When an employee is terminated in a way which breaks the terms of his/her employment contract, the contract is breached. The employee may seek damages to compensate for the losses incurred by the breach of the employment contract.
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Types of employment contracts
Most employees in the USA are at-will employees (except those in Montana), meaning that they can be fired at any time, with or without cause. This means that at-will employment is presumed, unless an employment contract sets different terms, than that of at-will employment.
It’s important to note that employment contracts don’t necessarily have to change the terms of at-will employment, meaning that they may not offer extra job security. They may simply regulate other aspects of the job.
An employment contract may be written, oral, or implied. Either way, it is a legally binding agreement between the employer, and the employee. Such contracts regulate the terms of employment.
There are 3 types of employment contracts:
When the terms of employment are set in writing, it is called a written contract. Such cases are usually straight forward, since all terms of employment are clearly spelled out in the contract.
When an employer and employee agree on the terms of employment verbally, it is called an oral contract. Oral contracts are initially based on a mutual verbal agreement, but practice shows that in case of disagreements later, the parties tend to remember the terms of the oral contract differently. This presents obvious difficulties, since it will be the word of the employee vs the word of the employer.
It’s good practice to write a memo of any conversations that can be deemed as oral contracts of employment, to prevent complications later on.
When the terms of an employment relationship can be implied from various actions and suggestions by the employer, it is called an implied contract. It is the nature of implied contracts, that they are not specific, and not formal. As such, the notion of implied employment contract doesn’t even arise, unless an employee is wrongfully fired. As you would expect, proving the terms of an implied contract is not easy, and the burden of proof is on the fired employee.
Employee handbooks can be considered written contracts, unless they have a disclaimer stating that they are not.
Not every state recognizes the notion of implied employment contracts though.
Examples of implied contracts recognized by US courts are:
- Statements or promises by the employer that suggest job security, for example, “If you bring your numbers, you’ll always have a job with us”.
- The employee has a long, successful history with a company with regular promotions and positive performance reviews.
- Internal policies of a company
Damages to be awarded with employment contract breach cases
When an employer breaks a valid employment contract and wrongfully terminates an employee, the employer will, in effect, owe the employee the money he/she should have received under the terms of the contract.
Rarely will the court order the reinstatement of the job. Instead, the ex-employee will be awarded a settlement amounting to the losses incurred as a result of the breach of contract.
Here are the types of damages one can expect with wrongful termination because of breach of contract claims:
- Liquidated damages – Rarely, an employment contract will have a liquidated damages clause. This is simply a provision, which specifies the amount one party must pay the other, in case of contract breach.
- Expectation damages – An employee may be entitled to expectation damages, which is the amount of money the person should have received as specified in the contract.
The court expects the ex-employee to mitigate damages, in other words, to take reasonable steps to lessen the losses incurred. Usually, this means looking for another job after being fired.
Example of expectation damages: An accountant signs a 1 year employment contract, which states that he will receive a $100,000 annual salary, and can only be terminated if he commits an accounting mistake. He is fired after 6 months for no such reason, which means that based on the original contract, he is still entitled to $50,000 from the company. He can’t just rest for 6 months though, and expect the money to be awarded by the court. Supposing he took steps to look for a job and found one that pays 20% less 3 months later, he would be entitled to 3 months lost pay, and also the difference between his pay at his new job and the old job until the end of the 12 months.
- Punitive damages – In wrongful discharge claims based on breach of contract, the employee is not entitled to compensatory and punitive damages.
- Court costs and attorneys fees – The court will not award extra damages to pay for the costs of litigation. The employee needs to pay those costs.
Example breach of employment contract claims and settlements
Due to the at-will nature of employment in the USA, successfully bringing a breach of contract case to court is difficult, unless the terms set forth in a written employment contract have been broken. Mostly company executives have employment contracts so specific, that a breach of contract claim is justified.
Here are some examples of wrongful termination cases due to breach of contract:
- A marketing executive is awarded $4.1 billion (yes BILLION), which is made up of expectation damages and interest. His contract stated that he was entitled to a base salary, company stock and 5% of company revenue. The company didn’t pay him and fired him, even though the company was very successful. All those added up, he was awarded the huge amount.
- A banking executive was awarded 3 month’s lost pay, after his employer discharged him breaking their employment contract. The contract stipulated, that a 6 month notice would be given in the event of termination, but the executive was only give 3 months notice.