What is an Implied Contract?
Contrary to popular belief, an employee does not need a written employment contract for a breach of contract claim. An implied contract is just as effective as a written contract for an employment dispute. An implied contract is when an employer has said something that leads a reasonable employee to believe that they will be hired on certain terms or that their employment will be continuous. There must be something beyond the mere existence of the employer – employee relationship that indicates to the employee that something more than the usual at-will relationship exists.
For example, an employee may be hired for a specific purpose, such as to complete a project or file for bankruptcy, or that they will be promoted after a certain period of time. In Williams v. Jowers , we represented an employee who was told that he would be promoted to a manager position after a year of employment, consistent with the practice for the last seven years. However, shortly before his promotion was due to take effect, the employees position was eliminated.
While generally not enforceable as an "employment contract" in California, implied contracts are often found in the employment context where the employee has been employed for a substantial time, told by the employer that he or she is doing a good job and will be treated accordingly, and would suffer substantial harm as a result of a firing without a good reason, e.g. an older employee with a long history with one employer. Further, the employer’s code of conduct, employee handbook, policies, and/or statements in interviews may imply an understanding that an employee will not be fired without good cause.
Law Governing Implied Contract Exception
The legal framework for the implied contract exception to the doctrine of at-will employment is derived from both case law and the Restatement (Second) of Contracts. According to the Restatement, an implied contract may be formed when the employee has reason to believe he will not be terminated without just cause. In the context of employment law, this exception has only been recognized by very small number of states.
One source of the protections for employees’ expectations of continued employment is employment manuals. The Restatement states that "[a]n offer to sell goods or services at a price to be the market price . . . creates a contract which will continue as long as market prices do." It goes on to apply that principle in the employment context where, for example, the employer’s employment manual states that "a person’s satisfactory performance will lead eventually to a permanent position if available." Based on that principle, a number of courts allowed an implied-in-fact contract to arise due to the language in an employee handbook. This theory is most often successfully applied when use of an employee handbook to limit termination was followed up with a performance evaluation form that referred back to the handbook.
Although the warning signs for employers are clear, there are also several employers out there who operate on the basis of disclaimer language. That is, even when a handbook contains statements suggesting the employee will not be terminated without just cause, the employment manual contains a caveat stating that the handbook is not a contract and does not alter the employment-at-will relationship. Courts have used varying standards to determine whether such disclaimers defeat attempts to argue over the language of the manual. In some instances, general disclaimers have been held insufficient to overcome the language of the manual. Other courts have held that, when disclaimers are not hidden, they are sufficient to defeat the claims of a former employee.
Identifying Implied Contract Provisions
Implied contract terms arise from the conduct of the employer and may be inferred from company policies that provide proof of the employer’s intent regarding what the employer will and will not do regarding employment. Every state recognizes some cause of action for wrongful termination that is based on an implied contract of employment. Courts consider employee handbooks, brochures containing work rules, and material in personnel files as evidence of company policies.
Courts take a strict view of implied terms and confine them to narrow limits of employment duration or the circumstances that surround a dismissal from employment. Long-term express, oral or implied contracts of employment may be severed just as short term contracts can be, but implied terms may not be severed be as short term, fixed-term, or just for a specific task.
Examples and Case Studies
The implied contract exception is not recognized in all states. In Byrd v. Hall Corporation, 2018 WL 2927179 (W.D. N.C. June 11, 2018), for example, the United States District Court for the Western District of North Carolina denied a request for certification of a class from an administrative assistant who alleged that she was misclassified as an exempt employee because she did not meet the salary basis test. Defendants contended that the allegation failed to state a claim under North Carolina law because North Carolina does not recognize the implied contract exception to the at-will doctrine. Id. at *2-3.
