California Labor and Employment Law

How to Read an Employment Contract: Part 1

Not all employers use employment contracts and not all employees get one. When employment contracts do come into play, they can come in all shapes and sizes. Sometimes they are not written down but have to be pieced together from multiple conversations and emails. Other times, they can be hundreds of typed pages long (e.g., if you’re a Fortune 500 CEO).

The good news is that almost all employment contracts require you to answer the same few basic questions.

When Will the Contract End? Can It Be Renewed?

Sometimes the contract will make it easy for you to find the answer to this question by having a section called “Term”, “Duration” or “Renewal”. Other times, you will have to hunt around a little. If the contract doesn’t have an expiration date, that could be cause for concern. Slavery and forced labor is, of course, not permitted in the U.S. Still, it’s generally a good idea for a contract to have an expiration date so that there is no confusion.

If the contract has one, you will want to know what the procedure for renewal will be. Sometimes the contract has an “evergreen” provision that makes renewals automatic. Other times, the contract will require one or both of parties to agree to it or negotiate a new contract.

Can the Contract Be Terminated Early and by Whom?

Look for a section called “Termination”. Most contracts will have one. If the contract is drafted by the employer, as is nearly always the case, then the contract will probably permit the employer to early terminate the contract 1) for or with “cause”, which means a “good reason” such as poor performance, fraud, disloyalty or misconduct by the employee, 2) “without cause”, which means the employer doesn’t need a reason to terminate you (in California, employment is presumed to be “at will” unless proven otherwise), 3) due to economic conditions, i.e., a “layoff”, etc. Sometimes the contract will require the employer to give you a certain amount of advance notice of the decision to terminate, say 30 days.

The contract may also give you the employee the power to early terminate the contract, although advance notice will usually be required.

Can the Contract Be Amended or Modified and by Whom?

The contract may have a section called “Amendment” or “Modification”. Or the answer might be at the end of the contract in a section called “Miscellaneous”. You might have to hunt around a little.

Contracts typically state that any changes to the contract, i.e., “amendments” or “modifications”, have to be in writing and have to be agreed to by all the parties. This means that a casual oral statement by your boss that “you’ll have a job for life” or “we’d never fire you without a good reason” may not add up to much unless your boss is willing to put it in writing. Likewise, if your boss suddenly decides to reduce your compensation, he may be breaching your contract if you didn’t agree to a written amendment.

Which State’s Laws Govern the Contract?

Look for a section called “Governing Law” or “Miscellaneous”. In any case, this provision will usually be somewhere at the end of the contract.

Basically, this provision tells you which state’s laws control the contract. This is the case regardless of where you work, where the contract was signed, where the employer is headquartered, etc. So even if you work in New York for a company based in Delaware and you signed the contract while on vacation in Hawaii, the contract will be governed by California law if that’s what the contract says. And if a problem or dispute arises under the contract, you will then need to retain a California lawyer to assist you. Do not assume that contract laws are the same under all 50 states – they are not.

Part 2

Next, in Part 2, I will discuss what happens if someone violates the contract, what obligations continue after the contract ends, whether the contract is the final word or whether emails and conversations with your boss can be considered. Stay tuned.

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