June 12th, 2018 by Frank Day, Robbin Hutton and Jessica Asbridge at Ford Harrison LLP
This blog is an excerpt from our book Hiring, Firing and Discipline for Employers, authored by Frank Day, Robbin Hutton and Jessica Asbridge at Ford Harrison LLP. For more state specific information, go to the Products tab above and subscribe to the Human Resources Manual for your state.
In most states, employment is presumed to be “at-will.” This means employees can be discharged and can resign at any time, with or without cause or notice. Such discharge or resignation usually does not give the employee the right to sue unless the employee can establish that an exception to the general at-will rule applies. The most commonly recognized exceptions to at-will employment include:
It is important to understand that state law primarily governs the employment relationship. While this chapter provides an overview of the ways in which the at-will relationship may be modified, state laws are very specific and can be complicated. Employers should consult with experienced employment counsel regarding the provisions of the laws of the states in which they have employees.
Elements of a contract
Most employees today do not have written employment contracts. Such contracts are usually limited to executive and other highly paid employees, employees with special knowledge and skill, and sales personnel working on commission. Written employment contracts usually detail the terms and conditions of employment and identify any limitations on the employer’s ability to discharge the employee (such as for just cause or notice requirements) as well as the employee’s ability to resign (notice requirements).
These contracts may also include non-disclosure, non-compete, and non-solicitation provisions. However, employees who otherwise would be considered to be employed at-will often argue that they have an enforceable employment contract based on oral statements made by interviewers or supervisors, language contained in employee handbooks, disciplinary policies, or other written documents prepared by employers, terms of benefits provisions, compensation agreements, or the prior course of dealing between the employer and employee. When one of the parties claims there has been a breach of contract, the first issue to be resolved is whether a legally enforceable contract exists. To create an enforceable contract, two parties with legal capacity to contract must mutually assent (for instance, there must be an offer and acceptance of that offer) to the terms of the contract and there must be consideration.
The parties to an employment contract must negotiate and agree to its essential terms for the contract to be enforced. The employee’s testimony regarding his/her subjective belief that he/she entered into an employment contract with the employer is not evidence of such a contract. Where there is no evidence that the employer agreed to a specific term of employment or that it unequivocally indicated a definite intent to be bound not to terminate the plaintiff’s employment except under clearly specific circumstances, there is no enforceable employment contract.
To establish mutual assent between the parties, there must be an offer and acceptance of that offer. Some states permit contracts to be created through oral statements. Whether these statements constitute a binding contract is often analyzed in the context of whether they are sufficiently definite to constitute an offer as to which there could be an acceptance that has legal ramifications.
Offers of permanent employment
Some state courts are generally hesitant to enforce claims of oral contracts for lifetime employment because such oral offers usually lack definiteness and mutuality of obligation, which are required to create an enforceable contract. Generally, courts construe such “contracts,” which contain no express or implied restrictions as to duration, as being indefinite, general hirings terminable at the will of either party, where the employee furnishes no consideration in addition to the services incident to employment.
Statements of periodic compensation
An employer’s statements concerning pay may result in a breach of contract claim. For instance, in Georgia, if an employment contract provides that wages are payable at a stipulated period, it is presumed that the hiring is for such period. Care must therefore be taken with respect to statements regarding pay.
Consideration is another element required for an enforceable contract. Consideration consists of some detriment to the offer, or some benefit to the offeree, or some bargained-for exchange between the two parties.
An implied contract
In the absence of specific language altering or limiting the at-will status of employees, general employment policies usually do not create a contract specifying that the employee can be terminated only for cause. In some states, however, employee personnel manuals or handbooks may create a contractual employment relationship if the handbook or manual contains clear promissory language that makes the handbook an offer that the employee accepts by continuing to work after receiving it. Additionally, if the language of handbook is not clear, it may create a factual issue regarding whether there is an enforceable contract. A jury must decide that factual issue.
Definite language required
To establish enforceable rights, the handbook or manual must be sufficiently unambiguous to constitute an offer.
In some states, continued employment is sufficient consideration to create a binding contract based on promises of job security contained in an employee handbook.
A clearly worded disclaimer in the employee handbook has been viewed by the courts in some states as a complete defense to a suit for breach of contract based on an employee handbook. However, if the disclaimer does not clearly state that the employee is an at-will employee, the court may find that it is not a defense to a breach of contract claim or that the employee is entitled to a jury trial because the handbook is ambiguous.
Benefits upon discharge
Handbooks may also give discharged employees’ rights to vacation pay or other job benefits, especially when the employer followed such a practice in the past.
Doctrine of good faith and fair dealing
Some state laws imply an obligation of good faith and fair dealing that may overcome the presumption of employment at-will. The law varies by state, but many states that recognize the covenant of good faith and fair dealing in contracts also recognize the covenant as a limitation on an employer's ability to discharge an at-will employee.
Public policy exception to employment at-will
Many states recognize a public policy exception to the employment at-will doctrine. To establish that the public policy exception applies, an employee must generally show the following:
Most state courts have determined that, pursuant to this public policy exception, employers may not discharge at-will employees for refusal to participate or remain silent about illegal activity.
Each written employment agreement should be prepared individually to specifically address the particular employment relationship. The following provisions should be considered:
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