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As long as you avoid written contracts with your employees, you may think you don’t have to worry about how your organization disciplines and terminates employees. This is far from true.

Actually, people usually think of a contract as a written multi-page document signed by both parties. But contract elements may exist in a simple letter offering a job, a statement on your application form or a well-meaning comment during the job interview. A legally binding contract can even be unintended, but implied.

Example: While interviewing a job applicant, your company vice president might say, “Our company is financially solid. We’ve never had a layoff here.” Six months later you eliminate this employee’s position due to budget cuts. But the vice president’s comment may have implied job security.

Implied Contract Example

The following is an example of how an employer’s customary practices can become a contract:

A security firm manager had a perfect record: No criticism from management in the seven years he managed the firm’s San Francisco office and regular salary increases. Then the company learned he and an employee in another city had talked about starting a competing business. But they never acted on this talk.

The manager had no written employment contract. When the company learned of the discussion of competing, management felt it was surely fair to remove this individual from a management-level position. After all, he was in a position which allowed him to know confidential information and know the firm’s clients. With this kind of knowledge, he could damage the company, as a competitor.

So the company demoted the manager to a night watchman’s job… and cut his pay by more than 50 percent. The manager quit. And sued for breach of implied contract.

The Ninth Circuit Court of Appeals ruled in the manager’s favor. The court’s reasoning: The company had a “custom of not terminating employees except for good cause.” In effect, this custom was a legally enforceable promise to the manager that he’d be terminated only for good cause. The manager hadn’t acted on his conversation, so the company had no just cause to terminate. (Tonry v. Security Experts.)

Warning: Representatives of your company, who act on the company’s behalf, can create contracts just as binding as if they were made by the chief executive.

Example: In a letter offering a job your supervisor might write, “This position will last until the project is completed.” A promise of job length. Half way through the project management terminates this employee. The company may have breached a contract with the employee.

How do you know what’s in the employment contract with an employee? If one of your employees brings a wrongful discharge suit against you, for example, how will you know exactly what the terms and conditions of employment are which a judge and jury could enforce against you?

The following summary statement tells you how broad the answer can be: “To have a binding obligation in an employment context, it is not necessary that the terms of the agreement be in writing. Instead, courts will look at the conduct of the parties, the practices of the particular industry, oral representations, the longevity of the working relationship and the damage that will be suffered by one party if his or her reliance on the representations or actions of the other party are not enforced as binding obligations.” (Source: “The Employee Handbook Audit,” Update 14. Alexander Hamilton Institute.)

So the terms and conditions of your contract with an employee can include:

  • Your actual practices. How you and your employee have actually conducted the employment relationship. How you have treated other employees and previous employees in similar circumstances.
  • Oral representations, even casual comments made by officers and executives and by the supervisor, to the employee. For example, over several years your supervisors have assured employees they have job security by using language like this: “You’ve got a job here as long as you want.” “We’re like a family here.” “You’ll never have to worry about getting let go.” Comments like these can be taken by employees as implied promises of job security, leading them to believe they have permanent employment.
  • Anything in writing which describes any terms, benefits or conditions of employment. These can be notes in an employee’s personnel file, language on the employment application, memos posted on the bulletin board, ambiguous language in an employee handbook, a letter to the employee.

An example of the dangers involved in creating an enforceable contract: The American Colloid Company, several years ago, sought to reassure employees by issuing a memo. In the memo the firm said firings would occur for good reason, but the firm would make every effort to avoid layoffs. Later a terminated employee sued, claiming the memo changed his employment-at-will status, that the company could fire him only for good reason. The U.S. Court of Appeals (Eighth Circuit) ruled for the employee, saying the firm’s memo created a termination-for-cause employment agreement!

What NOT to Do

Instruct officers, managers and supervisors never to make even an implied promise to an employee without approval of the president or top executive. Never put anything in writing regarding terms, benefits and conditions of employment unless you and your business or organization intend to honor it and live by it.

[NOTE: Information and guidance in this story is intended to provide accurate and helpful information on the subjects covered. It is not intended to provide a legal service for readers’ individual needs. For legal guidance in your specific situations, always consult with an attorney who is familiar with employment law and labor issues.]