Employer Law Newsletter
The term "employment contract" does not apply solely to a formal document signed by the employer and the employee. Instead, an employment contract may be created by almost any writing in the workplace, or even by a verbal statement, if the employer does not make clear that statement or writing is not meant to be binding.
The most obvious employment contract is a formal written agreement or letter from the employer to the employee stating the terms of an employee's employment, such as salary, vacation, and benefits. An agreement may also be created by an employee handbook or a list of employer policies that is distributed to an employee. An employee may then claim that, once the employee received the new policies and decided to continue working for the employer, both the employer and the employee became bound by those policies. Such an "implied contract" is most often used by an employee to prevent his or her employer from firing the employee without complying with a lengthy disciplinary procedure or from terminating the employee for reasons that are not listed in a policy stating the reasons for which an employee may be fired. An employer who wishes to avoid being bound by such policy statements must include some form of disclaimer with the policy, such as a statement that the policy does not create a binding contract and will be followed only at the discretion of the employer.
Verbal statements by an employer may also create a binding employment contract, and again, are often used to show that an employer promised to retain an employee for a certain length of time. For example, employees have pointed to statements such as "Keep your production numbers above your monthly goal, and you'll always have a job" to prevent an employer from firing them as long as they meet the requirements. Such statements must be specific in order to be enforceable, however; a statement such as "You'll always have a place with us" generally will not be enforced against an employer. Finally, in most states, verbal contracts are limited by the "statute of frauds," which states that a verbal agreement is enforceable only if it could be fully performed within one year. So, for example, a statement such as "You'll have a job here until you retire" likely would be enforceable only if the employee theoretically could take early retirement within the coming year.
A few states also recognize an implied contract created by the employer's "course of dealing" with employees. For example, if the employer never fired an employee as long as he or she maintained certain standards of performance, a court may imply an agreement between employer and employees that no employee will be fired if he or she maintains those standards.
An employment contract may also limit an employee's ability to compete with the employer or to disclose confidential information after he or she has left. Such "covenants not to compete" are strictly limited in most states, and in order to make such a covenant enforceable, an employer typically either must impose the agreement as a condition of employment, when the employee is first hired, or, if the employer requires the employee to sign the agreement during employment, the employer must give the employee some additional consideration, such as a raise, a promotion, or better commission terms, in exchange for the new requirement. In addition, because such an agreement limits the employee's ability to earn a living after the employment relationship is ended, it generally will be enforced only to the extent that it is reasonably necessary to protect the employer. In some states, an agreement that does not comply with state law will be thrown out in its entirety. An employer who wishes to entire into a non-competition agreement is well advised to consult a lawyer when drafting it.
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