There’s a common saying in the business world: “A business is only as good as its people.” So what happens when one of your key employees wants to quit?
Although the resignation of an important team member is not a piece of news any business owner wants to hear, it’s an inevitable part of doing business, and it doesn’t have to be a disaster. If you handle the situation well, you can either retain the employee or ensure a smooth transition when they do leave.
In this tutorial, we’ll look at all the steps you need to take to ensure that things do go smoothly. We’ll cover everything from handling the initial conversation and putting together a counter-offer through to arranging the handover, exit paperwork and exit interview if they do still decide to leave. And, in the final section, we’ll also look at a related issue: what to do when the shoe is on the other foot and you’re the one who wants to fire one of your employees.
By the end of this tutorial, you’ll be clear about how to handle an employee resignation or termination effectively. This is part of a larger series on HR for small business, so we’re talking primarily about how a small business owner can handle the situation. In a larger company, many of the same principles apply, but the situation will probably be handled by different people or departments.
1. How to Handle the Initial Conversation
When a key employee tells you they want to leave, it may feel like a slap in the face. The business consequences are one thing, but there may also be the personal feelings of rejection or even betrayal.
After all, when you work closely together every day for years, you’ll often develop a relationship that feels a lot like friendship. In small businesses with few employees, that relationship can be even closer and the sense of working together towards a common goal even stronger, which makes separation harder.
There’s also often a cloak-and-dagger quality to the whole thing—when people are interviewing for a new job, they usually do it without telling you, so that they don't hurt the working relationship if things don’t pan out. But that means that when they do break the news, it feels like a bolt from the blue, and you’re left wondering how long they’ve been planning this.
All of these feeling are natural, but it’s important to accept the news in a mature, understanding fashion. The reality is that the average person today changes jobs 10 to 15 times in their career, spending five years or less in each job. While you want to do everything you can to keep your employees happy and reduce turnover, people will still leave.
Often, too, there’s nothing you could have done to avoid it. The person may want to switch to a new industry or access an opportunity that your company doesn’t offer. Then there are personal reasons: a spouse’s move to a new city, a sick relative to take care of, and so on. There’s no need to take it personally. That old line “It’s not you, it’s me” really is true sometimes.
So don’t blame, accuse, or in any other way make the employee feel bad for doing something they have a perfect right to do. It’s fine to say you’re sad or disappointed to be losing such a valuable employee, but be sure to follow that up by saying that you understand and are happy for them to have such a richly deserved new opportunity.
Do try to gather some information at this point that will be useful for the next steps you have to take. Here are some important points to cover:
- Get very clear about the reasons for the departure. Ask open-ended questions to try to elicit any extra reasons, without being too intrusive or making the person feel defensive.
- Try to find out whether there’s anything you can do to convince the person to stay.
- Ask if they’ve already told any of their colleagues.
- Find out when they plan to leave.
If they haven’t told any of their colleagues yet, it can be a good idea to ask them to hold off for a day or two while you figure out the best way to announce it. This also gives you time to put together a counter-offer, if you choose to do that. More on that in the next section:
2. How to Put Together a Counter-Offer
If the employee is extremely valuable to your business, you may consider making a counter-offer. This strategy can be successful in about two-thirds of cases, according to a survey by The Creative Group. But it depends a lot on the employee’s situation, which is why it’s important to gather information in the initial conversation.
If your employee has always dreamed of being a journalist and has landed a competitive entry-level reporting position at The New York Times, for example, there’s probably no counter-offer in the world that could persuade them to stay at your small accounting firm. So don’t bother with a counter-offer—just wish the person well, make the transition pleasant for everyone, and try to stay in touch for the future.
But there are many situations in which a counter-offer can be effective. The most obvious is when the person is leaving because of a higher salary offer elsewhere. Then you have a simple choice to make: can you afford to match it?
Consider your budget, and try to do some research to figure out the employee’s true worth in the job market. How much would you have to pay to hire a quality replacement? It’s worth paying a little extra on top of that to avoid the disruption and expense of making a new hire. For more details on this topic, see this previous tutorial from our HR series:
Also keep in mind that your pay scale should be fair, so if you give a large raise to one employee, others may expect the same. There may also be morale problems if people feel that disloyalty is rewarded more than loyalty. And try to establish whether there are other underlying reasons beyond salary (there usually are). If you don’t address those, the employee may leave a year later, and your counter-offer did nothing but delay the inevitable while setting a precedent for giving raises to people who want to leave.
