Implied Employment Contracts

You may be surprised to learn that a fired employee may be able to sue you for violating the terms of an employment contract that you didn't even know existed. As a matter of fact, employers in virtually every state have been forced to incur tremendous legal costs in defending and paying damage awards in connection with lawsuits brought under so-called "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 is not an agreement that you knowingly enter. Rather, an implied employment contract arises when a court agrees with a fired employee that the employer effectively made some promise that was broken when the employee was fired. In other words, the court "implies" that there was a contract, even though the employer may not have intended such a contract to exist.

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


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 the company must have 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 being promises, that you're not prepared to keep. 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 even 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 your words at all times, you need to be especially careful during job interviews and performance reviews when statements about an employee's future with your business tend to naturally come up.