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it starts with one

Ryan Gill, president and partner of CULT Collective Ltd., a digital marketing agency based in Calgary.Jeff McIntosh/The Globe and Mail

In his early years as a small business owner and employer, Ryan Gill used to put off the unpleasant task of firing an employee.

"I would wait until Friday afternoon – my way of deferring the inevitable," recalls Mr. Gill, president of Cult Collective Ltd., a digital marketing agency in Calgary. "But all I was doing was allowing a person who wasn't a good fit to stay in the agency for another week."

Terminating employees is never easy, but for small business owners, the difficulties of saying "you're fired" are often magnified, human resources and business experts say.

"It's a very emotional process," says Glenn Swan, president and CEO of Swan Staffing, a Toronto recruiting firm that works primarily with ad agencies. "Working relationships are typically very personal in a small business setting, and it's not unusual for the person doing the firing to have a strong personal relationship with the person they're letting go."

The financial impact of firing an employee is also felt more acutely in a small business, where budgets are tight. According to a 2008 study by the Society for Human Resource Management in Alexandria, Va., the cost of firing and replacing staff can range from 60 per cent to 200 per cent of an employee's annual salary.

These estimates take into account loss of productivity – including the productivity of workers who are left behind – disrupted client relationships, delays in delivering products or services, the costs of hiring and training an employee, and notice and severance payouts to the fired employee.

"As a small business owner, you have a smaller financial safety net and one employee could represent as much as 50 per cent of your overhead," Mr. Swan says. "Losing that one person could result in potentially damaging situations that could really devastate a small business."

To minimize risks from terminating an employee, small businesses need to have proper human resource documents and processes in place, says Laura Williams, a Toronto labour and employment lawyer at Williams HR Law Professional Corporation.

At the top of Ms. Williams's list of hiring and firing fundamentals is the employment agreement – something she says many small business owners overlook. Those who do have employment agreements often don't have adequate protection built into these documents. "Often times what happens is the need to hire someone becomes so desperate and the employer wants to present an attractive [job] offer," Ms. Williams says. "So they'll detail the conditions of employment but won't include the terms of termination."

Because small businesses usually operate without an HR department or specialist, many lack an in-depth knowledge of employment standards, which are set and enforced at the provincial level. This lack of knowledge can get them into trouble when it comes time to part ways with an employee, Ms. Williams says.

One common misconception pertains to the notice period to which terminated employees are entitled. Provincial employment standards specify minimum requirements based on how long an employee has worked for a company, but the courts could decide that a longer notice period – or wages equivalent to this extended period – is warranted.

Ms. Williams has also seen some small businesses render their employment agreements invalid by throwing in overly broad or unreasonable post-termination demands, such as those that prevent a former employee from working in the same market, or even in the same country.

"A lot of employers say, 'You can't work in this industry in Canada for 24 months,'" she says. "But case law has been clear on this, and it's rare that you can restrict an employee through a non-compete agreement unless it's a key employee with fiduciary duties."

Mr. Swan says that, ideally, every employment relationship should be backed by an exit strategy – something that's standard in many large corporations but amiss in small business.

This exit strategy should include all legal documents – such as employment and confidentiality agreements – and a protocol for how employees should be given their walking papers.

When firing an employee, Mr. Gill at Cult says it's important to remember to be kind and considerate.

"It's a separation and it's painful, especially for someone who's been with the company for two, five, 10 years," he says. "So you have to be sympathetic, because you're not just taking away someone's livelihood, you're also separating them from people they've been working so closely with, people who are like their second family."

Mr. Gill suggests a follow-up conversation.

"I usually followed up in two weeks and took them to lunch, or for a walk," he says.

"Depending on the person and the situation, I might offer feedback on how they could improve themselves, in a frank but gentle way.

"There's no gain in me being harsh, but there is a gain in letting them know you still care about them, even if they're no longer working for you."