What if the person is leaving for a different reason? The good news is that counter-offers are not only about money. So you can get creative and think of ways to solve that person’s problem in a way that helps them to stay with you.
If they’re leaving to take care of a sick relative, for example, offering more money is unlikely to make a difference, and it may even offend them. But your counter-offer could involve giving them more flexibility to work from home, or to work different hours so that they can coordinate care with a partner, or perhaps shifting them to a freelance or contract arrangement where they work for you only when they’re able to.
This is just an example, and of course you need to consider carefully whether the terms you offer will work for your business or not. But the point is to consider whether you can address the employee’s reasons for leaving in a way that makes everybody happy. Try to do this as quickly as possible—within a day or two of receiving the news. If you delay too long, the move becomes a fait accompli, and even a reasonable offer is unlikely to change things.
3. Arrange the Handover
If the person rejects your counter-offer, don’t waste any more time with negotiation. Just accept that they’re leaving and act fast to ensure a smooth handover. That involves doing the following:
Establish a Timeline
In certain industries where employees have access to very sensitive data, employers sometimes ask them to leave immediately, but in general, you want to aim for as long a handover period as possible. An important member of your team carries a lot of knowledge with them, and you’ll need time to ensure that it’s not all lost when they walk out of the door.
Start the Hiring Process Immediately
Assuming that you’ll be hiring a replacement, start that process straight away. The ideal situation is to have a replacement lined up before the person leaves, so that they can train that person directly. Because of the time involved in hiring staff, that may not be possible, but starting early will at least minimize the gap, if nothing else.
Start by considering whether anyone inside the company could step up into the role, and ask if they’d like to apply. Internal promotions are great for employee morale and retention. And besides, some Wharton University research has found that internal hires tend to outperform external recruits, at least for the first two years, while costing less.
You could also ask people whether they’d like to take on any of the departing employee’s individual tasks. That may make the handover easier because it can be done directly.
If you can’t have the employee train a replacement directly, it’s important to document everything they do clearly so that the next person can take over eventually.
Try to be involved in this yourself, or delegate someone else on your staff to do it. You want someone to understand the handover documents and be able to explain them in person to the replacement, instead of just presenting them with a mass of files and notes.
4. Do the Paperwork
There will also be some administrative things to do before the employee leaves. The details of some of them may vary depending on where you’re based and any relevant employment laws, but here’s a sample:
Make Any Necessary Tax Filings
You may need to fill out tax forms when an employee leaves. In the UK, for example, employers must complete a P45 form stating how much tax has been paid so far in the tax year, with one copy going to the tax authorities and other copies to the employee.
Recover Company Property
You may have given the employee a company laptop to use at home, or other property. Ensure that you have a clear inventory of who owns what, and make sure it’s all handed back in time.
Process the Final Payroll and Organize Benefits
You’ll need to calculate the employee’s final paycheck and ensure it gets paid on time, as well as any outstanding bonuses or other amounts due.
Also figure out what’s going to happen with the employee’s company benefits: do they retain access to any of them, such as healthcare, or do they terminate on the day of departure? What do you need to do with the employee’s retirement account, to ensure that contributions are stopped but that the employee’s money is preserved for the future? How many vacation days has the employee taken, and do you need to pay them for any unused time?
Make sure the employee is aware of what will happen, and that you comply with local rules and regulations. For more, see the following tutorials:
- How to Run Payroll (Systematize Your Process)Andrew Blackman21 Jun 2016
- What Are the Important HR Requirements for Small Business?Andrew Blackman07 Sep 2017
- How to Offer Competitive Small Business Pay & BenefitsAndrew Blackman21 Feb 2022
Cover the Legal Stuff
It’s good practice to ask the employee to put the resignation in writing, just in case any dispute comes up later about how the employment ended. Also check the employment laws in your country to see if there are any legal notices you are required to give the employee when they’re leaving. And review confidentiality agreements and other legal documents the employee signed, to make sure that you’re both clear on how they apply after the person has left.
It may seem petty, but on the employee’s final day, make sure you revoke access to all of your computer systems as well as collecting any cards or keys that give access to your physical property. You may trust that particular employee, but over time, having a bunch of ex-employees with access to company accounts and buildings will create a major security risk.
