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Employment Contract Law - Firing an Employee with a Contract

Terms of employment are often governed by contract law. When an employee has an employment contract, chances are that the contract says something about how the employee can and can't be fired. Most employment contracts only allow an employee to be fired for "good cause," which can seriously limit an employer's ability to deal with a troublesome employee.

If the employee has an express written contract, then staying on the right side of the law is fairly simple -- just abide by the terms of the contract. Employment contracts come in many other flavors, however, and knowing whether you're complying with them or not can be difficult.

Oral Employment Contracts

Contracts don't have to be in writing to be valid under the law. If you promise an employee during the interview that you won't fire them "unless there's a good reason", you've probably established an oral employment contract. Even a casual conversation can be the basis for an oral employment contract, which means that employers have to be very careful what they say.

Courts are willing to uphold oral contracts, even ones based on limited conversations. For example:

  • During an interview, if an employer promises that the applicant will only be fired if he or she doesn't do the job well, then an oral employment contract is created.
  • During an evaluation, if a supervisor gives the employee feedback that "we expect you'll have a long career here if you keep up the good work", then an oral employment contract is created.

Implied Employment Contracts

Implied contracts overlap with oral contracts, where a conversation can be the basis for an implied contract. Implied contracts, as their name suggests, aren't express contracts, but rather come about through implication and suggestion. For example:

  • The employee handbook states that once employees have worked at the company for 3 months, they become "permanent" employees. This may create an implied employment contract.
  • An employer almost never fires employees unless they simply aren't doing their job well. An employee relies on this established practice and honestly believes that he'll only be fired for not doing his job. This may create an implied employment contract.

Implied contracts without some sort of oral promise however, are less likely to be found by a court. As long as you don't promise your employees job security, it is unlikely a court will find an implied employment contract without some further effort on the employer's part.

Firing an Employee -- Good Cause, Good Faith and Fair Dealing

If an employee does have an employment contract, express, implied, oral or written, then generally you must have "good cause" to fire the employee. Good cause generally means that the reason for firing the employee is based on purely business needs. Here are some of the most common examples courts have found are "good cause":

  • Low productivity
  • Poor work performance
  • General insubordination
  • Violating company rules
  • Threats of violence
  • Illegal acts
  • Harassment
  • Dishonesty
  • Habitual lateness
  • Excessive absences
  • Endangering coworkers
  • Consistently disrupting the workplace

In addition to good cause, employment contracts generally require the employer to act in good faith and deal fairly with the employee. This requirement is generally referred to as the covenant of good faith and fair dealing. To breach this covenant however, an employer generally has to be a pretty bad apple for a court to find a breach of the covenant. For example:

  • An employer fires an employee to avoid paying them retirement benefits;
  • An employer fires an employee to avoid paying a sales commission;
  • An employer fabricates evidence of an employee's performance to justify firing the employee.

In other words, an employer has to be blatantly dishonest before courts will find a breach to the covenant of good faith and fair dealing.

Next Steps 

There are many different reasons for firing a contract employee. Knowing what is legal and what is illegal under the law is vital. Speak to an experienced employment law attorney today to learn more. 

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