Damages in a Wrongful Termination Case for Breach of Contract

If your employer breaches your employment contract, you can collect money damages for your financial losses.

By , J.D. · UC Berkeley School of Law

If your employer broke your employment contract, you may have the right to collect "damages" (the legal term for money). Damages are intended to compensate you for the financial losses caused by the contract breach. The types of damages available in a breach of contract case are more limited than the damages available in other types of employment cases, such as a discrimination or wrongful termination lawsuit.

What Is an Employment Contract?

An employment contract is a legally binding agreement between an employer and an employee about the terms of employment. The most straightforward type of contract is a written contract, signed by the parties. However, contracts may also be oral (that is, the employer and employee verbally agreed to certain terms) or implied from the actions or statements of the parties (for example, a statement in an employee handbook that employees will be fired only for cause). For more information on the different types of contracts, see Types of Employment Contracts.

The terms of an employment contract are up to you and your employer. Of course, in the typical employment relationship, the employer has more bargaining power. However, the law does place a few things off limits. For example, your employer can't ask you to bargain away your right to earn at least the minimum wage or your right to collect unemployment, if you lose your job through no fault of your own. Beyond some basic rules, however, you and your employer are free to agree to whatever contract terms you wish.

Breach of Contract

An employment contract is "breached" (or broken) when one party doesn't live up to its end of the bargain. In the context of an employment contract, the employee typically claims to have been fired or laid off before the term agreed to in the contract, or for reasons not allowed by the contract. For example, if your contract says that you won't be fired for two years except for good cause, and your boss fires you so that he can hire his nephew, that would be a breach of contract.

Employment contracts are not always a guarantee of continued employment, however. For example, your employer may have asked you to sign an at-will employment agreement. At-will employment means you can be fired at any time, for any reason that isn't illegal, and you can quit at any time, for any reason. Because you can be fired at any time, however, you can't claim breach of contract if you are terminated.

At-will agreements may also specify things like schedule, compensation, and work location. However, even if your employer doesn't honor one of these terms – by, for example, paying you less than the contract states – you probably won't have a good breach of contract claim. Courts have generally held that, because employers are free to fire at-will employees, they are also free to change the terms of employment at any time. Legally speaking, if your employer is free to fire you and then offer to rehire you at a lower salary, it is also free to simply reduce your salary.

If your contract limits your employer's right to fire you, however, you do not work at will. In this situation, the employer must provide what it said it would in the contract. For example, if your contract says you will be paid a bonus of at least $50,000 a year, and you receive only $10,000, your employer has breached the contract.

Damages for Breach of Contract

If your employer breaks your employment contract, you are entitled to what you should have received under its terms. Generally speaking, this means that your employer owes you money. Courts are reluctant to order one party to a contract to actually do what it said it would do (called "specific performance"). For instance, if you had a one-year contract and your employer fired you after only six months, a court would almost certainly not order your employer to hire you back for six more months. Instead, the court would order the employer to pay you the money that you missed out on as a result of the breach.

Expectation Damages

In a contract case, an employee can collect "expectation" damages: what the employee expected to get out of the contract. For an employment contract, expectation damages are the amount the employee should have received if the contract were performed as promised. For example, if an employee's contract said she would receive a bonus of $60,000 at the end of the year, and she received only $20,000, she is entitled to an additional $40,000.

However, an employee has a legal duty to "mitigate" damages caused by a breach of contract. This means the employee must take reasonable steps to minimize the financial loss by, for example, finding another job. The amount the employee actually earned, or should have earned with reasonable efforts, is subtracted from the employee's damages award.

EXAMPLE: Claire has a two-year employment contract, stating that she may be fired only for committing "gross financial malfeasance" during the contract's term. The contract provides for an annual salary of $120,000, plus benefits. Claire is fired after one year so the company's new CEO can bring in his own management team. Claire may not simply spend the next year watching television on the sofa and then collect $120,000 plus the value of her benefits. Instead, she must search for a new job. When she finds one, she can ask the court for what she lost from the firing. If Claire dutifully searches for a new job, then finds one four months later that pays $2,500 less per month (with similar benefits), she can ask the court for $60,000: $40,000 for the four months she is out of work, plus $20,000 for the difference between what she should have earned under the contract for the next eight months ($2,5000 x 8). If Claire doesn't look for a new job, the court can subtract the amount it believes she reasonably could have earned in that time, had she properly searched for a job.

Liquidated Damages

Some contracts include a "liquidated damages" provision. This contract clause states that, in case of a breach, one party must pay the other a certain amount of money. Liquidated damages are intended to compensate for contract breaches that are hard to value monetarily. In an employment contract, however, these provisions are relatively rare. (It's usually pretty easy to figure out what the employee lost in terms of salary and benefits.) If your contract includes a liquidated damages clause, you can ask the court for that amount.

Compensatory and Punitive Damages

In a contract case, you are not entitled to damages for your emotional distress (sometimes called pain and suffering or compensatory damages). You are also not entitled to punitive damages: damages intended to punish the employer for especially egregious behavior. These types of damages are available in some employment discrimination and harassment cases (and in other areas of law, such as personal injury cases). However, you can't get them in a breach of contract case.

Attorneys' Fees

If your employment contract includes a provision requiring the employer to pay your attorneys' fees in case of breach, you can ask the court to award them. This is somewhat unusual, however. If your contract doesn't include this type of provision, the court cannot order your employer to pay your attorneys' fees or court costs. You'll have to pay for these yourself.

Next Steps

If your employer has breached your employment contract, you should consult with an experienced employment lawyer. A lawyer can evaluate your case and let you know what you can expect to collect in damages.

Because the damages available for breach of contract are not as significant as for other types of cases, a lawyer will also examine the facts to determine whether you might have other legal claims against your employer, which could increase the damage award.

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