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07. Termination of Employment Contracts

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07. Termination of Employment Contracts

Grounds for Termination

Generally, employees employed on an “at-will” basis may be terminated, with or without cause or grounds, provided it is not for an illegal reason, notably discrimination on grounds of a category protected by law or protected “whistleblowing” activity (reporting certain employer activity where the employee reasonably believes that the information he or she provided relates to potential violations of specific laws).

The employment contracts of executives and other highly-skilled individual often incorporate a “just cause termination” clause, mandating that the employee may only be terminated for “cause” and lists the permissible grounds. In such cases, the grounds for a “just cause” termination are negotiated by the parties on a case-by-case basis.

Collective Dismissals

There are no restrictions on an employer’s ability to collectively dismiss its employees. However, the WARN Act requires covered employers to provide 60 days’ notice in advance of covered plant closings and mass layoffs to: 1) the affected workers or their representatives (e.g., a labour union); 2) the dislocated worker unit in the state where the layoff or plant closing will occur; and 3) to the local government.

In general, employers are covered by the WARN Act if they have 100 or more employees, excluding employees who have worked fewer than six months in the last 12 months and not counting employees who work an average of fewer than 20 hours a week.  A covered plant closing is defined under the WARN Act as the shutdown of an employment site (or one or more facilities or operating units within an employment site) that will result in an employment loss (as defined) for 50 or more employees during any 30-day period. This does not count employees who have worked fewer than six months in the last 12 months or employees who work an average of fewer than 20 hours a week for that employer. These latter groups, however, are entitled to notice.

A covered mass layoff is defined as a layoff that does not result from a plant closing, but which will result in an employment loss at the employment site during any 30-day period for 500 or more employees, or for 50-499 employees if they make up at least 33% of the employer‘s active workforce. As defined in the WARN Act, “employment loss“ means: (1) an employment termination, other than a discharge for cause, voluntary departure, or retirement; (2) a layoff exceeding six months; or (3) a reduction in an employee’s hours of work of more than 50% in each month of any six-month period.

Even if a single mass layoff or plant closing does not trigger the WARN Act’s collective dismissal requirements, an employer also must give the 60-day WARN Act notice if the number of employment losses for two or more groups of workers, each of which is fewer than the minimum number needed to trigger notice, reaches the threshold level, during any 90-day period, of either a plant closing or mass layoff.

In addition to the federal WARN Act, many states have implemented their own collective dismissal notification statutes, known as “mini-WARN” laws. The state mini-WARN laws often mirror the federal statute, but with some variations, such as lower minimum thresholds for providing notice. For example, New Jersey recently amended its “mini-WARN” law to include coverage for part-time, remote and out-of-state employees, expansion of the definition of employer and 90 days’ written notice. Likewise, Illinois, Iowa, New Hampshire, New York and Wisconsin also have “mini-WARN” acts that apply to layoffs of as few as 25 employees.

Individual Dismissals

Except as otherwise provided in an employment contract or collective bargaining agreement, no law requires employers to follow a formal procedure when discharging individual employees. However, employees are protected from unfair dismissal in violation of federal, state and local discrimination or anti-retaliation laws.

Is Severance Pay Required?

Except as otherwise provided in an employment contract or collective bargaining agreement, employers need not make severance payments to terminated employees. However, employers often offer severance payments to bind an agreement made between the employer and employee at the time of termination to waive any potential claims arising out of the employment relationship.

Separation Agreements

Is a Separation Agreement required or considered best practice?

Separation agreements are not required under U.S. law.  In certain situations, the employee may agree to a contractual waiver of statutory rights, such as those under federal and state anti-bias laws. When proferring separation agreements, employers must keep in mind federal and state limitations, such as those promulgated by the National Labour Relations Board.

What are the standard requirements of a Separation Agreement?

Such agreements must generally meet a number of requirements to be enforceable, including the following: 1) the waiver must be knowingly and voluntarily executed by the employee; 2) the process for obtaining the waiver must be free of employer fraud, undue influence, or other improper conduct; and 3) the agreement must be supported by consideration over and above any benefits to which the employee is entitled as a matter of policy or past practice (e.g., severance pay or a severance plan, extended or continued insurance coverage, outplacement services, pro rata incentive compensation, or forbearance on employee loans).

