If an employment contract specifies that you will terminate only for cause, this creates an implied covenant requiring you to exercise “good faith and fair dealing” in the employment relationship.1 Essentially, this means you should make decisions on a fair basis and treat employees who are similarly situated in the same manner. “Similarly situated” means employees who are in the same general job categories and who have similar seniority and rank. Two employees who are both secretaries but in different departments are probably similarly situated, unless one is a new hire and the other has worked for the company for many years.

Written Employment Contracts

An employee with a written employment contract has a right to have that contract honored. A written contract can contain explicit limitations on when and under what circumstances an employee can be terminated. An employee with a written contract cannot be terminated without just cause if you include a “just cause” provision in the contract.

You can limit your liability by using written employment contracts that enforce the at-will nature of employment. The written document should state that your right to terminate is unfettered and that the employment relationship is at-will. You are significantly more protected when a prospective employee voluntarily signs this agreement.

Prepare each written employment agreement individually to address the particular employment relationship involved. When preparing employment agreements, consider the following issues:

• Define the duration of the contractual employment relationship.
• You can set forth a specified period of employment, and state that the period may be renewable at the option of the company.
• You can state clearly that employment is at-will and that the employment relationship can be terminated at any time, with or without cause. Even if employment is for a stated period, make it clear that you can terminate employment at any time.
• Include a merger and integration clause.
• This clause states that the written document constitutes the entire agreement between the parties, that the parties cannot rely upon any representations or promises other than those specified in the agreement and that the document can be modified only in writing and when signed by a corporate officer.
• Include an arbitration agreement, if recommended by your legal counsel.
• Include a liquidated damages clause.
• This clause specifically limits available remedies for breach of contract. Consult with legal counsel before including this option in an employment contract.

There are two major disadvantages of written contracts: first, written employment contracts tend to be less flexible; second, inadvertent omissions or ambiguities can be misconstrued. You must balance these considerations against the courts’ willingness to imply contractual limits on terminations when a written at-will agreement does not exist.

Oral Employment Contracts

An oral contract that is based on the conversations between you and your employee is just as binding as a written contract. However, if litigation arises from an employment dispute, oral contracts create problems in proving what the parties agreed to. Oral contracts are often created in job interviews, when an applicant asks about job security. A response from the interviewer, such as, “As long as you do a good job, you will have a job,” may create an oral contract. This oral contract prevents you from laying off that employee during an economically necessary layoff if they’re doing a good job.

Oral Employment Contracts and Signed At-Will Agreements

In Starzynski v. Capital Public Radio, Inc., a California Court of Appeal ruled that an employee with nearly 20 years on the job whose supervisor had promised him job security was nevertheless an at-will employee.2

Charles Starzynski worked as a program director for Capital Public Radio. After working there for over a decade, he signed an employment at-will agreement that stated only the company’s board of directors could modify the agreement. Both before and after signing the at-will agreement, Starzynski’s supervisor assured him that he would be terminated only for just cause. Starzynski resigned seven years later, claiming constructive discharge due to intolerable working conditions. (For more information, see Understanding a Constructive Discharge Claim.) Starzynski filed a lawsuit for wrongful termination, alleging the existence of an implied contract to terminate him only for good cause despite the written at-will agreement.

The court ruled that the supervisor’s oral promises of continued employment did not create an implied contract because Starzynski signed a clearly written acknowledgment that his employment was at-will. The court held that “an at-will provision in an express written agreement, signed by the employee, cannot be overcome by proof of an implied contrary understanding.”

At-Will Agreements and the NLRB

In 2012, the National Labor Relations Board (NLRB) began challenging language in at-will employment agreements as violating employees’ rights to engage in “concerted activities” — generally, activities for the purpose of improving working conditions, union representation or collective bargaining.

There have not been any binding federal court decisions on this issue, and it is unclear whether the NLRB’s position would survive judicial scrutiny. The NLRB has, however, indicated its willingness to expand its focus into reviewing common employee handbook policies (for more information, see Unions). Employers may want to consider disclaimers in their policies — that the at-will agreement is not intended to chill an employee’s right to engage in protected concerted activity.

• CalChamber’s Employee Handbook Creator® can help you easily create an employee handbook that contains an at-will policy.

1. Guz v. Bechtel National, Inc., 24 Cal. 4th 317 (2000)