Fires (or "Involuntary Terminations")

Lesson Last Updated: September 28, 2023

Lesson Highlights

This is perhaps the thorniest part of being an employer: firing people. It's not fun to do, and there's enough risk that it always feels a little bit scary, no matter how many times you do it.

Well, it might feel a little less scary knowing the legal landscape here in California. At least, that's our hope after you're done reading this lesson!

In this lesson, we'll cover the following topics:

How at-will employment works;
The basic documents you need to provide to an employee when they've been fired; and
How final pay works when you fire an employee.

At-Will Employment

California is an at-will employment state, which means an employer may generally terminate an employee at any time, with any notice or no notice, for any reason or no reason at all. Likewise, an employee may choose to leave under the same broad circumstances. This is important because "cause" is defined under California law as "a fair and honest cause or reason, regulated by good faith on the part of the employer." [1]

Now of course, we have faith that all of our clients are acting in good faith when they tell us that they need to terminate an employee. However, employers would be significantly burdened if they had to prove to a court or jury that they acted "fairly" and "in good faith" every time they fired an employee. Employers shouldn’t have to compile a dossier of evidence every time they need to make a hard decision like firing an employee.

There are a few things to keep in mind here:

There is a legal presumption that all employees are at-will here in California, bending in favor of the employer, but that presumption can become “displaced” (or overcome) if the employer communicates something contrary to its employees. This can happen accidentally! For example, if you require an employee to give notice before they can quit, you may have displaced that presumption; suggesting a notice period may not displace the presumption, but it will depend on the specific language used. This is another of the many reasons why an attorney should have eyes on the documents you provide to your employees.
Even if you don’t technically need a reason for termination, because the at-will presumption is intact, it’s still best practice to document the employment relationship as much as possible and rely on a documented reason for termination whenever possible. This can help protect you from a discrimination claim!

Make Sure You Document Everything

California law requires that all involuntary exits be in writing. [2] In addition, the law requires that employees that have been involuntarily terminated be given access to unemployment benefits, healthcare, and other benefits (in certain circumstances).

What follows is a (non-exhaustive) list of legal considerations and documentation that you’ll need to understand before you fire an employee. This is where things get complicated and it’s always a good idea to consult your lawyer to see how these requirements apply to you:

California law requires employers to give a written “Notice to Employee as to Change in Relationship” form to all discharged employees immediately upon involuntary termination. [3]. We’ve included a model notice at the end of the lesson, though your attorney may recommend a more robust document to ensure that you properly capture the nature of the termination. Always speak to an attorney before terminating an employment relationship!
The Employment Development Department (“EDD”) also requires employers to provide their unemployment benefits pamphlet, called “For Your Benefit,” to all employees “when appropriate” and typically this means upon involuntary termination. [2] We’ve included this pamphlet for you at the end of the lesson.
Then there’s COBRA and the required notices. COBRA stands for “Consolidated Omnibus Budget Reconciliation Act.” The Department of Labor requires that employers with twenty (20) or more employees provide a COBRA election notice to any employees who are involuntarily exited and who were on an employer-sponsored health insurance plan. You also need to provide this notice to any of the terminating employee's dependents on the plan. Any employer needs to notify their insurance carrier of the termination within thirty (30) days of the termination, and once the carrier is aware of termination, the plan must provide an election notice within fourteen (14) days. [4] However, best practice is to notify your insurance carrier as soon as possible, and ideally you reach out once you know what the termination date will be so they can get their ducks in a row. We’ve also included a model notice at the end of the lesson, just in case you need it.
The COBRA we referred to above is a federal law, but there’s also Cal-COBRA, which stands for “California Continuation Benefits Replacement Act.” Confusing, right? Make sure you ask your insurance carrier whether or not you need to provide a Cal-COBRA notice in addition to federal COBRA! [5] The answer is likely yes.
Similarly, the Department of Health Care Services requires employers to provide the Health Insurance Premium Payment (“HIPP”) notice, DHCS 9061, to certain employees along with the COBRA notice. [6] We’ve included the model notice at the end of the lesson.
The IRS requires notices to employees who have been involuntarily terminated within certain time frames to advise them of their rights to retirement benefits. [7] If you offer retirement benefits to your employees, we recommend reaching out to your benefits administrator or provider for information on this topic prior to termination.
California law requires employers to provide to employees, upon termination, notification of all continuation, disability extension, and conversion coverage options under any employer-sponsored coverage for which the employee may remain eligible after employment terminates. [8]

In a response to the trend of allowing employees to work remotely, California permits employers to distribute these required notices to employees by email. [9] However, the final paycheck is a bit trickier, so be sure to read the next section carefully!

