Employee contracts

Authored by Frank Day, Robbin Hutton and Jessica Asbridge at Ford Harrison LLP
June 12th, 2018

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:

  • federal and state anti-discrimination laws
  • the existence of a union contract requiring just cause for termination
  • federal or state statutes prohibiting discharge in certain situations (such as whistleblower laws).
  • violation of a state's public policy
  • breach of an implied promise of good faith and fair dealing
  • the existence of a contract, which puts the employer and employee in a relationship that is other than at-will

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.

Mutual assent

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.

Oral statements

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

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. 

Consideration

In some states, continued employment is sufficient consideration to create a binding contract based on promises of job security contained in an employee handbook.

Disclaimers

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: 

  • a clear public policy that existed and was manifested in the federal or state constitution, a statute, an administrative regulation, or the common law
  • a discharge involviing facts that would jeopardize the public policy
  • evidence to demonstrate an overriding legitimate business justification for dismissal.

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.

Contract provisions

Each written employment agreement should be prepared individually to specifically address the particular employment relationship. The following provisions should be considered:

  • Duration of employment - Duration of the contractual employment relationship should be expressly defined.  If the employment is not for specific duration, but is “at-will,” the contract should contain a statement to that effect.  If the employment is for a specific duration, consider including a “for cause” termination provision.
  • Notice provision - If notice of termination is to be required by either party, it should be spelled out in a notice provision.  If no notice is to be required, language to that effect should also be included to avoid a determination that reasonable notice is required.
  • Merger clause - An employer may rely on a merger clause providing that the written document constitutes the entire agreement between the parties, revokes and supersedes any prior agreements, and that no representations or promises other than those set forth in it may be relied upon.  The provisions of a written employment contract should state that it supersedes any alleged oral or implied agreements inconsistent with it.  It should specifically provide that no oral assurances or implied contracts are valid.
  • Alternative dispute resolution - An internal complaint procedure and an arbitration or other alternative dispute resolution (ADR) clause may create a feeling of job security, and may be combined with exclusive remedy language designed to prevent an employee from suing the employer until the internal complaint procedure has been exhausted.  Such a provision may not totally bar administrative and judicial proceedings brought to enforce statutorily created rights.
  • Releases/consent - When not specifically prohibited by law, written contracts should include consents and releases of all claims for matters such as substance abuse testing.  Employers should also consider including consent for a reference check and a clause holding the employer (and reference provider) harmless for any references.
  • Probationary period - Some employers choose to include acknowledgment of an “initial” probationary period. However, as discussed previously, this is not always a prudent decision. 
  • Liquidated damages - The employer may also consider including a liquidated damages clause specifically limiting available remedies if the employment contract is breached.  As a general rule, where such clauses are included merely as a penalty, they are unenforceable.
  • Non-competition clauses - Consider including non-competition or non-solicitation provisions and/or non-disclosure provisions.
  • Assignment of invention provision - Generally, an invention belongs to the inventor, and the fact that the inventor is an employee does not mean the employer necessarily has any rights to the invention.  It depends on the relationship of the parties and the circumstances under which the invention was developed.  If the employer hired an employee for the specific purpose of inventing something, that invention most likely belongs to the employer.  An employer likely has no legal interest, however, when an employee invents something that has nothing to do with his/her employment, on his/her own time, and with his/her own resources.  When the employee is not hired to invent, but on the employer’s time and with some of the employer’s resources develops an invention that somehow helps the employer, the general rule is that the employer has a “shop right,” which is a non-exclusive license to the use of that invention.  The “shop right” doctrine is fragile and of uncertain duration.  An employer can ease uncertainty with a written agreement that specifically assigns inventions to the employer.  As in the case of non-compete clauses, it is preferable to obtain the agreement at the beginning of employment.
  • Attorney's fees - A provision for an award of attorneys’ fees to the prevailing party should enforcement be necessary is often included in written employment contracts.
  • Forum selection clause - Employers may wish to specify the controlling state law in a written employment contract.
  • Jury trial - Some written employment contracts include a waiver of a right to a jury trial in the event that it is necessary to bring a court action to enforce the agreement.  Some courts do not recognize such waivers.
  • Commissions - Generally, state law governs whether employees are entitled to earned commissions when discharged, but contractual terms may create valid standards to the employee’s earning of the commission.
  • Severability clause - A severability clause is a provision that expresses the parties’ intent that a court enforces the contract to the greatest extent possible, severing or limiting unenforceable provisions of the contract, or portions thereof.  Severability clauses are particularly important in contracts containing restrictive covenants such as non-compete and non-solicitation provisions.