Basics of Employment Termination Clauses

When you receive a new job offer, you’re probably focusing on the start of the job and not the end of it. However, it can be too little too late to review the termination terms when you’re actually leaving or being let go from a job. This week, let’s cover the basics of what a termination clause consists of, its types, and its implications.

What is a Termination Clause?

A termination clause determines what happens when you leave a company. Sometimes, ‘termination’ sounds very negative, but it refers to the general termination of a formal employment relationship with a company as opposed to just being ‘fired’. This clause will stipulate the process and consequences of your departure as it relates to your compensation and benefits.

What are the types of Termination?

There are 3 common types of termination:

1. Voluntary Termination: Also known as quitting, this type of departure comes from the employee leaving their company on their own will by resigning.

2. Termination for Cause: Also known as getting fired, this type of involuntary departure is initiated by the company and due to the employee mishandling their work responsibilities.

3. Layoff: This type of involuntary departure is due to the downsizing of a company for reasons not directly related to employee performance, such as economic downturn or a change in company direction.

It’s important to note here the case of at-will employment, practiced broadly in every US state but Montana. Technically, at-will employment means that either parties can terminate the employment at any time for any reason or no reason at all. In other words, it creates a fourth type of potentially involuntary termination without cause, where you are terminated without the benefits granted to people who are laid off. There are important exceptions to at-will termination that we encourage reading our separate blog post to learn more about.

What are the implications of Termination?

Depending on the type of termination, employees are either entitled to benefits or some potentially very negative consequences. Let’s take a look:

1. Voluntary Termination: When you quit, you’re typically not given any post-departure benefits since you decided to leave ‘on your own’. You’re entitled to all your wages earned through your final day and benefits cease on that day as well. For many employers, however, it is common to extend benefits such as healthcare until the last day of your departing month. Afterwards, you are federally mandated access to the same healthcare plan through COBRA for at least 18 months while paying for the entire premium. Employers may also provide severance pay in exchange for signing a Separation Agreement.

2. Termination for Cause: When you’re fired, you will usually not receive any post-departure benefits or severance pay. That being said, asking you to sign a Separation Agreement in exchange for severance pay is not unheard of. As is the case of all terminations, you are still legally entitled to your final paycheck. Unless there has been a significant legal conflict between you and your employer, it’s difficult for employers to be able to ‘claw back’ your compensation after it’s been earned. The most common form of compensation clawback is in the case of bonuses and equity, so it’s worth reading the fine print of the conditions of granting such types of additional compensation.

3. Layoff: The US has sweeping protections for employees facing a mass layoff. We’ve written about the WARN Act in a separate post, where most businesses are required to provide at 60-day notice, during which time employees must be paid and provided full benefits. As a result, terminations due to layoffs provide the most ample post-employment benefits, such as job placement support, healthcare, and severance pay.

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We’ve covered a lot of content in this post, but we hope your takeaway is recognizing how important it is to understand your termination terms at the start of your job as opposed to the end. Regardless of what your contract says, you’re always entitled to your earned wages up till your final day of a job. However, beyond that legal requirement, there are many termination clause nuances that may impact your benefits and clawback of non-base compensation laid out in your contract. As always, read the fine print!

For advocacy and beyond,
The Ask Ginkgo Team