Enforceable Employment Agreements Can Negate At-Will Employment

Employers sometimes want to memorialize the terms of the employment relationship and their work-related expectations. If they are not careful with how these documents are drafted or in the oral promises given to employees, they may find that they have unintentionally created obligations that can be enforced against them and negated the at-will nature of the employment relationship.
Employment at-will means that both the employer and the employee can terminate the employment relationship at any time, without notice, and for any reason or no reason at all. While numerous statutory prohibitions and common law decisions have poked holes in the at-will doctrine, another way to negate the at-will nature of the employment relationship is to enter into a contractual relationship – and this can happen intentionally or inadvertently.

To determine whether you have created an enforceable agreement, you first need to know the elements necessary to form an enforceable contract. These include the following:

• Offer: The employer must make a clear and definite offer to the candidate/applicant.
• Acceptance: The candidate must accept the employer’s offer, and the acceptance must be clearly communicated.
• Consideration: There must be an exchange of value between the employer and the employee. In an employment relationship, the employer typically agrees to pay a specified sum of wages and provide certain benefits in exchange for the employee’s agreement to perform designated work. In Colorado and Arizona, continued at-will employment has been held to be sufficient consideration for a non-compete provision.
• Mutual Assent: Both the employer and the employee must agree to the terms of the contract. In other words, there must be a “meeting of the minds.”
• Legal Capacity and Lawful Agreement: Each of the parties must have the legal capacity to enter into a contract, and the purpose of the contract must be legal.

If any of these elements is missing, the contract may be deemed void and unenforceable. However, where these elements are present, a legally binding contract will be formed.

It is also important to understand that an enforceable contract can be formed orally, such as where a supervisor makes a promise to an employee in exchange for continued employment or for other considerations, such as the employee’s agreement to perform a specified task, a promotion, or a raise.

Employers generally prefer to maintain an at-will relationship with most staff. Therefore, it is important to identify those circumstances, as explained below, where employers sometimes unintentionally create enforceable contractual obligations and negate at-will.

Offer Letters
By their nature, formal offer letters are one of the most common ways employers create unintentional contracts of employment. After all, offer letters typically contain an offer of employment, consideration in the form of a promise of specified wages and benefits, and a place for the candidate’s signature, establishing the elements of acceptance and mutual assent.

The more detailed the offer letter, the more likely it will be deemed an enforceable contract of employment. While many employers want to put their offers of employment in writing to ensure there is a meeting of the minds with respect to the position offered, other employers choose to make offers of employment verbally to avoid creating contractual obligations. However, because enforceable contracts can be formed either orally or in writing, no matter how an offer is extended, it is important to emphasize that the employment relationship is at-will and that there is no designated period of time that the relationship will last.

Also, if written offer letters are used, it may be helpful to avoid having them countersigned by the prospective employee and to merely request that they contact you with their response. While this may not eliminate an argument that an employment contract was formed, it will be one factor arguing against contract formation. Because it is easy to negate the at-will relationship in an offer letter, we recommend you have an Employers Council attorney review your form offer letters prior to sending them.

Employee Handbooks
Handbook and policy language can also serve as the basis for the establishment of contractual obligations. For example, policies setting forth express termination procedures, requiring notice prior to separation, describing progressive discipline procedures, and establishing probationary periods, whether in a handbook or published separately, can create contractual obligations inconsistent with at-will employment.

Make sure to include a conspicuous disclaimer that the employment relationship is at-will, the handbook is not a contract, and that the current version supersedes all previous handbook versions and all prior oral statements made by management regarding the policies and guidelines contained in the handbook. This disclaimer should be placed in the handbook introductory statement and in the acknowledgment of receipt.

Employer Custom or Practice
Contractual obligations can also be formed by an employer’s course of conduct. Failure to consistently enforce a particular policy or a recurring long-term practice may create a contractual obligation. For example, failure to historically discipline employees for taking extended smoking breaks may give a current employee disciplined for taking smoking breaks a claim for breach of contract.

Oral Promises and Informal Writings
Unintended contractual or quasi-contractual obligations can also be created by a supervisor’s verbal statements or by written documents, such as emails or texts, if they are supported by consideration and relied upon. Where a promise is made orally, it is a good idea to follow up with written confirmation to avoid misunderstandings that can lead to disputes. The confirmation should outline the key points of the parties’ agreement and reaffirm that the employment relationship remains at-will.

When Is an Agreement Appropriate?
While employers want to avoid unintentionally forming contractual obligations, there are situations where they may choose to intentionally form an enforceable employment agreement. For example, it may be beneficial to have a binding employment agreement with C-suite executives for several reasons.

Given the importance and power of senior executives to set company policy and direction, employers may want a formal agreement with their senior staff that clearly sets out responsibilities and expectations and the scope of the executive’s role and authority. An enforceable contract gives the employer control over certain provisions, such as limiting the amount of damages in the event of a breach and clarifying the circumstances under which the parties can terminate the contract and end the relationship. Indeed, the senior executive may demand a written contract setting forth the scope of their responsibilities, compensation structure and benefits, job security, and the conditions upon which either party may terminate the contract before they are willing to accept the new position.

Having a clear formal written agreement with senior executives detailing the mutual expectations of the parties helps ensure continuity of leadership and can help prevent legal disputes resulting from misunderstandings.

There are also special situations where employers may want enforceable commitments with certain other staff members. For example, an employer may want enforceable agreements to protect confidentiality and prevent disclosure of proprietary or trade secret information. In appropriate circumstances and subject to applicable law, employers may want employees to sign non-compete clauses restricting the employee’s ability to directly compete with the employer for a defined period of time within a specified geographic area following separation.

Also, in certain industries, formal agreements may be required by law to ensure compliance with government regulations or provisions in collective bargaining agreements. As long as these narrow, specialized types of agreements clearly affirm that the relationship remains at-will and do not promise continued employment or contain specific provisions under which the relationship may be terminated, they will offer protection against arguments that the at-will nature of the relationship has been negated.

In conclusion, when an employer chooses to create enforceable obligations that negate at-will employment, the employer wants to do so knowingly rather than accidentally. By providing in written agreements that the employment relationship is at-will; not promising that the contract is for a specified period of time; avoiding termination, progressive discipline, and probationary period provisions; and otherwise crafting the agreement to avoid unintended enforceable promises, an employer can take steps to strengthen its defense to arguments that the employment relationship can only be terminated for cause.

Employers Council attorneys can review draft agreements or otherwise assist Consulting and Enterprise members with questions about whether an enforceable contractual promise has been made. All members can access a whitepaper on this topic, as well as sample handbook language. Additionally, we offer a training course, Legal Issues for Human Resources Professionals, that explores the employment at-will doctrine, at-will exceptions, handbooks, and implied contracts. It is available to members (at a discounted rate) and nonmembers. Click here to learn how to become an Employers Council member.