Employment Contracts: What Are They and How Do They Work?

A written, oral, or inferred employment contract can exist

An employment contract is an agreement between an employer and an employee on the length of time they will work together. A simple handshake agreement ("The job is yours if you want it; can you start tomorrow?") to a complex written contract loaded with legalese are all examples of employment contracts.

A written, oral, or inferred employment contract can exist. The terms of the contract will be determined by what the employer and employee have agreed to (or, in the case of an implied contract, what each side expressed by their words and actions).

At-Will Employment Contracts

In the United States, most employees are assumed to work at will. This means that they can quit or be dismissed at any time for any cause that isn't criminal. (Discrimination and retaliation are examples of illegal causes for firing.)

Montana has a distinct rule: an employee may be fired only for good reason after completing the employer's probationary period or working for six months (if the company does not have a probationary period). To put it another way, the employee no longer works at will since the employer requires a sufficient reason to end the job relationship.

Every other state, on the other hand, presumes at-will employment unless a contract specifies otherwise. An employment contract does not always modify an employee's position as an at-will worker: An employer and employee can agree on crucial employment aspects without agreeing on job security for the employee. Many businesses, in fact, require employees to sign written employment agreements that specifically state that they will be employed at will.

EXAMPLE: When Bob is hired by Fun Stuff, the human resources director sends him a letter formally giving him the job, which includes details about the position, compensation, reporting connections, job responsibilities, and working hours. Bob will labor at his own discretion, according to the letter. The director signs and sends two copies of the offer letter to Bob, with the request that he sign and return one copy to confirm his acceptance of the post on the terms presented. The offer letter becomes a written contract for at-will employment if both the employer and the employee sign it.

Even though an at-will employee can be fired for any lawful cause at any moment, the employee retains the ability to enforce the terms of the employment contract. Consider the following scenario: an employee signs a written employment agreement that includes an at-will provision and a formula for calculating commissions. The employee is sacked after a year. The employee cannot use the contract to dispute his dismissal because it states that he can be fired at any time. If the corporation, on the other hand, only paid him half of the agreed commission, he may claim for breach of contract.

Written Contracts

A written contract is a written agreement that outlines the terms of employment. Some written contracts, as previously said, are for at-will employment. Others restrict an employer's right to fire employees. High-level executives, for example, are frequently employed under a written contract that requires them to stay with the firm for a given period of time (two or three years, for example) and the company to keep the executive for the same period unless the contract specifies a reason for termination. Grounds could include executive wrongdoing, such as committing a felony or participating in financial malfeasance, as well as external events, such as the company's sale.

Oral Contracts

An oral contract is merely a verbal agreement rather than a written agreement. An employer might, for example, call a successful applicant and offer her the position, as well as a start date, salary, and schedule. There is an oral contract of employment once the employee replies, "that sounds great; I accept."

Oral contracts are just as legally binding as written contracts, but they are far more difficult to prove. In the event of a disagreement, it will be your word versus the employer's.

An oral contract, like a formal contract, could be for at-will employment or limit the employer's power to fire. If an employer states to an employee, "I need a one-year commitment from you; during that period, the company will not fire you if you make your numbers," and the employee agrees, the employee can hold the employer to that one-year pledge. It is a violation of contract if the employee is fired for any reason other than failing to meet the company's numerical goals.

Implied Contracts

An implicit contract is one that is implied from a mixture of the employer's oral and written statements and acts rather than being reduced to a formal agreement or even stated expressly. When an employee is fired, the question of whether there was an implied contract arises. The employer claims that the employee was employed at will and thus cannot sue for breach of contract; the employee, on the other hand, claims that the employer's actions and statements led the employee to believe that he or she would be fired only for good reason and thus created a contract to that effect.

Here are some of the variables that courts evaluate when determining whether or not an implied employment contract exists (various jurisdictions apply different standards for evaluating implied contract claims):

• Whether or whether the company provided job security assurances to the employee. For example, if the employer states that the employee will only be fired for good reason or that he or she will have a job as long as they perform well, a court may conclude that an implicit contract exists.
• Whether the employer's policies limit the company's authority to fire employees at any time. Progressive disciplinary rules, for example, that don't allow the employer to deviate from the established procedures, policies that make new employees "permanent" after a probationary term, and so on, whether the employer's policies limit the company's authority to fire employees at any time. Progressive disciplinary rules, for example, that don't allow the employer to deviate from the established procedures, policies that make new employees "permanent" after a probationary term, and so on.
• The length of time that an employee has been with the company. Short-term employees have a higher chance of making an implied contract claim than long-term employees who have received regular promotions, raises, and good performance evaluations.

A court will not allow you to argue that you had a contradicting implied contract if you sign an at-will agreement; the written agreement will be the final word on the topic.

​​​Yoel Molina, Esq. (AKA “Mo”)

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