Does the age of the employee make a difference?

Specific criteria must be satisfied for a waiver of federal age discrimination claims to be considered “knowing and voluntary” under the Older Workers Benefit Protection Act (“OWBPA”). The waiver must be written in easily understandable terms, must refer specifically to rights and claims existing under the Age Discrimination in Employment Act, must provide a minimum time period for consideration and revocation, and cannot extend to rights or claims that may arise after the date the release is executed. Additionally, it must advise the individual in writing to consult an attorney before executing the agreement.

Are there additional provisions to consider?

Additional disclosure requirements apply when waivers are requested from a group or class of employees, as in a mass layoff or reduction in force. Likewise, an employer can violate the National Labour Relations Act (NLRA) if confidentiality or non-disparagement provisions in a severance agreement require employees to broadly waive their rights under the NLRA.

Remedies for Employee Seeking to Challenge Wrongful Termination

Employees found to have been unfairly terminated in violation of the civil rights statutes or anti-retaliation provisions can resort to the various administrative agencies and the court systems. If an employee is found to have been terminated in violation of any applicable statute, the employee may be entitled to some or all of the following remedies:

  • reinstatement to former position (rarely granted);
  • monetary damages for wages and benefits lost as a result of the termination;
  • monetary damages for any emotional or physical distress suffered as a result of the employer’s actions;
  • punitive damages intended to punish an employer for egregious violations of the law; and
  • attorneys’ fees.

Whistleblower Laws

Two major whistleblower laws in the U.S. are the Sarbanes-Oxley Act of 2002 (SOX) and the Dodd-Frank Act of 2010. There are also a number of OSHA whistleblower statutes that prohibit retaliation, or “adverse action,” against workers who report injuries, safety concerns, or other protected activity. Further, there are a number of whistleblower laws at the state and local levels which generally prohibit retaliation against employees who report misconduct. In some states (e.g. New Jersey under the very broad Conscientious Employee Protection Act), it is very important for the employer to consider potential whistleblowing exposure whenever disciplining or terminating an employee.

The Sarbanes-Oxley Act includes provisions prohibiting discrimination against corporate whistleblowers who have revealed financial and other wrongdoing within a publicly traded company. SOX includes a broad range of corporate accountability and transparency measures, including a requirement that corporate boards establish internal independent audit committees. These audit committees must establish complaint procedures and accept anonymous complaints. SOX also includes provisions for enhanced financial disclosures, as well as provisions addressing auditor independence and certification of financial statements by corporate officers.

Sarbanes-Oxley’s whistleblower provisions create broad protection for employees of publicly held companies (and their contractors, subcontractors, and agents) who have a reasonable belief that fraud or other wrongdoing has occurred in violation of U.S. securities laws. A range of conduct is protected, including internal complaints, communications with Congress, contacts with government agencies, and participation in investigations of securities law violations.

Employees who suffer reprisals for engaging in protected conduct may file administrative complaints with the U.S. Department of Labour’s Occupational Safety & Health Administration (“OSHA”) within 180 days of the alleged discrimination. Complainants may name the company as well as specific individuals in such complaints. OSHA is required to determine whether there is reasonable cause to believe that the complaint has merit within 60 days of the filing of the complaint. If OSHA believes the complaint has merit, it can order relief, including preliminary reinstatement.

The Dodd-Frank Act allows for the award of monetary incentives to individuals who voluntarily provide original information relating to a violation of the securities laws, which results in the collection of monetary sanctions exceeding $1 million dollars. The bounty can range from 10 to 30 percent of the aggregate amount of sanctions collected, to be set at the discretion of the Commission (a number of factors are considered). The anti-retaliation provision prohibits an employer from retaliating against a whistleblower who makes one of three types of disclosures: i) those required by the Sarbanes-Oxley Act of 2002 (SOX); ii) those required by the Securities Exchange Act of 1934; and iii) those required by any other law, rule, or regulation subject to the SEC’s jurisdiction.

Some states have their own whistleblower laws, prohibiting termination or other adverse employment actions, in retaliation for good-faith reports made by employees about company activities that allegedly violate laws or regulations, or are fraudulent or criminal.

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