How to Lay Off Employees The old adage "It's a dirty job, but someone's gotta do it" couldn't be more true when it comes to laying off employees. Here's how to do it properly.

For many entrepreneurs, the thought of having to lay offemployees can be nerve-wracking. And if you're young, the actof firing an employee-especially one who may remind you of your oldUncle Stanley-can be especially daunting. You may have vividnightmares of the scene of the termination: What if Bob goes crazyand shoots up the joint? What if Brenda cries hysterically? What ifPete sabotages the computer network?

While these may be valid concerns, the fact is that terminationof employees, while almost always painful, is a vital, rejuvenatingpart of business life. Just read the business press, and you'llquickly realize that if you need to lay off some employees,you're not alone. So if you've already tried to fix mattersusing the strategies we suggested in "Restructuring a ProblemCompany,", you have no HR department and you don'thave a security guard hanging around the office, it helps to followin the footsteps of those who have been through it.

Step 1: Have a Strategy

The absolute worst way you can fire someone is haphazardly.It's harder on both you and the employee, and you have agreater risk of something going wrong-not to mention the risk offuture litigation. So whether you are canning one lousy performeror shutting down a whole business, you need to strategize ahead oftime.

A few months ago, Rafi Musher, founder and CEO of Cambridge,Massachusetts, strategic research firm Stax Research, scaledback his firm about 30 percent-and he actually wishes he would haveacted sooner. "All top firms do regular, healthypruning," says Musher, 33. "No one has a 100 percent hitrate on their hires." So he established a process of regularreviews to measure performance on a number of levels: Can theemployee grow with the business and the changes in his role? Howdoes the employee's productivity and salary level compare tothat of co-workers?

According to Musher, you ideally want to continually exit thebottom 10 percent of performers on your staff, and make thatpolicy. "If you don't think about it consciously," hesays, "you won't act on it in a timely way." Worse,poor performers impact the morale of the top performers, not tomention the bottom line and the paychecks, bonuses, and stockoptions of everyone in the company. And there are hidden costs,too-people who aren't doing well suck up a lot of managementtime, so the actual cost to the company is far greater than justsalary.

Step 2: Do Your Homework

One of the biggest mistakes you can make is to not prepareadequately. The last thing you want is your employees bombardingyou with a bunch of questions to which you can only reply,"Um, I'll have to get back to you on that one." Hereare some of the issues to consider:

• The reason for the termination. In almost all of the 50United States, as long as a separate employment contractdoesn't exist, your staff are "employees at will."This means you can fire them at any time, for any reason, providedthe termination is not based on race, religion or age. However,don't be so naïve that you think you don't need tooffer an explanation. Says James J. Rooney, chair of the employmentlaw division at Boston law firm Lucash, Gesmer & Updegrove LLP, "Oneof the best ways to avoid litigation is to handle [the termination]in a decent way." This means providing some sort of generalbut accurate reason for the firing.

• Last paychecks. Your only legal obligation to yourterminated employee is to pay all salary earned up to and includingthe termination date, plus any accrued vacation time. According toRooney, not having that last paycheck prepared for the employee onhis or her termination date is one of the biggest legal blunders amanager can make.

• Severance. There is no legal requirement to give anyseverance to employees, but most professionals see it as the rightthing to do. Of course, due to financial constraints, smallbusinesses are very rarely able to be overly generous. Twoweeks' pay is the norm for a small company, says Rooney, andit's rare to see more than three or four. Another commonpractice is to offer one week's pay for every year of service,with a two-week minimum. Generally severance packages do notinclude health care and other benefits.

• Other compensation. Be clear about your intentionsregarding any other compensation that may be due. Are thereoutstanding expenses to be reimbursed? Sales commissions to bepaid? Stock options or 401(k) benefits just about to vest? You needto have all this figured out before the meeting.

• Health insurance. In most states, you are required tooffer your employees some form of COBRA, which allows them tocontinue (at their own expense and for a finite period of time) thesame health insurance policy they had while employed by your firm.Get the required documentation from your insurance provider.

