The Role of Contracts in Employment Law

posted by Neil Klingshirn  |  Jul 14, 2009 8:25 PM [EST] in Contracts  |  applies to All States

Share on Facebook

Contracts play a central role in employment law. The most basic employment arrangement, at-will employment, is purely contractual in nature. Floyd v. DuBois Soap Co. (1942), 139 Ohio St. 520, 530-531, 23 O.O. 20, 41 N.E.2d 393. The employee agrees to perform work under the direction and control of the employer, and the employer agrees to pay the employee at an agreed rate. When the employment relationship ends, the employee will provides no further services for the employer and is generally entitled only to wages and benefits already earned.

Contract law also lays the foundation for non-competition cases and arbitration agreements. Employees can attack non-compete and arbiration agreements on contract formation grounds and with contract defenses.  Courts normally will not police an agreement for fairness. However, most courts have the discretion not enforce certain non-competition and arbitration terms. In those events, the courts modify or sever the offending term before enforcing the agreement.

On top of contract rights, the employment relationship is subject to statutory and common law rules that set minimum compensation and maximum hours and prevent employers from terminating employees for unlawful reasons.

Elements of a Breach of Contract Claim

To prove a breach of contract claim, an employee must prove:

1. the existence of a contract, 
2. performance by the employee, 
3. breach by the employer, and 
4. damage or loss to the employee. 

Firelands Regional Med. Ctr. v. Jeavons, 6th Dist. No. No. E-07-068, 2008 Ohio 5031, P 19. 

To assert a claim that a contract existed, party claiming the breach must allege facts showing:

1. an offer,
2. an acceptance, 
3. a meeting of the minds and 
4. consideration. 

Siemaszko v. FirstEnergy Operating Co. (FENOC), 187 Ohio App. 3d 437, 444 (Ohio Ct. App., Ottawa County 2010) (employee's promise to cooperate in a joint defense against claims brought against both the employer and the employee provided enough consideration to enforce the employer's promise to pay the employee's legal fees (citing Kostelnik v. Helper, 96 Ohio St.3d 1, reconsideration denied (2002), 96 Ohio St. 3d 1489).

Common Contract Terms

• Compensation. The amount that the employer will pay the employee for services is the most basic employment contract term. The parties are free to agree on any compensation agreement, so long as the employer pays the applicable minimum wage and overtime, does not discriminate based on gender, race and other protected class status and pays males and females equally for equal work.
  
• Duration. Unless the parties agree to a specific duration, the agreement is at-will, meaning either party can terminate it at any time.
• Non-disclosure. Non-disclosure agreements mimic the Uniform Trade Secrets Act's protection of employer proprietary information. However, an employer might demand even greater protections. 
• Non-competition. Courts will enforce reasonable restrictions on an employee's post employment competition, but will not enforce non-competition terms that place greater restrictions on an employee than is necessary to protect the employer's legitimate business interest. 
• Mandatory Arbtiration. The Agreement must be in writing, however, and is subject to judicial restrictions on enforcement.
  
• Severance.
• Grounds for Termination. If the agreement is silent, the employer may terminate the employee for no reason and without just cause. However, the employer cannot terminate the employee for reasons prohibited by law, such as discrimination or retaliation.

Consideration

Consideration is the bargained-for legal benefit or detriment.  Without it, parties do not form a contract.  This is important in non-competition cases involving at-will employees, where the employee can escape a non-competition agreement if the employer did not provide any consideration for it.  State courts are divided as to whether an additional day of at-will employment provides sufficient consideration for a non-competition agreement.

A Michigan court found that an employer gave an at-will employee nothing new for a non-compete signed three weeks after her at-will employment began, since her employer had the same right to terminate her employment the day after she signed it as it had the day before. Yerkovich v. AAA, 461 Mich. 732, 740-741 (Mich. 2000).  Illinois courts require employers to pay “adequate” or “sufficient” consideration to form a non-compete. McRand, Inc. v. Van Beelen, 138 Ill. App. 3d 1045, 1055 (Ill. App. Ct. 1st Dist. 1985).  Illinois employers can deliver adequate, sufficient consideration in the form of continued at-will employment, but only if the employment relationship continues for a substantial period of time. Id.

Many other states, including Ohio, Indiana, and Florida, treat continued at-will employment as sufficient consideration to create a valid agreement. In Ohio, each day of at-will employment is fresh consideration for a non-competition agreement. Lake Land Empl. Group of Akron, LLC v. Columber, 101 Ohio St. 3d 242 (Ohio 2004). The Ohio Supreme Court reasoned that an employer’s forbearance from ending the employee’s employment provides enough consideration to create a valid agreement.

posted by Neil Klingshirn  |  Jul 14, 2009 8:25 PM [EST] in Contracts  |  applies to All States