5 Ways to Avoid Costly Wrongful Termination Claims
5 Ways to Avoid Costly Wrongful Termination Claims
Published on Inc., May 16, 2025, by Shayne Fitz-Coy.
Wrongful termination claims cost businesses financial resources and management time. With the median EEOC claim over the last six years exceeding $450,000, based on my calculations, the financial stakes couldn’t be higher.
Although I rarely hear that someone who was let go at one of our portfolio companies has filed a legal claim for wrongful termination, when filed, these claims take up valuable management time and pull resources away from running the company. The “wrongful” part varies, but the common denominator is that the person wants more money.
I re-learned this lesson the hard way recently with an employee we’ll call “Jay.” He regularly slept at his desk and disappeared for hours during the workday. His performance issues were obvious during his brief six-week tenure. But when we terminated his employment we faced an uphill battle defending our decision because we had failed to properly document these incidents, resulting in money paid to the employee.
Here are five strategies to help business owners manage terminations effectively.
- Document performance thoroughly and use a “release of claims”
Establish a paper trail of performance issues before the termination occurs. As this viral TikTok video demonstrates, terminating an employee without proper documentation can lead to uncomfortable confrontations and potential legal issues.
Your documentation should include:
Specific incidents with dates and witnesses.
Previous performance discussions and warnings.
Performance improvement plans with clear metrics.
Written feedback shared with the employee.
The employee’s responses to improvement efforts.
During termination ask the departing employee to sign a “release of claims” agreement which typically involves a monetary payment in exchange for waiving the right to sue the company. These agreements are state-specific, so ensure yours reflects current labor laws. Most companies give employees one to two days to review the agreement.
- Pay special attention to highly compensated departures
For highly compensated employees, consider offering a more substantial release package. The upfront cost may seem high but is typically far less costly than defending against a lawsuit.
Even seemingly minor issues can become major legal problems with high-earning employees. Meta fired a $400,000-a-year employee in 2024 for misusing meal vouchers to buy personal items. While the termination itself was justified by consistent rule enforcement, the high-profile nature of the case shows that terminated executives are more likely to make headlines and potentially pursue claims.
- Prepare to negotiate settlement amounts
Be prepared to negotiate the amount of the settlement but set clear internal limits with your management and legal team before discussions begin. Paying more upfront for the “release of claims” is typically worth it compared to the cost of a potential lawsuit. However, it’s important to set limits because if you’re perceived as giving in too easily, you’ll always be asked for more.
Employment professionals generally agree that settlement negotiations should be handled carefully, with clear boundaries and thorough preparation. Legal teams advise practicing the conversation ahead of time and having a predetermined maximum settlement amount before discussions begin.
- Focus on business outcomes, not fairness
Determining the settlement amount should be driven by “What will it take?” rather than “What is appropriate?” Yes, the appropriate amount is probably zero, since this person is being asked to leave for a reason. But whatever the reason, their departure is the goal, and you’ve already achieved it.
Now, the question shifts to what you are willing to pay to move on cleanly. That amount may exceed your company’s standard severance formula but what is your peace of mind worth to your company?
Recent research on termination experiences suggests that employees primarily remember how they felt during the process, not the specific words exchanged. The perception of being treated with dignity often determines whether a former employee pursues legal action later.
- Choose your legal representation carefully
If you choose to go to court, pick a lawyer who will fight for you. Most lawyers I’ve encountered serve the insurance companies that retain them, not the clients they technically represent. The attorney assigned to you knows what the insurance company budgets for cases like yours and will manage their time accordingly.
Many business owners get into trouble by trying to handle termination legal matters without proper guidance. Common mistakes include failing to understand the proper process, not documenting employee transgressions adequately, or communicating poorly with the employee in question. These missteps significantly increase litigation risk.
Build termination practices into your business strategy
The best approach combines prevention with strategic response. Document performance issues thoroughly, implement clear termination protocols, and maintain employment practices liability insurance. When terminations become necessary (and they will) approach them with these five strategies.
How you handle departing employees reflects on your company culture and values. After termination, implement these critical security measures immediately:
Disable all system access and credentials.
Recover company property (keys, computers, phones).
Change passwords for shared accounts.
Update alarm codes and building access.
Inform relevant team members about the transition.
Remember that the goal of a termination is not to punish the employee but to protect your business. As Microsoft demonstrated with its recent performance-based terminations, even the largest companies must balance firm performance management with empathetic handling of departures.
Whether you’re firing one person or conducting layoffs, your approach to terminations today will affect your ability to attract talent tomorrow and your vulnerability to costly legal claims. Put these strategies into action before your next termination. Your company’s reputation and financial health may depend on it.
Originally published in Inc.