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Employee Lawsuits: Individual Employment Contracts

Contracts proliferate as at-will doctrine recedes.

Some employers have found that individual employment contracts with selected employees can be useful in memorializing certain aspects of the employment relationship. For example, individual employment contracts have routinely been used to restrict competition by employees after the employment relationship has ended. Similarly, individual employment agreements can be used to protect trade secrets against unfair appropriation by employees and/or competitors. In recent years, executives of many companies have been provided with significant payout provisions in their employment contracts that become activated by a change in control of the company. These so called "golden parachute" provisions provide for specific cash payments upon termination of the executive after the company is taken over by another corporation.

Individual employment contracts have also gained increased popularity because of the erosion of the employment-at-will doctrine. Employers faced with claims of breach of implied contract or wrongful termination suits, despite having made no written promises to their employees, have sought refuge in individual employment agreements with employees that spell out the conditions of employment including wages and benefits, the duration of the contract, and "cause for discharge" provisions. Where the written employment contract is carefully drafted, a provision setting forth the employment-at-will status of an employee can provide a substantial measure of protection for the employer against a wrongful discharge action. If the agreement is hastily drafted and significant provisions are omitted, it may engender more disputes with the employee rather than operate as an effective dispute resolution mechanism.

One mistake that often occurs in drafting individual employment agreements is the assumption by employers that even if they provide a measure of employment security to employees by drafting an agreement for a fixed term, once the term of the written agreement expires, the employee's status will revert to at-will and the employer will be free thereafter to terminate the employee for any reason at any time. Unfortunately, such an assumption is not accurate. A contract of employment that provides for a definite term and that expires without any attempt by the employer to discharge the employee is presumed to be renewed upon the same terms if the employee continues to render the same services. For example, in a Massachusetts decision, an employer attempted to terminate an employee after the expiration of a contract of employment that was to run for 18 months and "for such additional periods as may be mutually acceptable." The court ruled that because the employer had taken no action to terminate the employee at the end of the term, the employment agreement was presumed to be renewed for an additional 12 months. To avoid automatic renewal of a contract, a contrary intention must clearly be evidenced by some action taken by the employer or the contract of employment must clearly state that the employee's status is to be "at-will" following expiration of the contract term.

If an employer wants to fully protect itself in its contractual relationships with individual employees, all important terms of the employment relationships must be spelled out. An employer cannot assume that they will retain the right to discharge an at-will employee if it enters into an agreement for a specific term but omits the "reasons for discharge" provision from the individual employment agreement. In reality, the exact opposite is true. When a contract provides for a definite term of employment, the contract is no longer terminable at-will and the employee can only be discharged for "good cause." Thus, express written assurances of continued employment lead to difficulties if the employer attempts to discharge the employee for other than good cause during the term of the agreement. Often, this issue arises because the employer was haphazard in creating an employment for a definite term and simply did not realize that it was entering into an enforceable employment agreement terminable only upon good cause.

For example, in one decision, an owner of an office building entered into an agreement with an individual to provide janitorial services. The janitor signed a contract bearing the heading "1/84-12/84." The written agreement also provided for annual compensation that was stated in the agreement. The contract contained no provision for discharge, because the employer assumed the janitor was a subcontractor, not an employee. The court ruled otherwise, however, saying that the janitor was, in fact, an employee who had a contract for a definite term that could only be terminated upon good cause.

If employees are to be hired for a definite period of time and a written agreement is used to cover certain aspects of their compensation, it is very important to spell out the reasons for discharge. If the employer intends to retain its discretion to discharge the employee for any reason or no reason at all, such discretion must be clearly specified in the agreement. If the employee is to be employed for as long as the employee's performance remains satisfactory to the employer, that discretion must also be expressly set forth in the agreement. The contract must clearly state that the employer is the ultimate judge of "satisfactory performance." Even with such language, courts will likely imply a "reasonableness" requirement into any clause giving the employer the right to determine "satisfactory performance." Where the employee is afforded the right to be discharged only for good cause, the term "good cause" should be specifically defined in the agreement. An employer can define "good cause" in any manner it desires as long as the definition provides a clear understanding to both parties as to the deficiency in performance that will result in the discharge of the employee.

Finally, even if the individual employment agreement adequately sets forth the at-will status of the employee, or if the employee is discharged for reasons that are clearly within the good cause definition in the agreement, the employee may still bring a breach of contract action to enforce specific rights under the contract. Thus, it is important to clearly define the wages and benefits to be received by the employee in the contract itself. Also, if the employee is to receive severance pay or other benefits upon termination, the total amount of such benefits should also be specified in the contract of employment.

Individual employment contracts can be very useful in reducing an employer's potential liability in breach of contract or wrongful discharge suits. Such contracts should not be hastily drafted, however, and they should be reviewed carefully by the employer and/or his legal representative prior to execution by the employer and employee. Although good draftsmanship cannot anticipate every problem that can arise during an employment relationship, proper protective language can limit liability when and if the unexpected happens.

Disclaim Everything in Your Handbook

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Employee Lawsuits: Offer Letters and Implied Contracts of Employment

Employee Lawsuits: Misrepresentation or Fraud

Employee Lawsuits: Promissory Estoppel and the Covenant of Good Faith

Employee Lawsuits: Minimizing Exposure

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