When Are Your Employees No Longer Your Employees?

Mitt Romney has been catching flack lately after Securities and Exchange Commission filings showed he remained the “CEO, Chairman, and sole shareholder” of a private equity firm three years after he claimed to have quit. He defended the records by saying he wasn’t involved in the decisionmaking during those three years and retired “retroactively.”

His predicament raises an interesting issue: when are employees actually terminated?

Employees with severance packages typically present this thorny question. For example, if you’re providing a laid-off employee two months of pay and health insurance, will they remain active employees? Or will you terminate their employment and pay them in a lump sum? When do you have to send their COBRA notices? When do you have to send them WARN notices? Do you still have to contribute to their 401(k) if you’re paying them out over those two months? If they have a nonqualified deferred compensation plan, have they separated from service for purposes of 409A? For purposes of their 401(k)? Do they accrue vacation time?

It’s a tricky question, and can cause major problems if not addressed clearly up front. Employers should make sure to explicitly spell out the answers to these questions when there is any question about when someone’s employment is actually terminated.

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