Can You Fire Someone With an Employment 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 legal reason. At-will employees also have the same freedom to leave their employment. Employment contracts can alter this relationship by specifying how and when an employer can terminate an employee.

This article explores different types of employment contracts and how they impact an employer’s ability to terminate an employee. If you’re uncertain about letting someone go, consider consulting a local employment lawyer to review employment contracts and give guidance on legally firing employees.

What Is an Employment Contract?

An employment contract is a legally binding agreement between an employer and an employee defining the terms of employment. This agreement governs the employment relationship and may include terms covering:

• Salary and compensation structure
• Company policies
• Holidays and paid time off (PTO) procedures
• Health insurance and other benefits
• The process for termination, including notice requirements
• Severance pay and final paycheck delivery

Employment contracts must conform to state and federal labor laws. Drafting clear, compliant contracts with the help of a labor lawyer can help prevent future disputes over wrongful termination or a hostile work environment.

Types of Employment Contracts

There are three main types of employment contracts:

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

Let’s take a closer look at each one.

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 they won’t fire them without just cause, most courts will consider that as an established oral employment contract. Even a casual conversation can form the basis of 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, a supervisor who tells an employee they will have a long career if they keep up good performance may create an oral employment contract

Words matter. It pays to be very careful about what gets said during contract negotiations.

Implied Employment Contracts

Employers and their representatives create implied employment contracts through their actions. 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.

An employer who never fires employees unless they literally don’t do their job may have this practice 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 and look for evidence of a promise made by the employer. Absent a promise of job security, it may be difficult fo the court to rule for an implied employment contract between the employer and the employee.

“Good Cause” for Termination Under a Contract

If an employee has an employment contract, the employer often needs good cause to terminate employment. Good cause means employers can fire employees only for lawful reasons, such as misconduct. State and federal laws protect employees from terminations based on an illegal reason, such as a protected characteristic like:

• 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.

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

Under most employment contracts, the employer must act in good faith 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

These demonstrate that the employer acted in bad faith or dishonestly. The courts will likely find a breach of the covenant of good faith and fair dealing.

The Termination Process

Employers and small-business owners should develop a consistent process for employee termination. In a termination meeting, the employer can attempt to accomplish the following:

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

Cutting corners or ignoring laws during a termination will almost certainly backfire on an employer.

Get Legal Help with Employee Terminations

Terminating an employee with a contract carries significant legal risks if not handled correctly. An employment contract creates obligations that, if breached, can lead to costly wrongful termination litigation. A qualified local employment law attorney can protect your business by reviewing the specific contract, determining if you have good cause, and advising you on a compliant termination process. Speak to an experienced employment law attorney to ensure you are acting within your legal rights.