a laptop comes back.

Key takeaways

• Final pay deadlines are set by state law, and you can’t condition them on returning company property.
• Severance isn’t legally required unless a contract or policy promises it, but it’s the price of a signed release.
• Employees 40 and older get 21 days to consider a release and 7 days to revoke it.
• Unvested shares are repurchased at the price the employee paid. Vested options have a limited exercise window, usually 90 days.
• If a former employee threatens to sue, preserve evidence, notify your insurer and talk to counsel before responding.

What should I check before firing someone?

Most US employment is “at will,” meaning you can end it for any lawful reason. The risk lies in an unlawful reason, or one that looks unlawful. Before you act, check:

• Protected characteristics. Race, sex, age (40+), religion, disability, pregnancy and other protected categories. Many states add more.
• Recent protected activity. Did they complain about harassment, discrimination, pay or safety, report a legal violation, or ask for leave or an accommodation? Firing soon after any of these looks like retaliation, even if the reason is real.
• Leave. Someone on, or asking for, medical, parental or disability leave needs a call to counsel first.
• The paper trail. Is the real reason written down, in reviews, warnings or emails, from before today?
• Their contract. Offer letters and employment agreements can promise notice, severance or “cause” requirements.
• Visa holders. Ending an H-1B employee’s job has its own rules: you must notify immigration authorities and offer the cost of return travel home, or you may keep owing wages. Call counsel first.
• Timing. Firing someone just before a vesting cliff or bonus date invites a claim that you did it to avoid paying. If the timing is close, document why now.

If any of these apply, talk to counsel before the conversation, not after.

How do I deliver the news?

• In person or on video, with a second person present (a co-founder or HR).
• Lead with the decision, then a one-sentence reason that matches your documentation, such as “this is about performance against the goals we discussed in June.” Don’t debate it, and don’t add new reasons on the spot.
• Don’t promise anything you haven’t approved in advance, such as severance, a reference or a revised last day.
• Put the essentials in writing the same day: the termination date, when final pay arrives, what happens to benefits and equity, and how to return property.
• Tell them in writing not to do any more work after their last day. Work after termination is work you owe wages for.
• Cut off system access at the time of the conversation. Before the meeting, make sure the company, not the employee, owns every admin account, domain and vendor login, and remove them from any officer title or bank signatory role.

When is the final paycheck due?

State law sets the deadline, and some are strict:

• California: at the moment of termination, including unused vacation. Late pay triggers a penalty of a day’s wages for each day late, for up to 30 days.
• Massachusetts: on the day of termination, including unused vacation.
• New York: by the next regular payday.
• Other states: deadlines range from immediately to the next regular payday, and states differ on whether unused PTO must be paid out. Check your state before the conversation.

Final pay includes earned commissions and bonuses as well as wages. Commissions usually follow the terms of the commission plan.

You can’t hold back final pay, or deduct from it, until company property comes back. Most states prohibit it. Recover property separately (see below).

What notices do I have to give?

Several states require written notices at termination. For example:

• New York: written notice of the termination date and the date benefits end, within 5 working days, plus the state’s unemployment insurance notice.
• California: a written notice of the change in employment status, the state unemployment insurance pamphlet, and the HIPP notice about help paying for health coverage, at termination.

Other states have their own forms. Your payroll provider can usually generate them.

Also send notices for other benefits, such as options to convert life or disability coverage and 401(k) distribution information. Your broker or PEO usually handles these.

What happens to their health insurance?

If you have 20 or more employees, federal COBRA lets them continue your group health coverage at their own cost, and you or your plan administrator must send the COBRA notice. Smaller employers are often covered by state “mini-COBRA” laws instead, including in New York and California. Ask your broker or PEO which rules apply to your plan.

What happens to their equity?

Restricted stock:

• Unvested shares: the company has the right to buy them back at the price the employee paid (for stock bought at formation, typically $0.00001 per share). The employee usually pre-signed a stock power (a one-paragraph transfer form) with the agreement, so the company fills in the blanks, pays the repurchase price and takes the shares back. Most agreements give the company a deadline, often 90 days, to do this. Calendar it.
• Vested shares: they keep them, subject to the company’s right of first refusal and any other transfer restrictions.

