Written Employment Agreements Can Reduce Litigation Risks But Open The Door to Wrongful Termination Claims

No matter the context, taking the understandings, expectations, and agreements between two or more parties from their mouths and ears and putting them on paper is designed to provide those parties with clarity, certainty, and finality. Memories are short, and recollections are subject to alteration and manipulation. Words exchanged in the ether may be said by one side one way and heard differently by the other. When contracts are reduced to writing, dueling and contradictory stories become far less relevant, and disputes about what the parties agreed to are far less likely.

That is one of several reasons employers enter into written employment contracts with key employees. While putting an employment agreement in writing may indeed reduce the chances of a dispute, it will not eliminate that possibility. Employment litigation still frequently arises even when a written agreement outlines the terms of an employee’s tenure. This can involve alleged violations of employment laws, such as discrimination and harassment claims, as well as other acts or statements by the employer that an employee asserts supersedes, supplements, or changes the terms of the written agreement. But claims can also arise from alleged violations of the agreement itself, especially those provisions setting forth how and why the employer may terminate the employee.

At-Will v. Just Cause

In the absence of an employment contract or collective bargaining agreement setting forth the length of an employment term or specific, agreed-upon reasons that would justify termination for cause, most employees work on an “at-will” basis. That means employers can usually terminate an employee at any time and for any reason not prohibited by law (e.g., race, gender, age, membership in any other legally protected class, retaliation for exercising legal rights).

But if an employment agreement specifies that an employee may only be terminated for cause and delineates what those causes are, a terminated employee may claim that the purported reasons asserted by their employer to justify their firing are either not present or are merely pretexts.

While most employees are employed on an at-will basis, the opposite is true for c-suite executives generally, and CEOs in particular. According to a 2021 report from the Roosevelt Institute, “Analysis of the employment contracts of CEOs in large, publicly traded businesses reveals that the vast majority are not employed at-will. Instead, CEOs at most publicly traded companies are protected against arbitrary firings: either they can only be fired for specific reasons, or they receive extra compensation if they are fired without cause.” The report also noted that “In a sample of CEO contracts from S&P 1,500 firms, over 97 percent of contracts included provisions spelling out grounds for just cause terminations

Wrongful Termination Claims Without Employment Contract

Even in the absence of a written employment agreement, an aggrieved employee may claim that oral representations, company policies or procedures, or the contents of an employee handbook support a claim that they can only be terminated for cause. If a discharged employee can establish that such representations or contents are legally enforceable terms of the employment relationship, they may be able to overcome the presumption of an “at-will” relationship and challenge the propriety of their termination if it was contrary to those terms.

Damages and Remedies For Wrongful Termination

In most wrongful termination cases, the largest component of potential damages is the difference between the employees’ earnings before and after termination. Put another way, what was the employee earning before they were terminated and what could they have reasonably expected to earn but for the termination?  A court would then subtract from this sum any amounts the employee earned in a new job or what they could have reasonably been expected to earn if the employee was diligent in looking for comparable work. This amount through the date of trial is “back pay,” while compensation for future lost wages is considered “front pay.”

Additional monetary damages that may be available include the value of any lost fringe benefits, expenses incurred in looking for new employment, damages for emotional distress, and reasonable attorney fees and costs. A discharged employee may also seek affirmative relief, such as reinstatement to their former position.

As we discussed in this previous post, a well-crafted employment agreement offers significant advantages in terms of attracting and retaining top talent and reducing litigation risks. That said, employers should consult with experienced counsel before offering employment contracts to executives and other high-level personnel to ensure the upsides for the employee are matched by robust protections against potential downsides for the employer.

If you have questions or concerns about employment agreements or wrongful discharge claims arising from such agreements, please contact Jordan Held or Mariah Natzke at Kreis Enderle today.

Welsh Wire Podcast

You can listen to Jordan and Mariah discuss the proposed rule change on the Welsh Wire Podcast hosted by Welsh & Associates.