A case study in bad optics
- Claire Baker
- May 5
- 4 min read
Terminations can be tricky, especially when there are negative feelings on both sides. Terminations are especially delicate when an HR leader leaves under unfriendly circumstances because HR knows about more than just the company's most sensitive secrets, they also know their rights as employees.
Contentious terminations are also difficult for the departing HR person. Without themselves overseeing the process, there are frequently errors in final pay, COBRA, and other end-of-employment processes.
What can go wrong in a termination?
There are a number of state-specific regulations around final paychecks including:
When the employee receives their final paycheck
Whether unused PTO is paid out
COBRA eligibility
Equity purchases or re-purchases
Return of equipment and intellectual property
Running these processes smoothly lets the employee make a clean break and shows that the company respects their contribution to the company. However, when one of these processes goes wrong, it can aggravate an already tense situation, even if the error was a mistake.
Running these processes smoothly lets the employee make a clean break and shows that the company respects their contribution to the company.
Friction during an employee’s exit increases the risk that they’ll take out a grievance by using sensitive information against the company. They could be less guarded with trade secrets, share damaging information publicly, or even file a lawsuit. As a result, most companies issue severance packages contingent on a release of liability and additional confidentiality terms.
The risks of any of these negative outcomes are even higher when the departing employee works in HR, because of their access to sensitive information and in-depth knowledge of the laws.
How it started
The PeopleOps Specialist for a San Francisco-based tech company wasn't working out and there was resentment all around. The company negotiated a phased departure, offering the employee plenty of notice, plus severance.
The Specialist agreed to stay on for a couple of months as a consultant after their termination. They would stay “on call” in case the successor had any questions. The successor was me.
Where it went wrong
A miscommunication about the termination date resulted in two extra days of wages being included in the final paycheck.
Under normal circumstances, the overpayment could have been corrected easily. But the payroll correction came after a separate request had already converted the employee to a contractor.
Because the employee was now a contractor when the final paycheck was recalculated, the payroll system applied the rules for a 1099 contractor. It removed two days of wages, but also refunded all tax withholdings and benefit deductions. This resulted in an overpayment of more than $1,000.
What's the difference between an employee and a contractor?
A business is expected to pay for the taxes, benefits, and equipment for their employees. A contractor manages these responsibilities themselves, so taxes aren't withheld from their pay and they're not eligible for benefits.
The problem
The unexpected overpayment raised concerns of intentional manipulation. Even though it had been an honest mistake, leadership was hesitant to allow the error to financially benefit the departing employee. There was also concern about downstream tax consequences if the issue wasn’t resolved correctly.
Unfortunately, the fix turned out to be more complicated than anyone anticipated.
To complicate matters, the broader relationship had already become strained. Severance negotiations were tense, and pressure to finalize the agreement fell on the HR team—alongside the responsibility to correct the tax error before the payout deadline.
The plot thickens
The correction required several layers of engineering escalations from the payroll provider, each with longer turnaround times. Until the W2/1099 issue was resolved, the team couldn’t generate a corrected paystub or finalize severance.
Despite all efforts to prioritize the issue, the escalation team didn't finish the ticket until several days after the deadline had passed.
Throughout the process, the former employee still had admin access to the payroll system and could see the inconsistencies in real time. With delayed communication and a missing payment, suspicion grew. Lawyers were mentioned.
Solution
Eventually, we calculated the severance manually and sent the severance payment outside the payroll system. The paystub would have to come later.
Forty-seven days after the employee's final day of work, the payroll system finally generated a corrected paystub and we terminated the employee in the system.
Impact
Legal exposure: Despite our dedicated efforts to keeping the momentum throughout the seven weeks it took to resolve the issue, we were powerless to prevent it from inflaming bad feelings on both sides. All things considered, the employee was quite patient through the whole thing and gave us more leeway than they had to. The stress that it put on an already-fraught relationship could have led to additional legal exposure and costs.
Financial: This gap in the payroll company's software cost the company a great deal of money and stress. In addition to the overpayment, it also cost thousands of dollars in lost productivity, consulting and legal fees.
Waste: Perhaps the most frustrating aspect of this story is that it didn't have to be this way. Because the PEO is the legal employer, processes like changing an employee's W2/1099 status or payroll corrections had to go through their team. Had we used this payroll provider's self-managed payroll service, we could have changed the employment status and payroll corrections directly and there would have been no opportunity for the two requests to get out of sequence.
A better way
At Back Office MVP, we believe in always treating your team with respect, especially at the end of the employee lifecycle. The termination processes we design for our clients prioritizes accuracy as part of the employee experience. We build failsafes into that process to ensure that anything that could affect the employee's post-employment experience like final pay or benefits transitions are handled efficiently and accurately. Part of that process includes reducing the number of people any termination process passes through so that no aspect of the process falls out of synch.
At Back Office MVP, we believe in always treating your team with respect, especially at the end of the employee lifecycle.
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