Final Pay Rules

The timing of when you have to provide a departing employee with their final paycheck is determined by the exit type. We’ll cover the timing for each type of exit in their respective sections!

Employees who are fired must be paid on the same day as termination, at the place of termination. [10] So for example, if your employee is notified that they will be terminated effective February 28, then they need to be paid on February 28 and no later.

The final paycheck must include any accrued but unused paid time off/vacation, and it can only be paid via direct deposit if the employee signs a separate authorization form for direct deposit; you cannot rely on the original form signed at the beginning of employment. Note that even if an employee signs the authorization for direct deposit, the money would need to be in their bank account before close of business that day to make the deadline required under law. In most situations, this means you should be ready with a paper check instead.

An employer who willfully fails to pay any wages due to a terminated employee in the prescribed time frame (i.e., on the final day of work for a fire) may be assessed a waiting time penalty. The waiting time penalty is an amount equal to the employee's daily rate of pay for each day the wages remain unpaid, up to a maximum of thirty (30) calendar days. [11] A few exceptions:

An employee will not be awarded waiting time penalties if the employee avoids or refuses to receive payment of the wages due. So if your former employee purposely evades you, they won’t be accruing waiting time penalty amounts. That’s on them for not taking the final pay, not the employer.
If a good faith dispute exists concerning the amount of the wages due, no waiting time penalties would be imposed. An example of this would be if the final check delivered does not equal the amount the former employee expected, and you have to work together to determine who is correct (and therefore, how much is actually owed). However, this has to be in good faith. If an employer is purposely creating a dispute or otherwise underpaying, this will not be a strong defense! [12]

A question we’ve received a few times is, “can I deduct from the final paycheck?” The answer is generally no. In California, there are three (3) limited circumstances when an employer may deduct from a paycheck:

An employer may deduct when required or empowered to do so by state or federal law;
An employer may deduct when a deduction is expressly authorized in writing by the employee to cover insurance premiums, benefit plan contributions, or other deductions not amounting to a rebate on the employee's wages; or
An employer may deduct when a deduction to cover health, welfare, or pension contributions is expressly authorized by a wage or collective bargaining agreement.

And FYI, a rebate just means a refund. If you overpay an employee, you cannot deduct from a future paycheck to even it out. However, the law does allow for an employee to voluntarily agree to repayment of any overpaid wages as long as the employee's wages are not reduced below minimum wage. [13] Wild, right? This is why it’s important to either have eyes and ears everywhere as an employer, or to delegate to a leadership team you really trust!

Relatedly, we’ve been asked “well what if an employee returns company-equipment with damage to it?” Here’s the deal: in the eyes of the state of California, that’s the cost of doing business. Their take on this is that losses occurring without any fault on the part of the employee or that are merely the result of simple negligence are inevitable in almost any business operation. There has to be a “dishonest or willful act, or… gross negligence of the employee” in order for an employer to successfully argue that they should be repaid for damage. [14] So basically, unless your employee purposely throws a laptop out of the window on the top floor of a 10-story building, the employer will need to absorb the costs of damage to equipment.

The takeaway here should be that very rarely can you deduct from your employee’s paychecks. Always, always check with your attorney first to confirm your understanding before making any deduction, and always make sure you speak to an attorney before you fire someone.

This Lesson's Sources:

[1] CACI No. 2404 (2004 ed.)

[2] California Employment Development Department, Required Notices and Pamphlets

[3] Cal. Unemp. Ins. Code § 1089

[4] An Employer’s Guide to Group Health Continuation Coverage Under COBRA

[5] Cal. Health & Saf. Code § 1366.24

[6] Cal. Lab. Code § 2807

[7] IRS Retirement Topics - Notices

[8] Cal. Lab. Code § 2808

[9] Cal. Lab. Code § 1207

[10] Cal. Lab. Code § 201

[11] Mamika v. Barca, 68 Cal.App.4th 487