California Labor and Employment Law » Employment contract

How to Read an Employment Contract: Part 2

Eugene Lee — Tue, 22 Dec 2009 21:40:33 +0000

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.

Is the Contract the Final Word?

Look for a sentence at the end of the contract that says something like the following: “This Agreement contains the entire agreement between the parties with respect to the subject matter hereof. Each party acknowledges that it has not relied on any representations or promises except as set forth herein. Any and all prior negotiations, discussions, agreements, or understandings, whether written or oral, are merged into and are superseded and displaced by this Agreement.” The contract might also have a section called “Merger” or “Integration” or “Prior Understandings Superseded”.

This means that everything you were told and thought when you signed the contract is irrelevant. The only thing that matters is what’s contained in the four corners of the paper on which the contract is written.

Of course, the opposite is true too. If the contract does not contain the above, then all the emails and conversations you had with your employer when you signed the contract would be considered by a judge in interpreting the contract’s terms.

What Happens if Someone Violates the Contract?

The contract may have a section called “Breach”, but more often, the contract will build in the consequences of contractual violations into the “Termination” section, since termination of employment is the usual response to a violation. There may be other consequences too. You may be required to re-pay the employer for any training they have invested in you. Or you might be on the hook for a monetary sum called “liquidated damages”.

You will also want to look for a section called “Dispute Resolution” or “Arbitration”. Or it might be in a section called “Miscellaneous”. In any case, the relevant language will likely be near the end of the contract. This section sets out the procedures the parties have to follow if the contract is violated or a dispute otherwise arises under the contract. Sometimes the contract will require the parties to engage in a multi-step process of first trying to work things out themselves, and failing that, hiring a mediator or arbitrator. Other times the contract will require the parties simply to file any lawsuit in a certain jurisdiction.

This can a real trap for employees if they’re living and working in one state but the contract requires them to file a lawsuit all the way on the other side of the country. I’ve also discussed the downsides of arbitration for employees several times in other posts: “Is Arbitration Good or Bad for Employees?” and “Arbitration Works Better than Lawsuits . . . But for Whom?”

Another thing to watch out for: the contract may require the party who loses the dispute to pay for the costs and attorney fees of the prevailing party. Given attorneys can charge anywhere from $200 to $1,000 per hour, this can add up fast for the losing party.

What Obligations Continue after the Contract Ends?

After the contract expires or is early terminated, you may not be completely off the hook. The contract may have a “noncompete” clause that prohibits you from working for another employer in the same industry within a certain geographic region and/or for a certain period of time. Noncompete clauses are generally unenforceable in California but that doesn’t stop employer from including them in contracts so you should keep an eye out for them.

The contract could also have continuing confidentiality obligations that require you to preserve and protect from disclosure any confidential information and/or trade secrets you acquired during your employment. If you fail to comply, the contract may require you to pay a certain amount of money to the employer, so-called “liquidated damages”.

Final Words of Advice

This post contains a lot of information but, remember, it’s no substitute for a trained lawyer. There’s a reason “Contracts” was a year-long course in law school and why contract breach lawsuits constituted a third of all civil trials according to the U.S. Bureau of Justice Statistics‘ 2005 national survey of trials conducted in general jurisdiction courts across the country. If you have a question about a contract, need help negotiating one, or are faced with a contract breach, either by you or your employer, talk to a lawyer.

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How to Read an Employment Contract: Part 1

Eugene Lee — Thu, 17 Dec 2009 17:45:24 +0000

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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Can My Employer Break My Employment Contract? Can I?

Eugene Lee — Thu, 22 Nov 2007 23:23:07 +0000

Whenever it comes to contracts, the answer is always the same: it depends on what the contract says. A contract is a contract is a contract. Neither you nor your employer can breach a contract without facing the consequences. That is, unless the contract says it’s ok. This is why it is so important that employees keep copies of any contracts they have signed with their employers. If you don’t have a copy of your contract, your employer is required by law to give you one if you request it. To see how, go to this post.

These are important provisions to look for in your contract:

At will employment/Termination: In California, employment is presumed to be at will. This means your boss can fire you at any time for any reason (as long as it’s not discriminatory, retaliatory or interfering with your medical leave rights). Your boss could say, “You’re too tall, you’re fired” or “you’re too obnoxious, you’re fired” or “I don’t like you, you’re fired” or . . . well, you get the idea. The contract will usually spell out whether your employment is at will or not. Even if it does, don’t give up. The contract might include other contradictory provisions which say that your boss can’t fire you at will after all. When in doubt, talk to an attorney.
Arbitration: More and more employment contracts require you to resolve any disputes you might have with your employer before an arbitrator. This is basically the employer’s way of making sure you can’t sue him in court. What’s wrong with arbitration? Arbitrators can charge thousands of dollars, you might be on the hook for part or even all of it, arbitrators rarely give large awards to employees and, worst of all, arbitrators overwhelmingly tend to favor the employer who is more likely to be a source of repeat business over you, the individual whom the arbitrator will likely never see again. Here’s another thing, the clause is often written to require the arbitration to occur in another state.
Non-compete: Many agreements bar employees who leave the company from working in the same industry for a number of months or years. In California, these kinds of restrictions are not generally enforceable, particularly once the employee has left the company. As a result, most employers won’t try to enforce this clause. Still, it’s worth noting if your contract has this clause.
Liquidated damages: A few contracts might impose a monetary penalty on a party who breaches a contract. Note, if the penalty is too large, courts might strike the clause as being an unenforceable penalty.

Courts have also held that the terms contained in any employee manuals or employee policies which your employer has are also contractual. For example, if your employer’s policy manual says that you are entitled to bereavement leave and can’t be fired for it, then your employer is contractually bound to honor that commitment.

Finally, if your boss has orally made promises to you, like “you’ll have a job here for as long as you want one”, courts have held that those are oral contracts and are binding on the employer.

If your employer (i) breaks his contract with you, (ii) violates a term of the policy manual or (iii) goes back on his spoken word to you, you may have a legal claim for breach of contract. Legal claims for oral contracts have to be filed in court within 2 years. For written contracts, the time limit is 4 years. [Cal. Civ. Proc. C. sections 337 and 339]. If you think you have a claim, don’t wait – consult an attorney right away.

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