Stock options:

• Unvested options: cancelled at termination and returned to the pool.
• Vested options: the employee can exercise them within the window in the plan, usually 90 days. After that, they lapse. ISOs exercised more than 3 months after termination are taxed as NSOs. See NSO vs ISO.

Update the cap table after any repurchase or cancellation. See What Happens to Startup Stock When You Leave the Company.

Do I have to pay severance?

No, unless an offer letter, employment agreement or company policy promises it. If one does, you owe it. In practice, startups pay severance in exchange for a signed release of claims. At an early-stage startup, two to four weeks of base pay is common for most employees, and executives often negotiate three to six months in their employment agreements.

Severance doesn’t have to be all cash. A package can also include a few months of paid COBRA premiums, a longer window to exercise vested options, partial vesting acceleration, and an agreed message about the departure. Changing option terms can have tax consequences, especially for ISOs, so check with a tax advisor first. Keep packages consistent for employees in similar roles and circumstances, because each one sets a precedent the next departing employee will point to.

A release needs consideration, meaning something the employee isn’t already entitled to. Severance the employee is already owed under a contract doesn’t count on its own.

Separation acknowledgment or separation agreement?

• Separation acknowledgment: a one-page letter, signed only by the company, confirming the end date and reminding the former employee of their existing confidentiality and IP obligations. Use it when there’s no severance. It can’t create new obligations.
• Separation agreement: a contract signed by both sides, in which the employee releases claims in exchange for severance. For employees 40 or older, federal law requires the agreement to give them at least 21 days to consider it and 7 days to revoke after signing (45 days, plus extra disclosures, if two or more people are let go together). Some states, including New York and California, also limit what releases and confidentiality clauses can cover.

See Separation Agreement.

What about their confidentiality and non-compete obligations?

Pull their signed confidentiality and invention assignment agreement (and any non-compete), and remind them of the obligations in writing, in the acknowledgment or the separation agreement. Confidentiality and IP assignment survive termination almost everywhere. Non-competes are a different story: California, Minnesota, North Dakota and Oklahoma generally won’t enforce them, and other states limit them. See Non-Compete Clauses.

How do I get company property back?

Keep a list of what each employee has, then send a prepaid return box with a deadline. You can make severance conditional on returning property, but not final wages. If something isn’t returned, follow up in writing, and talk to counsel before deducting anything or threatening action. If a claim is threatened or likely, don’t wipe or reissue the returned laptop or phone until counsel says you can (see below).

What do I tell the team?

That the person is no longer with the company, their last day, and who is picking up their work. Don’t share the reason. Explaining why someone was fired creates privacy and defamation risk and doesn’t help the team. If you signed a separation agreement, make sure what you say matches any agreed statement. Then make sure the redistributed work is realistic, so the remaining team isn’t quietly overloaded.

What if they file for unemployment?

The state will ask you to respond. Keep your answer factual and consistent with the reason you gave, and don’t contest a claim without a good reason. If the employee’s account of why they were let go is wrong, or they allege discrimination, respond in more detail and have counsel review it first, because what you say becomes evidence.

Letting several people go at once? Layoffs bring additional rules, including federal and state WARN Act notice requirements (federal WARN starts at 100 employees, and New York’s at 50) and group release disclosures for workers 40 and older. Talk to counsel before announcing.

What if a former employee threatens to sue?

Call counsel right away, because the deadlines are short. A company served with a lawsuit in federal court generally has 21 days to respond, state courts set their own deadlines, and missing one can mean a default judgment. A demand letter from the employee’s lawyer usually names its own response date, and ignoring it makes a lawsuit more likely.

Preserve everything that might be relevant as soon as a claim is threatened or reasonably foreseeable, not only once a lawsuit is filed. That includes email, Slack and other messages, the personnel file, and the employee’s returned laptop and phone. Don’t wipe or reissue those devices, and turn off any automatic deletion that would erase relevant messages. Courts can sanction a company that loses evidence, even through routine cleanup.

Then check two things. If you have employment practices liability insurance (EPLI), notify the carrier promptly, because late notice can cost you coverage and the policy may control which lawyers you use. See What Should Founders Know About Startup Insurance and Accounting? And check whether the employee signed an arbitration agreement, which may move the dispute out of court.

Don’t contact the former employee, their lawyer or likely witnesses about the claim until you’ve spoken with counsel. Gather the offer letter, signed agreements, performance records and the handbook in effect during their employment, so counsel can assess the claim quickly.