How Startups Should Handle Termination To Avoid Legal And Reputational Risk

Ending an employment relationship is one of the most sensitive decisions a startup can make. Yet in many fast-moving companies, it is handled with more urgency than structure, often resulting in avoidable legal exposure and brand damage.

Recent events in the global tech ecosystem illustrate this clearly. When Twitter (now X) laid off more than half of its workforce in 2022, the company faced a class-action lawsuit and intense public scrutiny. Similarly, the removal and rapid reinstatement of the CEO of OpenAI in 2023 showed how workforce decisions can quickly spiral into a reputational crisis.

For startups with limited resources and heightened visibility, termination missteps can escalate quickly. This edition of TechBrief by TALP, outlines the main ways an employment relationship can end and key considerations for ensuring compliance, fairness, and organisational protection.

How an Employment Relationship Can End

1. By Effluxion of Time (End of a Fixed-Term Contract): When an employee is hired for a fixed term (the classic "contract job"), the relationship ends automatically when the agreed term expires. In most cases, no notice or further action is required unless the contract states otherwise.
2. By operation of law: Some terminations occur because the law itself steps in. This may include situations such as the death of an employee or the winding up of the employer company. In such cases, the relationship ends automatically.
3. Termination by Notice: Most employment contracts allow either the employer or the employee to end the relationship by giving written notice. Notice periods vary, 30 days, 60 days, 3 months, depending on what the parties agreed.

This seemingly simple process is where many startups make preventable errors.

Key Considerations to Note when Terminating by Notice

• A shortfall of even one day amounts to wrongful termination: If the contract requires 30 days' notice, 29 days will not suffice. Anything less than the agreed or statutory period exposes the startup to claims of wrongful termination. To be safe, begin counting from the day after the notice is issued and end on the day before it takes effect.
• The relationship continues throughout the notice period: Until the notice period ends, the employee remains fully employed and must not be marginalised, excluded from work activities, or treated unfavourably.
• Payment in lieu of notice must be correctly executed: Where allowed by the contract, an employer may terminate immediately by paying the amount the employee would have earned during the full notice period.
  Crucially, this payment must be made at the time the termination notice is issued. Any delay may expose the company to claims.
• Terminal benefits must be processed promptly: Once employment ends, employees are entitled to all terminal benefits due under the contract or employment policy. These payments should be made on or before the employee's last day of employment, as any delay or failure to pay may expose the startup to avoidable legal claims.

Termination by Dismissal (For Cause)

Dismissal ends the relationship immediately without notice, payment in lieu, or terminal benefits. This is usually reserved for serious misconduct such as fraud, bribery, theft, or other actions that fundamentally breach trust.

Dismissal requires strict adherence to procedural fairness, including:

1. A formal notification of the allegations.
2. Adequate opportunity for the employee to respond, challenge evidence, and call witnesses3.
3. Appearance before a properly constituted disciplinary panel.
4. Exclusion of anyone connected to the allegations from the panel to preserve neutrality.
5. Issuance of the dismissal decision by the authorized person or body under the contract or company policies.

These requirements mirror the "due process" or "natural justice" standards recognised in many common-law jurisdictions.

Employments with Statutory or Regulatory Protection

When startups think about ending an employment relationship, they usually focus on what the employment contract says. But in many countries, certain roles are also protected by statute or industry-specific regulations. In these situations, the law sets additional requirements that must be followed before an employee can be removed. If a company skips any of these legal steps, the termination may be considered invalid, even if the contract appears to allow it.

For example, in Longe v. First Bank, a well-known Nigerian case, a director's removal was ruled unlawful because the employer failed to follow the statutory procedures required under the Companies and Allied Matters Act for the removal of directors. Although this case is jurisdiction-specific, the underlying principle is common across many countries: when the law imposes extra rules for certain positions, those rules override the contract.

A similar dynamic exists in regulated industries such as oil and gas, financial services, or aviation in various jurisdictions. Employees engaged by employers who hold specific licences, certifications, or perform regulated responsibilities may only be dismissed after obtaining approval from the relevant regulator or government authority. If that approval is mandatory and the employer proceeds without it, the termination may have no legal effect.

What this Means for Startups

• Identify positions with statutory or regulatory protection: These may include directors, compliance officers, safety-critical personnel, or employees engaged by an employer holding a regulated licence (as the case may be).
• Follow both the contract and the law: If statutory rules apply, they must be followed strictly. Missing even one requirement can invalidate the termination.
• Secure required approvals: Where regulators, boards, or ministries must authorise or review the termination, obtain required approval before taking action.
• Keep thorough records: Document every step; notices issued, hearings conducted, decisions made, approvals obtained, and payments processed. Clear documentation is essential if the decision is ever challenged.

Conclusion

Termination is more than ending a role; it is a process that carries legal, financial, and reputational consequences. Errors that seem minor can give rise to significant claims, especially in environments where employees are increasingly aware of their rights.

Startups should approach termination with precision. Review the employment contract and company policies carefully, ensure compliance with all statutory requirements, and document every step. When in doubt, consult an employment law expert to avoid missteps that could undermine the organisation's growth and credibility.

To view original Tope Adebayo article, please click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.