I thought we had an “at-will” relationship with our employees, but recently, we got sued and the court found that the employee had an “implied contract” with us. Now we want to be sure that we’re not creating contracts we don’t want and that we do have contracts we need. How should we move forward? — Dara S., HR Manager in Santa Clarita
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You’re not the first to find yourself party to an implied contract that you never knew about. Actually, every employment relationship is a contractual relationship regardless of whether the contract is in writing. Employment contracts take many forms, including at-will employment, implied contracts created by offer letters or language in employee handbooks, collective bargaining agreements or union contracts, and individual written employment contracts and covenants.
California has a law on its books stating that employment that has no specified term may be terminated at the will of either party. Accordingly, California is an employment-at-will state, and either the employee or employer is free to terminate the employment relationship at any time and for any reason as long as the reason is not illegal (e.g., discriminatory). However, there are exceptions to at-will employment, and many of these are recognized under California law.
Implied Contracts
Oral statements as contracts. Despite a strong presumption in favor of the at-will standard, California courts may find that an employer’s oral “promise” created an implied contract. The court will generally look at the “totality of the circumstances,” including the oral promise, the employer’s personnel policies or practices, the employee’s length of service, employer actions and communications that seem to ensure continuing employment, and regular practices in the industry.
For example, in Foley v. Interactive Data Corp., decided by the California Supreme Court in 1988, that an employee received numerous oral assurances of job security and consistent promotions, salary increases, and bonuses was sufficient evidence to prove that he could not be discharged except for cause.
Even though an isolated or casual remark regarding employment will rarely, if ever, change an otherwise at-will relationship, employers should remain cautious because such a remark combined with other circumstances could create a different contractual relationship. Managers and supervisors should be educated about the employment-at-will standard and instructed to refrain from making any contrary representations.
Employee handbook statements as contracts.
The California courts have held that statements and/or policies contained in an employee handbook may create an implied contract. Accordingly, employers should draft handbooks with the following guidelines in mind:
- Use nonmandatory language (e.g., “guidelines” versus “rules” or “policy”).
- Avoid references to “probationary” or “permanent” employees.
- Include an at-will statement and contract disclaimer at the beginning of the handbook and also as part of certain policies such as disciplinary policies. Use language in the disclaimer indicating the employee handbook is not meant to create, nor should it be construed as creating, a contract of employment, that all employment is at-will, and that as such, employment may be terminated by the employer at any time, with or without cause.
- Have employees sign a statement acknowledging that they received a copy of the handbook, that their employment is at-will, and that nothing in the handbook is intended to or does create an employment contract.
Written Contracts
Most employers also have written contracts that may affect employment-at-will status of employees that could include the following:.
Collective bargaining agreements. A collective bargaining agreement (CBA) is a contract between an employer and a labor union that represents a group of employees in the workplace. The National Labor Relations Act (NLRA) regulates and protects the activities of organized labor in the workplace. The CBA often contains discipline procedures that must be followed.
Individual employment contracts. An individual employment agreement is a written, binding contract between an employer and a prospective or current employee that, when properly drafted, can be a highly effective means of protecting a company’s financial and intellectual resources.
As a result, most employers require an employment contract as a condition of employment when the position in question is either highly influential (such as the chief executive officer), involves sensitive trade secrets or client list information (such as sales positions, engineers, and computer programmers), or requires a significant amount of front-end cost (such as relocation packages, extensive or specialized training, or a sign on bonus). In addition, employers may use separation or severance agreements at the end of the employment relationship or enter into agreements that only deal with a discrete subject, such as arbitration or noncompetition agreements.
Restrictive covenants. Restrictive covenants include noncompetition, nonsolicitation, and proprietary information agreements. In California, all contracts restraining anyone from engaging in a lawful profession, trade, or business of any kind are considered contrary to public policy and are therefore void. However, agreements designed to protect trade secrets, confidential information, customer lists, and employees and define the ownership rights to intellectual property are generally permitted. Any restrictive covenant must be narrowly tailored to protect only the employer’s legitimate business interests.
Noncompetition agreements. Noncompetition agreements void and unenforceable in California.
Nonsolicitation agreements. Nonsolicitation agreements are particularly useful when an employee leaves the company to work for a competitor. In general, they prevent departing employees from soliciting employees in an effort to get them to come work at the departing employee’s new company.
Proprietary information. These agreements are intended to protect information, which may include trade secrets, technological developments, formulas, customer lists, and copyrighted material.
Inventions and proprietary rights. Employment agreements that require the assignment of an employee’s invention rights are generally permissible. However, an employer may not require an employee to assign rights to an invention that was developed outside of the employment relationship.
Because of the complexity of employment agreements and the laws interpreting them, employers should seek the advice of an experienced employment attorney when drafting such agreements. — CELA Editors