When it's time to terminate an employee, even an executive, an employer often has a reason. Whether the reason is poor performance or a specific incident of misconduct, there is often a cause for the dismissal.
Still, there are other situations where an executive's tenure has run its course. The company may have decided to look for someone with deeper experience or may be looking to reorganize and make changes. When there is no cause for the termination, a disgruntled executive may look to sue your company.
Here's what to keep in mind when you're considering terminating an executive.
Time to dig up the employment contract
An employment contract is key to hiring an executive. Because executives have decision-making power and access to company secrets, a disgruntled executive could cause irreparable damage to the company on the way out the door.
One of the key parts of the employment contract will be the section detailing what happens when an executive is terminated with or without cause. A termination with cause occurs when an employee is fired for a specific reason and that reason is given to the employee at termination. Terminations with cause usually involve performance issues or employee misconduct. A termination without cause occurs when the employee is not given the reason for termination. When an executive is terminated without cause, he or she may be entitled to severance pay depending on the language of the contract. Some executive employment contracts provide for generous severance benefits. Disputes arise when a company terminates an executive for cause, but the executive challenges the validity of the termination, claiming the company fabricated the reasons behind the for-cause termination, merely to avoid paying the severance.
Protecting your Business
Employment contracts often contain provisions outlining the pay an executive is entitled to upon termination. Failure to pay an executive contractually owed severance can expose your business to liability. An employee can sue for breach of contract, statutory claim for unpaid wages, or wrongful discharge. Employers need to understand how these provisions work and carefully document performance issues in the case of a termination with cause.
Should they stay or should they go?
Ultimately, you need to make the decision that is right for your business. As you determine whether to keep an executive, consider the company's reasons, its legal obligations, and make sure you have good documentation as to the basis for the termination.