Managing Employee Resignations

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TLDR

If you run a business, you’ll have employees quit. There’s no way around it. Even your best employees may resign for a multitude of reasons.
No matter the reason, when an employee resigns, some level of disruption occurs. To minimize this, it’s best to be prepared for the inevitable, having processes and procedures in place for either event.
Once an employee resigns, you should begin following your standard resignation procedures. In any resignation, whether it’s friendly or not, following your procedures to the letter is critical, as it helps protect you from future liability, such as from a potential discrimination charge.
You’ll need a written resignation letter for that employee’s personnel file, documenting their decision to leave. Most resignation letters will address the employee’s intent to leave along with the effective date of the termination.
Your IT professional should disable all computer and account access, disable all passwords, and secure the return of any startup-issued equipment, such as laptops or cell phones.
You should identify that employee’s open tasks and projects, deciding what can be finished by the employee and what needs to be transferred to other employees. This also is an excellent time to evaluate whether you need to hire a replacement.
Next, you should determine which benefits programs the employee has subscribed to, such as health insurance or retirement benefits. Additionally, you’ll need to check with your state law to determine how to issue the employee’s last paycheck.
Lastly, you should conduct an exit interview.
When an employee resigns, you’ll also have to address your other employees and about the employee’s departure.
For key employees, you want to make sure that you have non-disclosure, confidentiality, non-solicitation, and, perhaps, non-competition agreements in place. Additionally, it’s crucial to determine how to handle a terminating employee’s stock, if applicable.

If you run a business, you’ll have employees quit. There’s no way around it. Even your best employees may resign for a multitude of reasons. According to a recent report by the U.S. Bureau of Labor Statistics, the employees typically stay at their jobs for 4.1 years.

For instance, the employee may want to pursue future endeavors. Or stay home with family. Or go back to school. However, no matter the reason, when an employee resigns, some level of disruption occurs. To minimize this, it’s best to be prepared for the inevitable, having processes and procedures in place for either event.

In this article, we’re going to explore how to manage employee resignations.

How to Resign an Employee

Once an employee resigns, you should begin following your standard resignation procedures. In any resignation, whether it’s friendly or not, following your procedures to the letter is critical, as it helps protect you from future liability, such as from a potential discrimination charge.

Here are the steps you should follow when creating resignation policies and procedures.

Request a resignation letter

When an employee resigns, they may tell you verbally. However, you’ll need a written resignation letter for that employee’s personnel file, documenting their decision to leave. Most resignation letters will address the employee’s intent to leave along with the effective date of the termination.

Here, you’ll know if the employee gives you a notice period before the last day of work, such as a two-week notice. Legally, a notice period is not required by either state or federal regulations. However, your employee handbook may specify that the employee gives notice of termination. If your state law determines that your employee handbook is a contract between the startup and the employee, and notice is required, then the employee will have breached that contract by leaving without notice.

To understand if your employee handbook is a contractual agreement between you and your employees, you should seek qualified legal advice in your state.

Notify IT

As security is a concern anytime an employee leaves, you’ll need to notify your IT professional, whether they are in-house or acting as a third-party vendor for your startup. Your IT professional should disable all computer and account access, disable all passwords, and secure the return of any startup-issued equipment, such as laptops or cell phones.

Transfer work assignments

Once you receive word that an employee is leaving, you should identify that employee’s open tasks and projects, deciding what can be finished by the employee and what needs to be transferred to other employees. This also is an excellent time to evaluate whether you need to hire a replacement based on the resigning employee’s workload. If you decide that a replacement is necessary, you should determine the timeline for a replacement while making a recruiting plan.

Address benefits cessation and last paycheck

Next, you should determine which benefits programs the employee has subscribed to, such as health insurance or retirement benefits. For health benefits, if your startup employs 20 employees or more, you are required to offer federal health coverage continuation under the Consolidated Omnibus Budget Reconciliation Act (COBRA). If you have less than 20 employees, then you’ll need to check your state’s law. Many states require smaller companies to offer health coverage continuation under state law, often referred to as “mini-COBRA.”

