Firing Employees With Employment Contracts

Employment contracts can limit your ability to fire employees.

Updated by , J.D. ● University of Missouri School of Law
Updated 9/06/2023

If an employee has an employment contract -- whether written or oral, express or implied -- that contract may limit your ability to terminate the employee.

If an employment contract exists, you must treat the employee fairly and fire the employee only for "good cause." However, it is not always easy to determine if an employment contract exists.

Determining Whether There's an Employment Contract

Before you fire an employee, you must figure out whether you have an employment contract with the employee. Occasionally, this will be as simple as opening the employee's personnel file and seeing a document labeled "employment contract." This type of contract is called an express written contract.

However, employers sometimes create employment contracts without meaning to. This type of contract -- called an implied contract -- binds an employer as much as a written contract does.

Employers create implied contracts when they promise employees something, usually job security. These promises can occur in all sorts of circumstances, such as during a casual conversation with an employee or as part of a discussion in an employee handbook.

No matter how the promise occurs, if a court thinks that the promise has enough weight and that the employee has relied on that promise (usually through continuing employment), the court may view that promise as a contract and require you to hold up your end of the deal.

Do You Have an Implied Employment Contract?

Figuring out whether you have unintentionally created an implied contract can be a tricky business, but past court decisions do provide some guidance.

Courts have found that an implied contract was formed in the following circumstances:

  • In trying to convince a prospective employee to take a job, an employer promises the employee that he will only be fired if he doesn't do his job well.
  • An employee manual states that once employees have completed an initial 90-day probation period, they become "permanent" employees.
  • During an evaluation, a supervisor gives an employee a glowing review and says that he will have a long future at the company as long as his good performance continues.

Don't let the specter of implied contracts worry you too much, however. If you feel certain that you have never promised the employee job security, then chances are good that the employee does not have an implied contract.

Termination of Employment Contract

If you determine the employee does not have a contract, you can fire the employee for any reason that isn't illegal. (For more information, see Illegal Reasons for Firing Employees.)

Can an Employer Terminate an Employment Contract Early?

If the employee does have an implied contract, however, you can fire the employee only for "good cause." And if you have an express written contract with an employee and you want to terminate that employee, you must follow what the contract says.

Contracts will either list reasons for which the employee can be fired or simply state that an employee can be terminated only for good cause.

Good Cause to Fire a Contracted Employee

The exact meaning of good cause varies from state to state, but generally it means what it says: You must have a "good," meaning legitimate, reason for firing the employee. Usually that means the termination must be based on reasons related to business needs and goals.

Firing an employee because you don't like the fact that she has an illegitimate child, for example, isn't good cause. Firing an employee because he harasses female coworkers is.

Examples of good cause include the following:

  • poor job performance
  • low productivity
  • refusal to follow instructions
  • habitual tardiness
  • excessive absences from work
  • possession of a weapon at work
  • threats of violence
  • violating company rules
  • stealing or other criminal activity
  • dishonesty
  • endangering health and safety
  • revealing company trade secrets
  • harassing coworkers
  • disrupting the work environment
  • preventing coworkers from doing their jobs, and
  • insubordination.

Good Faith and Fair Dealing

Regardless of what type of contract you have with the employee, that contract will obligate you to treat an employee fairly. This obligation is called the covenant of good faith and fair dealing.

Although this rule might seem like a gaping hole in your ability to terminate employees, it really isn't. To breach this obligation, employers have to engage in very egregious conduct, such as:

  • firing employees to prevent them from collecting sales commissions
  • firing employees just before their retirement benefits vest, or
  • fabricating evidence of poor performance to justify firing the employee.

For a complete guide to your legal rights and responsibilities as an employer, get The Employer's Legal Handbook, by Aaron Hotfelder (Nolo).

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