Can I Terminate an Employee Due to Lack of Work?

Terminating an employee due to lack of work is legal in nearly every state, as long as the business reason is real, the person you selected wasn’t chosen for a protected characteristic or in retaliation for protected activity, and you meet the notice, final-pay, and benefits obligations that attach the moment the termination takes effect. A genuine revenue decline, a lost contract, or an eliminated position is a valid reason to let someone go. Employers get into trouble on the how, not the why.

When Lack of Work Is a Lawful Reason to Terminate

Every state except Montana follows the at-will employment rule, so either side can end the working relationship at any time for any lawful reason.¹ You do not need to show “just cause” for eliminating a position when the work genuinely isn’t there. Declining revenue, a canceled project, the loss of a major client, or a strategic restructuring all qualify as legitimate, non-discriminatory business reasons.

At-will status is a default, not a guarantee. An employment contract, a collective bargaining agreement, or certain language in a company handbook can override it. If a contract says termination requires good cause, a downturn in business may or may not satisfy that standard depending on how the contract is written. Verbal promises of continued employment can create an implied contract as well, and courts have enforced those promises without a formal written agreement. Before selecting anyone for a layoff, pull every relevant contract, offer letter, and handbook provision and confirm what you have actually promised your workforce.

When Lack of Work Becomes an Illegal Reason

The most common way employers get sued is using “lack of work” as cover for a decision that’s really about something else. Three claim types dominate.

Discrimination

Title VII of the Civil Rights Act prohibits firing someone because of race, color, religion, sex, or national origin.² The Age Discrimination in Employment Act protects workers 40 and older, and the Americans with Disabilities Act covers employees with qualifying disabilities.³ A layoff doesn’t have to be intentionally discriminatory to violate these laws. If your selection criteria produce results that disproportionately affect a protected group, that pattern alone can support a disparate impact claim even when no one intended to discriminate.

Retaliation

An employee who recently filed a workers’ compensation claim, reported unsafe conditions, made a harassment complaint, or blew the whistle on illegal activity has legal protection against being fired for those actions.⁴ Lay someone off shortly after they engaged in protected activity and expect them to argue the “lack of work” explanation was pretext. Timing alone doesn’t prove retaliation, but it shifts the practical burden onto you to show the decision was genuinely economic.

Breach of Contract

If an employment agreement limits termination to specific grounds, a lack-of-work layoff may not be permitted unless the contract explicitly allows for it. Courts in most states also recognize implied contracts created by handbooks that describe progressive discipline, promise termination only for cause, or set out procedures that must be followed before anyone is let go. Skipping those procedures during a legitimate reduction in force can still support a breach of contract claim.

Check Your Selections for Disparate Impact

This is the step most employers skip and the one that generates the most litigation. Before finalizing any layoff list, compare the demographics of the people you’re cutting against your overall workforce. The EEOC recommends a straightforward calculation: work out the percentage of each protected group on the layoff list, then compare it to that group’s percentage in your total workforce.⁵

If women are 30 percent of your workforce but 80 percent of the layoff list, you have a statistical red flag that demands attention. The fix isn’t to abandon your business objectives. Look at whether alternative selection criteria, like productivity metrics or specialized skills, would achieve the same cost savings while reducing the lopsided impact.⁵ Run the analysis across every protected category: race, sex, age, disability status, and national origin. Document the results and any adjustments you make along the way. If you end up in front of the EEOC, that documentation is your best evidence that business needs, not bias, drove the layoff.

Documentation to Have in Hand Before the Meeting

A lack-of-work termination that looks legitimate on paper is far easier to defend than one reconstructed from memory after a complaint is filed. Assemble three sets of records before anyone is told they’re losing their job.

Business justification. Financial statements showing a revenue decline, written notice of a lost contract, a project cancellation memo, or board minutes approving a restructuring. These establish that the economic pressure was real and preceded the decision to cut staff.
Selection criteria. A written explanation of why specific positions were eliminated or why particular employees were chosen. Acceptable criteria include eliminating an entire role, seniority within a department, or documented performance metrics. Whatever you use should be objective and applied consistently.
Contract and policy review. Copies of every affected employee’s offer letter, employment agreement, and the current handbook, with any clauses about termination procedures, notice, severance obligations, or promises of job security flagged. If your handbook describes a progressive discipline process, confirm you aren’t required to follow it for an economic layoff.

WARN Act Notice

The federal Worker Adjustment and Retraining Notification Act requires covered employers to give 60 calendar days’ advance written notice before a plant closing or mass layoff. It applies to businesses with 100 or more employees, not counting workers who have been employed for less than six months or who average fewer than 20 hours per week.⁶ It covers plant closings that affect 50 or more employees at a single site, and mass layoffs that hit 500 or more workers at a single site, or between 50 and 499 workers if they represent at least one-third of the site’s workforce.