Additionally, you’ll need to check with your state law to determine how to issue the employee’s last paycheck. For example, in New York, the employer must pay the resigning employee no later than the next regular payday. Further, if the employee asks the employer to mail the check, the employer must do so.

Oregon, on the other hand, has much stricter “payment of final wages” laws. For example, suppose an Oregonian employee quits with less the 48 hours’ notice. In that case, the employer must pay that employee within the next five business days or on the next regular payday, whichever is sooner. However, if the employee quits with at least 48 hours’ notice, the employer must pay that employee on their last day of work, unless such day falls on a holiday or weekend. If that’s the case, the employer must pay the employee by the end of the next business day.

Oregon has a few more requirements related to the payment of final wages, but you get the idea. Be sure to check with state laws, or hire a qualified attorney, to make sure you’re not yourself up for unnecessary fines and penalties.

Conduct an exit interview

Lastly, you should conduct an exit interview. This allows you to discuss the reasons for the employee’s resignation. Further, it will enable the employee to give you feedback on your startup about management styles, workload, and the like. Take this opportunity to learn how to improve moving forward.

How to Notify Staff of an Employee Resignation

When an employee resigns, you’ll also have to address your other employees and about the employee’s departure. Call a quick meeting, letting your team know about the resigning employees’ last day. If the departing employee is a valued member of the team, you may want to share the good news of the employee’s next move, encouraging your team to join in well wishes.

Upon hearing about the employee’s resignation, your team may be concerned that their workloads will increase, bearing the brunt of the departure. Assure them by discussing your plan about how the work will be re-distributed and if you plan on hiring a replacement.

What to Do When a Key Employee Resigns

If the employee that’s resigning is a key employee, does your resignation approach change? Before we get into additional processes and procedures, let’s revisit the definition of a key employee.

According to Indeed, “key employees refer to employees with a large amount of ownership or a decision-making role within a company. They essentially have a significant role in a company's operations. Key employees also refer to employees who contribute to the success of a business and continue to exceed expectations.” Key employees may be other founders or early employees who helped your startup get off the ground or expand.

This may be an employee you relied on to help execute your vision by bringing a specific set of skills to the startup. And it hurts when someone like this leaves. But you can’t let emotions rule here—as hard as it may be.

For key employees, you want to make sure that you have non-disclosure, confidentiality, non-solicitation, and, perhaps, non-competition agreements in place. The non-disclosure and confidentiality agreements legally prohibit the employee from telling others about your proprietary and confidential processes, products, and services. In contrast, the non-solicitation agreement bans them from “stealing your customers” or other team members.

A non-competition agreement prohibits employees from working in a similar area as your startup within a particular geographic area during a specific timeframe. For example, the contract may ban the employee from working in a similar field as your startup within your county for two years.

However, the time for a key employee to sign these agreements is not when they terminate employment but when they join you, making the execution of these agreements a condition of employment. Putting these protections in place at the beginning of the employment relationship protects you in the end when a key employee with intimate knowledge of your business leaves.

Keep in mind, non-competition agreements (or “non-competes”) are increasingly becoming unfavorable in the eyes of the law. Therefore, before you have an employee sign one, it would be best to consult with an experienced attorney.

Like any terminating employee, you’ll work with IT, determine how to handle the last paycheck and the cessation of benefits, and decide how to handle that key employees’ workload. However, as a key employee, that team member may also have stock in your startup.

It’s crucial to determine how to handle a terminating employee’s stock. To know what steps to take, you’ll need to determine what kind of stock it is (e.g., stock options, restricted stock, or straight stock) and which legal document governs it (e.g., operating agreement or shareholders’ agreement). For example, the employee may have to sell the stock back to the startup, receiving the value of the stock in cash. Or, if the employee has stock options, he or she may have a specific period in which to exercise the options.

Losing an employee is never easy. However, the more your prepare, the more legally protected you are. Consider hiring a qualified business attorney to help you put the proper documents and processes for resignation in place. It would be money well spent.

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