Employment Contract Law: Firing an Employee With a Contract

Firing an employee with an employment contract is more complex than terminating an at-will employee. Employers can terminate at-will employees for almost any reason. At-will employees can also leave their employment for any reason. Employment contracts, by contrast, often dictate how and when an employer can terminate an employee. Many employment contracts only allow termination for "good cause." This can seriously limit an employer’s ability to fire an employee.

If the employee has a written contract, staying on the right side of the law is relatively straightforward — abide by the contract terms. However, employment contracts come in many other flavors, and knowing whether you comply can take time and effort.

This FindLaw article explores different types of employment contracts and how they impact an employer’s ability to terminate an employee.

Employment Contracts

A contract is a legally binding agreement, often expressed as the result of a negotiation between the parties. An employment contract, therefore, is a legally binding agreement between an employer and an employee regarding the terms of employment. Possible terms of employment include, but are not limited to, the following:

• Salary
• Company Policies
• Employee holidays
• Employee paid time off (PTO) procedures
• Health insurance
• Employee termination process
• Social media policy
• Termination policy, including severance pay and delivery of a final paycheck

Employment contracts govern the employment relationship and should conform to state and federal labor laws. Although many companies have strong HR departments to help them administer company policies, they should seek the counsel of a labor lawyer in drafting company policies. Doing so can help them avoid wrongful termination or hostile work environment lawsuits.

Types of Employment Contracts

There are three main types of employment contracts, including, but not limited to, the following:

• Written (express) employment contract
• Oral employment contracts
• Implied employment contract

Written (Express) Employment Contracts

A written employment contract is an agreement between the employer and the employee. Ideally, this agreement reflects a negotiation between both parties, reduced to writing.

In a legal action, the court will look at the agreement before making a final decision. For example, if an employment contract grants an employee more PTO than other employees, the company must honor this agreement. Both the employer and the prospective employee should seek the counsel of a labor or employment attorney throughout the negotiation process to protect their rights.

Oral Employment Contracts

Oral agreements are usually valid under the law. If an employer promises an employee during the interview that you won’t fire them without just cause, you’ve likely established an oral employment contract. Even a casual conversation can serve as the basis for an oral employment contract. Therefore, employers must exercise caution when speaking to prospective employees.

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

• During an interview, any employer who promises to terminate employment based on job performance creates an oral employment contract.
• During an evaluation, the supervisor who tells the employee they will have a long career if they keep up the good performance creates an oral employment contract.

Implied Employment Contracts

Employers and their representatives create implied employment contracts through their actions. Consider, for example, an employee handbook. Most employee handbooks outline the company’s rules and policies, including when an employee becomes a permanent employee and becomes vested in a pension plan. A court could decide the handbook constitutes an implied contract.

Alternatively, consider an employer who never fires employees unless they literally do not do their job. Their actions may constitute an implied contract. An employee can rely on this established practice and honestly believe poor performance is the only ground for termination.

Ultimately, a court will determine if an employer’s actions constitute an implied contract. A court will likely look for evidence of a promise made by the employer. Without a promise of job security, a court will be unlikely to find an implied employment contract between the employer and the employee.

Firing an Employee

If an employee does have an employment contract, they often need good cause to terminate employment. Good cause means employers will only fire employees for purely business needs. State and federal laws protect employees from terminations based on an illegal reason. Some of these reasons include protected characteristics such as the following:

• Race
• Gender identity
• Sexual orientation
• National origin
• Religion
• Disability

As a matter of public policy, employers cannot terminate employees as retaliation for reporting illegal conduct or actions to the Equal Employment Opportunity Commission (EEOC). For example, a company cannot terminate an employee for filing a sexual harassment complaint.

Good Cause

Here are some of the most common examples courts have found are good cause:

• Poor performance
• General insubordination
• Violating company rules
• Threats of violence
• Dishonesty
• Habitual lateness
• Excessive absences
• Endangering coworkers

Moreover, the employer must act in good faith under most employment contracts and deal fairly with the employee. This requirement is the covenant of good faith and fair dealing. Consider the following examples:

• 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 must demonstrate blatant dishonesty before courts will find a breach of the covenant of good faith and fair dealing.

Termination Process

Employers and small-business owners should develop a consistent process to deal with employee termination. Ideally, through a termination meeting, the employer can do the following:

• Explain the reason for the termination
• Review the employee’s personnel file
• Review the severance package, if any
• Review Consolidated Omnibus Budget Reconciliation Act (COBRA)
• Retrieve company property from the former employee

Get Legal Help

Small-business owners should exercise care when terminating employees to avoid unnecessary litigation or similar legal action. A qualified local employment law attorney can help you protect your business by reviewing employment contracts or employee handbooks to ensure federal and state law compliance. Speak to an experienced employment law attorney to learn more.