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Employee Termination for Startups: What Founders Need to Know
Firing an employee is one of the most difficult parts of running a startup. Whether due to performance issues, role redundancy, or a strategic shift, termination is not only a business decision but also a legal one. If handled poorly, it can lead to lawsuits, damage team morale, and affect your ability to attract future hires.
Contractor or Employee? A Startup Founder's Decision Guide
Startups thrive on flexibility, and independent contractors often feel like the perfect solution. But the distinction between contractor and employee carries real legal weight. Get it wrong, and your company could face IRS audits, back taxes, wage penalties, and even personal liability.
FAQs
Open allCan I make an offer letter verbal instead of written?
It’s not recommended. A written letter avoids disputes, creates clarity, and provides a paper trail if questions arise later.
Do startups need both an offer letter and an employment agreement?
Yes. The offer letter provides a summary of terms, while a formal employment agreement can cover more detailed obligations, protections, and restrictions.
Is an offer letter legally binding?
Most offer letters are not legally binding contracts, but they do outline expectations. Binding obligations often come from separate agreements, like equity grants or confidentiality agreements.
Should startups get resignations in writing?
Yes. Even a simple email confirmation helps avoid disputes later and provides documentation if questions arise with unemployment agencies.
What should startups include in a final paycheck?
All wages earned, plus unused vacation or PTO if state law requires it. Bonuses or commissions earned up to the last day should also be included.
Can employees who quit still collect unemployment?
In most cases, no. However, if they resigned due to unsafe conditions, harassment, or other “good cause,” they may still qualify.
Does it matter legally if someone quits or is fired?
Yes. Terminations usually trigger more legal and financial obligations, including unemployment eligibility and faster final paycheck deadlines.
What’s the best way to tell the team about a termination?
Keep it professional, brief, and focused on the business. Avoid sharing details about performance or personal issues. Frame the update around the company’s future direction.
Should founders always use a separation agreement?
Not always. For low-risk terminations, it may not be necessary. However, in cases involving layoffs, complaints, or sensitive situations, a separation agreement can reduce potential disputes.
Do startups have to pay unused vacation after termination?
It depends on the state. For example, California requires payout of unused vacation, while other states leave it to company policy. Check your state’s rules before finalizing pay.
Can a startup fire someone without giving a reason?
In most at-will employment states, yes. However, firing must not be based on discrimination or retaliation. Documenting valid business reasons is strongly recommended.
How often should startups review classifications?
At least annually, or whenever roles change significantly. Job responsibilities, not just titles, determine exemption status.
Do all salaried employees qualify as exempt?
No. Salary alone isn’t enough - the role must also meet the duties test.
What happens if I misclassify an employee?
You may owe back overtime pay, penalties, and attorney fees. Regulators can also audit your payroll practices.
What does “exempt” mean under employment law?
It means the employee is exempt from overtime pay requirements, usually because they earn a salary and perform executive, administrative, or professional duties.