Labor and Employment

What Does It Mean to Have an Employment Contract?

By Lisa Guerin, ​J.D., Boalt Hall at the University of California at Berkeley
Learn how employment contracts are formed and how they affect your rights.

Most employees in this country work at will. This means they can quit at any time, with or without notice, and their employer can fire them at any time, with or without notice, for any reason that is not illegal. If you have an employment contract, however, it might change the at-will employment relationship.

At-Will Employment

If you work at will, your employer doesn’t need good cause to fire you. You can be fired because you are a poor fit, because your employer wants to hire a friend to do your job, or simply because your employer doesn’t like you.

However, your employer can’t fire you for illegal reasons, even if you work at will. The law placesseveral reasons off limits; some major categories include:

  • Discrimination: Your employer may not fire you based on your membership in a protected class—for example because you have a disability or because you are pregnant. (See our employment discrimination and harassment page for more information.)
  • Retaliation: You may not be fired for complaining, either internally or to an outside agency, about workplace misconduct such as discrimination or harassment, violations of wage and hour laws, health and safety hazards, and so on.
  • Whistle-blowing: Your employer cannot fire you for reporting dangerous or illegal workplace activity like violations of consumer safety laws, deceptive advertising, improper use or disposal of toxic chemicals, or shareholder fraud, for example.
  • Public policy violations: You may not be fired for exercising a legal right (such as the right to take family and medical leave) or for refusing to engage in illegal activity (such as refusing to file false corporate tax returns).

How Employment Contracts May Limit Employers

An employment contract can change the at-will relationship, giving you additional job protections. However, the contract must limit the reasons for which your employer can fire you. Not all contracts do: An employer might ask you to sign an at-will employment agreement, for example. This type of agreement might include some information about your job duties, compensation, start date, and so on, but it will also state that you can be fired at any time.

However, some employment contracts restrict the employer’s termination rights by, for example, stating that you can be fired only for specified reasons (like committing financial malfeasance) or that you can be fired only for good cause. If that’s the case, the employer must abide by the terms of the contract.

A contract can be written, oral, or implied. For a written or oral contract to be formed, you and the employer must have made a specific agreement—either documented on paper (for a written contract) or spoken aloud (for an oral contract). Implied contracts are more complicated. An implied contract is not agreed to explicitly, but is instead inferred from the employer’s statements or actions. Typically, a court will look at statements in employment documents (such as the employee handbook, performance evaluations, and written policies), statements by managers, and company practices to determine whether the employer has made an implied promise that an employee won’t be fired without good cause.

Example: Acme’s employee handbook says that employees who complete a 90-day probationary period will become “permanent employees” and “part of the Acme family.” The company’s discipline policy promises that employees will receive two verbal warnings and a written warning before being fired for performance, conduct, or attendance problems. The company’s owner holds frequent “town hall” meetings with employees, at which he says that the company’s workforce is its greatest asset and that employees will always be treated with respect and fairness. No company documents mention at-will employment. By its statements and actions, Acme has almost certainly created an implied contract that employees will be fired only for good cause.

How Employment Contracts May Limit Employees

Because an implied employment contract focuses on the employer’s statements and conduct, it typically doesn’t place any restrictions on employees. However, a written or oral employment agreement may put some limits on you.

If, for example, you have agreed in writing that you will stay with the company for a set period of time (called the contract’s “term”), you must live up to this obligation. If you quit early, your employer can sue you for breach of contract. If your employer wins, you might have to pay it for the money it lost as a result of you leaving sooner than you promised. For example, if an employer has to pay your replacement a higher salary, it can sue you for the increased cost of hiring the new employee.

Some written contracts also include other restrictions on employees. For example, a contract might include a noncompete clause, which prohibits you from starting a competing company or going to work for a competitor for a period of time after your employment relationship ends. Noncompete clauses are not legal in every state (California won’t enforce them, for example). And, even states that allow noncompetes may limit their reach—by, for example, placing time or geographic limits on them.

If you’re asked to sign a contract that includes a noncompete clause, you may want to run it by a lawyer to make sure it’s legal and to understand what you’re giving up. (To learn more, see Non-Compete Contracts: Uses and Abuses.)

How a Lawyer Can Help

If you need help understanding an employment agreement your employer has asked you to sign, consider a quick consultation with an employment lawyer. A lawyer can explain the agreement to you, let you know if it includes any illegal or troubling terms, and suggest better language that you might propose to your employer.

A lawyer can also help if you believe your employer has broken an employment agreement. A lawyer can assess the facts and determine whether a court is likely to find in your favor and how much you can expect to collect in damages.

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