Types of Employment Contracts

An employment contract is an agreement between an employer and an employer regarding the term of employment. An employment contract can range from a simple handshake agreement ("The job is yours is you want it; can you start tomorrow?") to a lengthy written contract filled with legalese. (See Nolo's article on written employment contracts to learn more about this type.)

An employment contract may be written, oral, or implied. No matter what form the contract takes, its terms will depend on what the employer and employee have agreed on (or, in the case of an implied contract, what each side expressed by their words and actions).

At-Will Employment Contracts

Most employees in the United States are presumed to work at will. This means they can quit at any time, and can be fired at any time, for any reason that isn't illegal. (Illegal reasons for firing include discrimination and retaliation.)

Montana has a different rule: Once a Montana employee has completed the employer's probation period, or has worked for six months (if the employer has no probationary period), the employee may be fired only for good cause. In other words, the employee no longer works at will, because the employer needs a good reason to terminate the employment relationship.

In every other state, however, at-will employment is presumed unless a contract creates a different relationship. An employment contract doesn't necessarily change an employee's at-will status: An employer and employee can agree on important details about the job without agreeing that the employee will have job security. In fact, many employers ask employees to sign written employment agreements explicitly acknowledging that they will be employed at will.

Example. When Fun Stuff hires Bob, the human resources director sends him a letter formally offering the job, which includes information about the position, salary, reporting relationships, job duties, and work hours. The letter also clearly states that Bob will work at will. The director signs and sends two copies of the offer letter and asks Bob to sign and return once copy, to indicate his acceptance of the position on the terms offered. Once signed by employer and employee, the offer letter becomes a written contract for at-will employment.

Even though an at-will employee can be fired at any time for any legal reason, that employee still has the right to enforce the terms of an employment contract. For example, let's say an employee signs a written employment agreement that includes an at-will provision and a formula that will be used to calculate commissions the employee earns. After a year, the employee is fired. The employee may not rely on the contract to challenge his firing; it says he can be fired at will. However, if the company paid him only half of the promised commission amount, he could sue for breach of that contractual provision.

To learn more, see Nolo's article on Employment at Will.

Written Contracts

A written contract is a document that sets form the terms of employment. As explained above, some written contracts are for at-will employment. Others limit the employer's right to fire. For example, it's not unusual for high-level executives to be hired pursuant to a written contract that obligates them to stay with the company for a set period of time (two or three years, for instance) and obligates the company to retain the executive for the same period absent an action specified in the contract as grounds for termination.

Grounds might include misconduct by the executive, such as committing a felony or engaging in financial malfeasance; they might also include outside events, such as a sale of the company.

Oral Contracts

An oral contract is simply an agreement that is spoken rather than written down. For example, an employer might call a successful applicant on the phone, offer her the job, and settle on a starting date, salary, and schedule. Once the employee says, "that sounds great; I accept," there is an oral contract of employment.

Oral contracts are just as enforceable as written contracts, but much harder to prove. If there's a dispute, it will be your word against the employer's.

Like a written contract, an oral contract might be for at-will employment or it might limit the employer's right to fire. If, for example, an employer says, "I need a one-year commitment from you; during that time, the company won't fire you as long as you make your numbers," and the employee agrees, the employee can hold the employer to that one-year commitment. If the employee is fired for any reason other than failing to hit the company's numerical goals, that's a breach of contract.

Implied Contracts

An implied contract is one that has not been reduced to a formal document or even stated explicitly, but is instead implied from a combination of the employer's oral and written statements and actions.

Whether there's an implied contract typically comes up after an employee has been fired. The employer argues that the employee was at will, and so can't sue for breach of contract; the employee counters that the employer's actions and statements led the employee to believe that the employee would be fired only for good cause, and were sufficient to create a contract to that effect.

Here are some of the factors courts consider in deciding whether an implied employment contract was created (different states apply different standards when considering implied contract claims):

• Whether the employer gave the employee assurances of job security. For example, if the employer says that the employee will be fired only for good cause or will have a job as long as he or she performed well, that might lead a court to find that an implied contract exists.
• Whether the employer's policies limit its right to fire at will. For example, progressive discipline policies that don't give the employer leeway to depart from the stated procedures, policies providing that new employees become "permanent" after completing a probationary period, policies promising regular promotions and raises if performance meets a certain standard, and policies requiring good cause to fire might be used as evidence that the employer had given up the right to fire at will.
• The employee's tenure. A long-term employee who has received regular promotions, raises, and positive performance evaluations has a better shot at making an implied contract claim than a short-term employee.

If you sign an at-will agreement, a court will not allow you to argue that you actually had a contradictory implied contract; the written agreement will be the final word on the subject.