Mark the Occasion
No matter the circumstances of the departure, organizing some kind of event to thank the person for their service and wish them well is a nice touch. It shows not only the departing employee but all your existing employees that you value their work.
5. Run an Exit Interview
The final thing you need to do before the person leaves is to conduct an exit interview. The information you glean here can help you to make improvements and reduce the chances of key employees leaving in future. It will also help you to get clearer about the role itself and how you can best hire and work with the person’s replacement.
You’ll want to ask more about the reasons for the resignation. (Yes, we covered that before, but now that the departure is confirmed and the employee is on the way out, they may open up more and give more details.) Ask if anything in particular triggered the decision, and if you or any other managers could have done anything to prevent it.
Ask about how the job was in general: the best parts and the worst, anything that helped or hindered the person from doing their job well. Were the objectives and requirements clear? Were the pay and benefits up to expectations? Did the person have enough training and support?
This exit interview template from Adelphi University is designed for nonprofits, but most of the questions will be useful for any type of business. Use it as a guide, and add your own questions as appropriate.
6. What If You Want Them to Leave?
So far, we’ve dealt with a scenario in which a key employee wants to leave. But what if it’s the other way around? What if you want to fire the person for poor performance?
Many of the steps are the same, especially the later ones such as doing the paperwork, processing payroll and running an exit interview. But there are some differences earlier on.
Specifically, you’ll need to document everything to avoid an unfair dismissal lawsuit. And besides, following a clear process like the one below is good not only for avoiding lawsuits, but also because it gives employees a fair chance to improve and keep their jobs.
The first stage when you spot performance issues is to speak to the employee and explain that they’re not meeting expectations.
In some cases, that may be all that’s needed. The person may genuinely not know that a certain type of behavior is unacceptable, and they may be doing something that was tolerated by a former employer. Simply talking to the employee informally and explaining clearly and firmly what you expect from them can often be enough get things back on track. Or they may not have the training or support to do things the right way, so be sure to ask if they need any kind of help.
Give a Series of Formal Warnings
If the poor performance continues, it’s time to begin disciplinary procedures. This still may not end in firing the person—keep an open mind and give the person a chance to turn things around. Keep asking at every stage whether you can do anything to help them, or whether there’s anything about the way the workplace is set up that is hindering them from doing what’s required of them.
There should be a series of two or three warnings, so that the employee is given time to work things out. At each stage, document everything in writing: send a letter or email to the employee stating that their performance is unsatisfactory, explaining exactly why, and inviting them to a meeting to discuss it.
During the meeting, give the employee a chance to give their side of the story and keep offering support or training to help them improve. Afterwards, write to them documenting what was discussed and making your expectations for future improvement clear.
Have the Dreaded Meeting
Nobody likes firing people, but sometimes that will be the only option left. If your attempts to help the employee improve have not yielded any significant improvement in results, then you’ll have to terminate their employment.
There’s no good way to hold this kind of meeting, but generally it’s best just to be direct. Simply give the news, which shouldn’t come as a surprise after all the warnings you’ve given previously. Give a clear explanation of the reasons for the dismissal and explain what will happen next.
After this, the steps to follow are pretty much the same as those above in sections 4 and 5. Tie up all the administrative things, and hold an exit interview. The questions you ask in the exit interview will be different, but it’s still important to have it. Understanding what went wrong from the employee’s point of view may help you to avoid similar problems in future.
Follow the Law
Employment laws vary by country, and in some places there may be additional rules in place to do with the exact series of steps involved, the information you have to give to employees about their right to be represented by a trade union, and so on. So make sure you research your local laws and do everything by the book.
In this tutorial, you’ve learned how to handle the painful scenario in which an important employee wants to quit. We’ve also covered the difficult situation of having to fire someone for poor performance.
You’ve learned about making counter-offers, arranging the handover, doing the paperwork and other administrative details, and running an exit interview. And you’ve learned the steps to follow to document poor performance and then terminating someone’s job.
In the next part of this Complete Small Business HR Guide, you’ll learn how to deal with some of the worst HR issues in small business. See you again soon!
Editorial Note: This content was originally published in 2017. We're sharing it again because our editors have determined that this information is still accurate and relevant.