• Complete release. Because you are not required to giveyour employees severance pay, says Rooney, "if you're niceenough to give [the terminated employee] some money, get somethingin return." That quid pro quo is a "completerelease," a legal document the employee signs stating that inreturn for the severance package, he or she won't sue you. Youcan download templates of these releases from the Internet, but besure you get one that's relatively short and readable (avoidunruly legalese), and be aware of the following clauses required byfederal law:

• If the employee being fired is over 40 years old and is notfired as part of a general layoff, you must allow him or her 21days to sign the waiver and return it to you. In addition, theemployee may change his or her mind up to seven days after thereturn of the waiver and revoke the agreement. Of course, you donot pay any severance until both the 21-day and seven-day waitingperiods have expired.
• If the employee being fired is over 40 years old and is firedas part of a layoff, you must allow him or her 45 days to sign thewaiver and return it to you, in addition to the seven-day"cooling off" period.
• If the employee is under 40, you do not have to offer anynotice period at all, but it is still appropriate to allow theemployee about a week to decide, according to Rooney. You don'tneed to allow time for the employee to change his or her mind aftersigning.

• Individual issues. Don't think you can fire a wholegroup of employees without pouring over each individual personnelfolder. Everyone has his or her own issues. Possibly an employeehas an H1B visa and will therefore be deported if fired. Or perhapsyou agreed to reimburse an employee for tuition-will you still paythe outstanding amounts?

• Return of property. Make a list of all the company'sproperty that may be in the hands of your employees. They arelegally obligated to return it to you upon termination. Laptops,mobile phones, keys, parking passes, hardware, software, books,etc. are all to be returned as soon as possible after theseparation date. If you are paying severance, hold out until youget your stuff back.

Step 3: Plan the Logistics and Execute

There is no great time for a layoff, but most experts recommendyou do it in the middle of the week. Also, first thing in themorning is preferable, mainly so you don't have to sit aroundall day waiting to act.

If you are just firing one employee in a small, open office, tolimit the gawking of others and the affected employee'sembarrassment, consider firing him or her off-site, say, at thecorner deli. But no matter where you hold the meeting, ask an HRrepresentative (if you have one) or other senior manager to joinyou. "Often there is a credibility dispute and a question ofwhat was said," says Rooney, and having an extra person in theroom helps to mitigate that.

If you have several employees to fire at the same time,you'll need to carefully work through the logistics. Youcan't be in 10 meetings at once, and you want to avoid havingemployees all sit at their desks with sweat pouring down theirfaces, waiting to see if they will be called in front of the firingsquad next.

Eric Spitz, CEO of Medford, Massachusetts, digital sportstechnology firm Trakus Inc., recently had to lay off 40 percent of hisstaff, or about 18 people. On the morning of the layoff, Spitz helda meeting for all employees and told everyone there would be alarge number of layoffs, explaining the rationale behind thedecisions. Then he told staff to return to their desks. "Ifthey had an e-mail waiting for them," explains Spitz, 31,"they'd been affected and had to return to the conferenceroom for their paperwork." The terminated staff then had until1:30 p.m. to collect their belongings and leave.

As for the actual termination meeting, don't give longspeeches, argue or allow a debate to ensue. You've made yourdecision, and you cannot allow yourself to be talked out of it. Ameeting to fire someone need not last longer than 10 or 15 minutes.Explain your reasons, review the paperwork, and move on.

Step 4: Deal With the Aftermath

Even if you're firing one person, in a small company therecould be a large impact on remaining staff. Be prepared to addressthem immediately, and assuage their fears that their necks may benext on the chopping block. Also, don't reveal details aboutthe terminations-remember, many of your employees may be goodfriends with those ex-employees and may be emotional about thetermination. After all, while you've been planning this eventfor weeks or even months, everyone else will feel like they weresuddenly hit over the head with a sledgehammer.

Lastly, know that no matter how much careful planning you do,something will go wrong. So be flexible. Your employees may come inlate or call in sick. Three people may be on vacation. Or, as hashappened to this author, you may forget that it's "BringYour Kids to Work Day" for the whole office.

Do your best, be decent, and if it helps you sleep at night,just remember this: By making your company more efficient,you're doing everyone a favor.

As a CFO, CEO and consultant, Dale M. Galvin has noticed aninverse relationship between the quantity of hair on his head andthe number of employees he's terminated. He holds an economicsdegree from Cornell and an MBA from MIT, neither of which was ableto save his last two companies from the guillotine. He is nowtraveling the world seeking new methods of making employees'lives miserable.