Can I fire an employee for any reason?

No. Although the law gives employers a great deal of leeway in deciding whether to fire an employee, there are limits. State and federal laws prohibit employers from firing workers for certain reasons -- for example, because of the worker's race or religion, because the worker took family leave, or because the worker complained of illegal company activity.

If the employee has an employment contract or you have made promises to the employee, then you must honor your commitment. Typically, this means you cannot fire the employee without "good cause."

Do I have to give a fired employee a severance package?

It depends. The law does not require you to give severance packages to employees whom you fire. However, if you ever promised the employee a severance package, you should deliver on that promise. And if you ever signed a contract with an employee in which you agreed to provide a severance package, then you must honor that contract.

What do I tell prospective employers who call me for a reference for an employee whom I fired?

Sometimes, you might be willing to give a fired employee a positive reference. After all, an employee who wasn't a good fit at your business might do well elsewhere. If you can say positive things about the employee, then say them.

If, however, you are not comfortable giving a positive reference, then you shouldn't. In such a situation, less is better than more. When prospective employers call, tell them that you can only confirm dates of employment and job responsibilities and no more. You must take care not to "trash" the employee to a prospective employer, because this will leave you vulnerable to a defamation suit from the former employee.