Employment Contracts

What is a contract?

A contract is an oral or written agreement between two or more persons to take or refrain from taking some action. A legally enforceable contract is one in which both (or all) parties to the contract provide something of value to the other party or parties in the agreement. For example, if you take your car into a repair shop to be fixed, you ordinarily enter into a legally enforceable contract with the shop. The repair shop agrees to fix your car, which is a value to you. You agree to pay for the work performed, which is a value to the business.

To create an employment contract, the employer must make a specific offer and there must be acceptance of the terms of the offer by the employee. Normally the employee accepts the offer by remaining on the job and continuing to work. In addition, there usually must be a meeting of the minds or mutual intent that the promise be binding.

Not all agreements are enforceable in court. For instance, if your neighbor wins the lottery, and, in a fit of generosity, promises you that he is going to treat you to breakfast in the morning, there is an agreement for your neighbor to take you to breakfast. If he breaks his promise and doesn’t take you, you can’t sue in a court of law. You did not provide or agree to provide your neighbor anything of value in exchange for the promise of breakfast. To be legally enforceable, a contract must contain an exchange of value (or, in legal terms, “consideration”).

If one party to the agreement breaks (or “breaches”) the terms of a contract, the other party can file a lawsuit to have the court order the other party to live up to the agreement or to pay the other party for any monetary loss or damages incurred because of the broken contract.

Every person who works for wages has at least one express contract with his or her employer. By entering into an employment relationship, you agree to perform specified work for your employer. Your employer agrees to pay you for your work. If your employer does not pay you, your employer has broken this most basic of employment contracts.

Written contracts

Written contracts are, of course, the most easily recognized employment contracts. They usually contain specific terms and conditions of the employment relationship, such as duration, pay, and responsibilities. These contracts are signed by both employer and employee. Employees most likely to have individual contracts include athletes, entertainers, and high-level executives. If you have a written contract for a fixed term, for example, two years, the law requires that the employer have “just cause” for termination.

Employer handbooks, policy manuals, letters of agreement, memoranda of understanding, letters reflecting a job offer or other written statements of the employer’s policies or rules may also be considered contracts. Whether such writings are enforceable contracts depends on the facts and circumstances of the particular case. For these types of writings to be considered legally enforceable contracts limiting the employer’s right to terminate the employee at will, the document must contain language which shows that the employer and employee did not intend an at-will relationship.

Review your employer’s policies or written rules to see if they contain any statements about termination or discharge. Check all manuals issued by your employer from the date you were first employed to the date of your termination. Check also for promises of job security. Statements of an employer’s policy of retaining your employment unless you engage in certain prohibited conduct may sometimes be considered limitations on the employer’s right to fire you “at will.” A written policy that there will be no terminations without just cause may be enforceable as a contract.

If you had a written agreement which was broken by your employer, you have the right to sue your employer for any economic damages you sustained. Such damages can include the wages and benefits you will lose as a result of the broken contract or expenses incurred in locating another job. Before going to court, however, you should confront your employer and try to negotiate a peaceful settlement of the matter.

Oral contracts

Agreements that are not in writing may sometimes be binding. There are certain limitations on the enforceability of oral contracts that do not exist for written contracts. Oral contracts are difficult to prove. But do not automatically assume that you have no enforceable agreement with your employer just because it is not written down, especially if others heard the statements.

Implied contracts

Express oral and written agreements between an employer and an employee are not the only type of contract recognized by courts. In the employment setting, certain terms of employment may be implied by your employer’s conduct, policies and practices. These are known as implied contracts.

Progressive discipline policies, statements made about job security, and even your employer’s past history of requiring just cause for termination can all be evidence of an implied contract between you and your employer that you will not be fired without cause. Again, you must closely examine your employer’s policies, rules, handbooks, practices and any statements made to you by managers to see if you might have an implied contract with your employer regarding the circumstances under which you can be terminated.

What is an enforceable promise?

Under certain conditions, a promise by an employer may be enforced in a court of law, even though the employee did not give or promise something of value in exchange for the employer’s promise. To make a promise enforceable in the employment setting, you must show the following:

A specific promise by your employer to take some action;

That you relied on the promise;

That your reliance on the promise was reasonable;

That your reliance on the promise caused you harm or was detrimental to you in some way; and

That to avoid unfairness, the promise should be enforced.

The best way to illustrate this concept, known as “detrimental reliance” or “promissory estoppel,” is by example. A salesman, Archie, has worked for 22 years for a manufacturer. He is recruited by a competitor and offered a job with a higher base salary and commission structure. Archie offers his resignation to his current employer. The company president assures Archie that his job is secure, that he has always been an excellent employee, and that if he continues to perform well, he will have a job with the company for at least five years. Archie is satisfied with that answer and informs the competitor company that he is staying at his current job. Two months later, the sales manager accuses Archie of complaining about him to the president. “You’re fired,” the manager tells him. Two days later, he receives a letter, signed by the president, confirming his termination.

In this scenario, the employer specifically promised Archie that his position with the company was secure for five years as long as he continued to perform his job well. Based on the president’s assurances, Archie refused the employment offer at the other company. Archie’s reliance was harmful or detrimental because he could have had a higher paying position with another company. Unfairness would certainly result if the promise were not enforced.

If you believe that your employer broke a specific promise to you, you may be able to enforce the promise and recover damages if there was detrimental reliance. You should certainly consult an attorney if you think this doctrine might apply to your situation.

The covenant of good faith and fair dealing

The parties to a contract have a duty of “good faith and fair dealing” towards each other. As a general rule, the duty does not limit the employer’s right to dismiss an employee. However, a very few states do apply the covenant to a contractual employment relationship and permit a dismissed employee to sue for bad faith discharge.