Implied Employment Contracts

Most employer-employee relationships are based on the principle of employment-at-will. Employment-at-will means that there’s a presumption that the employee is employed at your will for an indefinite rather than for a fixed term. (Montana is the only state that doesn't recognize this principle.) However, a fired employee may be able to sue you for violating the terms of an employment contract that you didn't know existed. Employers in virtually every state have incurred tremendous legal costs in defending and paying damage awards in connection with lawsuits brought under implied employment contracts.

When you and an employee enter into a formal agreement, whether written or verbal, specifying the terms of the employment relationship, you have an express employment contract. In contrast, an implied employment contract isn't an agreement that you knowingly enter into. Rather, an implied employment contract arises when a court agrees with a fired employee that you effectively made some promise that was broken when the employee was fired. This promise forms the basis of an implied contract.

The promise underlying an implied employment contract is usually found in a statement that you made orally or in an employee handbook or orientation materials. The fired employee claims that the statement defined the duration of employment or established the procedures you would follow before firing the employee.

The following are examples of statements that may be found to constitute an implied contract:

"The company’s policy is to treat employees in a fair manner and to release employees for just cause only." (Implies that there must be a reason to fire an employee.)
"Upon completing a six-month probationary period, an employee can expect to be employed as long as his or her work is performed satisfactorily." (Implies that an employee who has completed the probationary period cannot be fired without some warning that his or her work performance was poor.)
"An employee will be dismissed following a third warning that the employee has failed to meet performance standards or has violated company policy." (Implies that an employee will not be fired prior to receiving a third warning).

Be careful about making any employment promises, or statements that can be interpreted as promises, that you don't intend. Written statements are particularly troublesome, so you should review job application forms, employee handbooks, and any other documents that you may distribute to your employees. Look for any statement that may restrict your right to fire your employees and decide if you really want to live with that restriction. If not, delete the statement.

You may want to include on your job application forms an affirmative statement to the effect that an applicant, if hired, will be subject to employment-at-will.

Your spoken words also can get you into trouble. Although you need to watch what you say at all times, be especially careful during job interviews and performance reviews when statements about an employee’s future with your business are likely to come up.