In New York, however, a collective bargaining agreement can be construed to provide for a just cause standard where a written disciplinary policy exists. For example, in Williams v. CVS Rx Services, Inc., 2018 WL 3078766 (E.D. Mich. June 21, 2018), employees filed a lawsuit alleging violation of both the FLSA and Michigan law for alleged misclassification. Noting that the implied contract exception is an equitable doctrine that does not require intent on the part of the employer to alter the at-will nature of the relationship, the Court looked to provisions in a collective bargaining agreement to support certification of the proposed class. The Court further rejected Defendant’s argument that a proposed Michigan class should be dismissed because Michigan does not recognize the implied contract exception and reasoned that it did not matter whether the applicable law allowed for the classwide application of the exception, but rather whether a valid contract supported an inference under Michigan law that employees were subject to a just-cause standard.
No matter the case law, the decision to certify the class always rests with the individual judge, who has enormous discretion.
Implications for Employers and Employees
The recognition of a common law implied contract exception to the at-will doctrine significantly impacts both employers and employees. For an employer, the most immediate risks of the implied contract exception are the prospect of having to defend a court action by an employee who would otherwise be an at-will employee, and the risk that the employee’s damages will not be limited to what the employer owes under the terms of an applicable written agreement.
For the employee , the implied contract exception has the potential to be very positive. An employee who formerly was an at-will employee will have a good deal more recourse against a former employer for non-violation of an express agreement than would have previously been the case. Such an employee also might have a remedy against a former employer for pain and suffering resulting from the allegedly wrongful termination.
Because the law regarding an implied contract exception has not yet been fully developed in Florida, acting with caution with respect to employees and former employees who might claim to have an implied contract often is the best approach. Such caution should include:
For most employers, the best posture will be to avoid disputes over what the law is regarding an implied contract and get to a resolution of claims by former employees based upon an express agreement, if that is possible without a protracted and expensive dispute.
How to Draft Clear Employment Contracts
The implied contract exception and the difficulty of defeating it with a motion to dismiss highlights the importance of careful drafting of employment contracts and policies. A well-drafted contract should clearly set forth all of the terms and conditions of employment, including pay, at-will status, vacation and sick leave, and grounds for termination, in one document, and it should be signed by both the employer and employee. If there are any inconsistencies between the contract and related documents, such as handbooks, the contract will control.
Depending on the nature of your business and employees, you might also consider whether to include a non-compete and/or non-solicitation agreement, even for at-will employees. In many states, such agreements need to be signed up front (i.e., before employees receive any pay) and often require reciprocal consideration, such as an initial bonus.
In addition, employers should consider revising their forms and policies to prevent misunderstandings regarding whether employees are at-will. Many employers have boilerplate employment offer letters or handbooks that say the employee is at-will, but have other language elsewhere that could be construed to create an implied contract. Employers should review their forms with their counsel to ensure there is no language that implies anything more than at-will status.
Future of Implied Contract Law
Looking ahead, the potential for the implied contract exception to evolve is significant. For one, practitioners need to learn how to leverage this exception since many employers have policies in place that would otherwise create the expectation of at-will employment. Furthermore, the National Labor Relations Act (NLRA) gives unions a new tool to challenge such policies, regardless of whether employees are members of a union. The case law discussion from Wright and later cases that rely on Wright provide critical insight into how the implied contract exception may be applied in years to come. It has long been the case that non-union employees do not have protection under the NLRA against employer conduct, but with the 2014 decision in Purple Communications, Inc., the National Labor Relations Board (NLRB) issued an opinion that allows employees to use work email for union purposes during non-work time. In Wright, the NLRB weakened the "electronic communications" drawback to the exception. With the use of cell phones and other digital devices and applications , employers have the ability to check emails, text messages, and social media platforms during work hours; they are permitted to frequently look at their phones, tablets and computers. The same applies to employees. Some employers require employees to use these tools not only during work hours, but as part of their work responsibilities. As such, the exception may be open to challenge by either side. We are already seeing companies heavily modifying their employee handbooks and communications policies so as to protect themselves from liability. The challenge, of course, is that the changes may conflict with other enforceable policies or violate the letter and spirit of at-will employment. As with all exception cases, the balancing factor comes in identifying the language and line of reasoning that the courts are using. Will the exception eventually extend to employees’ use of their pay for attorney’s fees? The case of Wright puts an entirely new spin on this exception and it is one to keep in mind.