Notice must go to three recipients: each affected employee (or their union representative), the state’s dislocated worker unit, and the chief elected official of the local government. An employer that skips the notice is liable to each affected worker for back pay and benefits for up to 60 days. A separate civil penalty of up to $500 per day can be assessed for failing to notify the local government, though that penalty is waived if the employer pays all affected employees within three weeks of the shutdown or layoff.⁷

Exceptions That Shorten the Notice Period

WARN allows shorter notice in limited circumstances, but the employer bears the burden of proving the exception applies and must still give as much notice as possible.⁸

The faltering company exception applies only to plant closings, not mass layoffs. The employer must have been actively seeking financing or new business that would have prevented the shutdown, and must show a reasonable, good-faith belief that giving the full 60 days’ notice would have scared off the potential deal.⁸

The unforeseeable business circumstances exception covers both plant closings and mass layoffs caused by events outside the employer’s control that could not reasonably have been predicted when the 60-day notice would have been due. A major client abruptly terminating a contract, a strike at a key supplier, or a sudden economic downturn can qualify. A gradual decline visible for months will not.⁸

State Mini-WARN Laws

Many states have their own layoff notification statutes with lower employee thresholds, smaller triggering layoff sizes, or longer notice periods than the federal 60 days. When both federal WARN and a state law apply, follow whichever gives the employee greater protection. If you operate in multiple states, check each state’s requirements separately.

Severance Releases When the Employee Is 40 or Older

Offering severance in exchange for a release of claims is standard practice during layoffs, and it closes the door on future litigation. But if any affected employee is 40 or older, the Older Workers Benefit Protection Act imposes strict requirements on the release, and cutting corners makes the waiver unenforceable.

For a group layoff, each employee must receive at least 45 days to consider the agreement before signing. For an individual termination that isn’t part of a group program, the minimum is 21 days.⁹ Either way, the employee gets seven days after signing to revoke, and that revocation window cannot be shortened or waived for any reason.¹⁰

Group layoffs carry extra disclosure requirements. The employer must give each employee a written description of the group being considered for layoff, the eligibility criteria, and the job titles and ages of everyone selected and everyone in the same job classification who was not selected.⁹ Broad age ranges like “40 to 50” do not satisfy the requirement; individual ages must be listed.¹⁰ The agreement must advise the employee in writing to consult an attorney, and the severance payment must be something beyond what the employee was already entitled to receive.

The Termination Conversation

Hold the meeting in a private setting with the employee’s direct supervisor and an HR representative present. The HR person serves as a witness and helps keep the conversation on track. Be direct: tell the employee the position is being eliminated for a business reason such as restructuring or reduced workload, and that the decision is final. If the layoff has nothing to do with performance, say so clearly.

Provide a written termination letter stating the reason and the effective date. Hand the employee a packet covering their final paycheck, any severance being offered, and instructions for continuing health insurance. Avoid extended debates about the business rationale or negotiations over the decision itself. The meeting should be brief, respectful, and focused on what happens next for the employee.

What You Owe After the Last Day

Final Paycheck

State law controls how quickly you must deliver a terminated employee’s last paycheck. Deadlines range from the day of termination to the next regular payday, depending on the state. Some states also require paying out accrued but unused vacation or paid time off; others leave that to your written policy. Check your state’s specific deadline before the termination meeting so the check is ready on time. Missing it can trigger penalties that are entirely avoidable.

COBRA Continuation Coverage

If you offer a group health plan and have 20 or more employees, federal law requires you to offer departing employees the option to continue their coverage. After the termination, you have 30 days to notify the plan administrator of the qualifying event. The plan administrator then has 14 days to send the employee an election notice.¹¹ The employee gets 60 days from receiving the notice, or from the date coverage would otherwise end, whichever is later, to elect COBRA.¹² The employee typically pays up to 102 percent of the full premium, which is a significant expense to flag during the termination meeting.

Severance Withholding

No federal law requires severance pay, but many employers offer it as part of a separation agreement, particularly when seeking a release of claims. The IRS classifies severance as supplemental wages. For 2026, employers withhold federal income tax on supplemental wages at a flat 22 percent when the employee’s total supplemental wages for the year are $1 million or less. Amounts above $1 million are subject to a 37 percent rate.¹³ Severance is also subject to Social Security and Medicare taxes.

Unemployment Insurance

Employees terminated for lack of work are generally eligible for unemployment benefits, since the job loss was through no fault of their own. Each state sets its own eligibility rules, but most require the employee to have earned a minimum amount of wages during a “base period” covering roughly the first four of the last five completed calendar quarters before filing.¹⁴ The employee must also be able and available to work and actively seeking new employment.

Layoffs are not cost-free for the employer even after severance is paid. The unemployment system uses experience rating, so your future payroll tax rate is tied to how many former workers have collected benefits. More layoffs mean a higher rate over the following three to five years. Factor that into any decision about the size and timing of a reduction in force.

1
USA.gov. Termination Guidance for Employers
2
U.S. Equal Employment Opportunity Commission. Title VII of the Civil Rights Act of 1964
3
U.S. Department of Labor. Age Discrimination
4
U.S. Department of Labor. Whistleblower Protections
5
U.S. Equal Employment Opportunity Commission. Avoiding Discrimination in Layoffs or Reductions in Force (RIF)
6
U.S. Department of Labor. Plant Closings and Layoffs
7
Office of the Law Revision Counsel. 29 U.S. Code 2104 – Administration and Enforcement
8
eCFR. 20 CFR 639.9 – When May Notice Be Given Less Than 60 Days in Advance
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Office of the Law Revision Counsel. 29 U.S. Code 626 – Recordkeeping, Investigation, and Enforcement
10
U.S. Equal Employment Opportunity Commission. Q&A – Understanding Waivers of Discrimination Claims in Employee Severance Agreements
11
Office of the Law Revision Counsel. 29 U.S. Code 1166 – Notice Requirements
12
eCFR. 26 CFR 54.4980B-6 – Electing COBRA Continuation Coverage
13
Internal Revenue Service. 2026 Publication 15 – Employers Tax Guide
14
U.S. Department of Labor. State Unemployment Insurance Benefits