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Employee Termination Practices: Minimizing Legal Risks and Ensuring Compliance

Are you worried about being sued for wrongful termination?

Employee termination can be a challenging and legally sensitive process for any organization. The repercussions of mishandled terminations can range from financial losses to legal troubles. It is crucial to follow effective termination practices to protect your firm and minimize legal risks associated with terminating an employee. In this article, we will explore key considerations and steps to ensure a smooth and legally compliant termination process.

The Importance of Proper Termination Practices

This is a nightmare scenario where one rogue adviser can cost your firm a lot of money and headaches.  Because the firm had no termination policies and had not documented the interaction and investigation of the trading activity, they spent a lot of time defending a wrongful termination suit. They are still involved in several arbitrations with clients and ultimately were fined by the state for failing to respond to the red flags created by the adviser’s rogue trading activity in a timely manner.

Let’s start with a cautionary tale. We recently learned about an advisory firm that faced significant financial and legal consequences due to a wrongful termination. One of their advisers, who suffered from bipolar disorder, engaged in high-risk trading activities on behalf of clients with conservative investment strategies. The resulting losses led to client complaints, arbitrations, and regulatory scrutiny. The firm terminated the adviser, but the situation escalated when the former employee sued, alleging unlawful termination based on a mental health issue. The lack of termination policies and inadequate documentation made the firm vulnerable to prolonged legal battles and regulatory penalties.

While such nightmare scenarios are rare, it’s crucial to be prepared and implement proper termination practices to minimize legal risks in any termination scenario. Improper terminations can lead to defamation claims, retaliation cases, and wrongful termination allegations. By following a well-defined termination process, you can mitigate these risks and ensure compliance with employment laws.

Key Topics to Address in a Termination Meeting

When terminating an employee, certain essential topics should be addressed during the termination meeting. By covering these points, you can provide clarity, maintain professionalism, and reduce the potential for misunderstandings or legal disputes. Here are the key topics to include:

Decision and Reasoning

Clearly communicate that a decision has been made to terminate employment and provide a concise, factual explanation of the reasons behind the decision. Documenting the key facts supporting the termination decision is crucial for future reference.

Effective Date and Separation Details

Specify the effective date of separation and discuss logistical details related to the employee’s departure, such as returning company property and any immediate actions following the meeting.

Review of Separation Package

Outline the separation package and benefits the employee is entitled to, including any severance pay, continuation of benefits, or other relevant compensation details. Ensure transparency and address any questions or concerns the employee may have.

Reference Policies and Procedures

Explain the company’s policy and procedures regarding providing references for the terminated employee. Discuss any limitations or guidelines in place to ensure compliance with legal requirements and protect the firm’s interests.

Exit Activities

Cover any additional exit activities, such as exit questionnaires, outplacement services, or final meetings to facilitate a smooth transition for the departing employee.

Post-Termination Restrictions

If applicable, review any post-termination restrictions, such as non-compete or non-disclosure agreements, and discuss their implications with the employee. Provide guidance on adhering to these restrictions to protect your firm’s interests.

Post-Termination Contact Information

Inform the employee whom they should contact for any post-termination issues or questions they may have, ensuring a clear point of contact for ongoing communication.

Preparation and Legal Guidance

To ensure a well-executed termination process and compliance with employment laws, it is advisable to prepare for the meeting in advance. Additionally, involving your attorney in the termination process can provide valuable legal guidance and help you navigate potential legal pitfalls.

Understanding Employment Contracts

While the “employment at will” doctrine allows termination without notice or cause, having an employment contract can provide additional clarity and protection for both parties. Particularly for positions such as Investment Adviser Representatives (IARs), having a written agreement and non-solicit and non-compete provisions can be beneficial.

Proper termination practices are essential for protecting your firm’s interests and minimizing legal risks associated with employee terminations. By addressing key topics in termination meetings, preparing in advance, and seeking legal counsel when necessary, you can ensure compliance with employment laws and maintain a professional and respectful approach throughout the process. Remember, effective termination practices contribute to a positive workplace environment and safeguard your firm’s reputation.

Need counsel? Contact us to speak with one of our attorneys today.

Author Bio

Leila Shaver is the Founder of My RIA Lawyer, a law firm that provides compliance and legal consulting for financial institutions. With extensive experience as a securities attorney and compliance expert, she has served as Chief Compliance Officer and General Counsel to RIAs, BDs, and TAMPs with billions in assets under management.

Leila understands the challenges RIAs face and is committed to helping RIAs streamline their processes, mitigate risks, and ensure compliance with regulatory requirements. She received her Juris Doctor from Atlanta’s John Marshall Law School and is a West Georgia Young Lawyers’ Association member. Leila has received numerous accolades for her work, including the Carroll County Bar Association’s Outstanding Young Lawyer Award in 2017.

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